Questions: 1. Regional distributors are currently using continuous review invent
ID: 371178 • Letter: Q
Question
Questions:
1. Regional distributors are currently using continuous review inventory policy. Compute and describe their inventory management policy and associated cost. Ignore inbound and outbound transportation cost. Provide answers and calculation for order quantity, demand during lead time, safety stock, average inventory level, inventory holding cost per week, ordering cost per week and total cost per week.
Please seee information below.
KLF Electronics
KLF Electronics is an American manufacturer of electronic equipment. The company has a single
manufacturing facility in San Jose, California. KLF Electronics distributes its products through five
regional warehouses located in Atlanta, Boston, Chicago, Dallas, and Los Angeles. In the current
distribution system, the United States is partitioned into five major markets, each of which is served by a
single regional warehouse (see Figure 1a). Customers, typically retail outlets, receive items directly from
the regional warehouse in their market. That is, in the current distribution system, each customer is
assigned to a single market and receives deliveries from one regional warehouse. The warehouses
receive items from the manufacturing facility.
In recent years, KLF has seen a significant increase in competition and huge pressure from their
customers to improve the service level and reduce costs. KLF manages all its inbound transportation
(manufacturing facility to warehouse). However, it is becoming increasing challenging to manage orders
for different quantities, coming at different times from all 5 regional warehouses.
Alternate Distribution Strategies
There are different distribution strategy proposals are under consideration. First one is to replace in the
five regional warehouses with a single, central warehouse that will be in charge of all customer (see
Figure 1b). All the retailers will directly order from this central warehouse. This warehouse will be one
of five current regional warehouses. This will also reduce complexity of order fulfillment and inbound
transportation of manufacturing facility from five different to one warehouse. Currently, it takes two
weeks to satisfy an order placed by any of the regional warehouses. KLF don’t anticipate any different
lead time for satisfying orders if one of these regional warehouse becomes central warehouse.
Since Los Angles is only regional warehouse closure to manufacturing facility, another Central
Warehouse could be added which will be in charge of Atlanta, Boston, Chicago, and Dallas (See figure
1c Mix Model). Initial solution will be to find suitable location equidistance from these four cities.
However there are other factors that will be considered in determining location. Manufacturing facility
will serve Los Angles warehouse as usual in additional to central warehouse. KLF is also thinking of
outsourcing task of order fulfillment, all inbound and intermediate logistics (Manufacturing facility to
Los Angles and Central Warehouse, Central Warehouse to Atlanta, Boston, Chicago, & Dallas
warehouses) to a third party logistics provider (3PL) which specialize in logistics and distribution
services. This company can provide service at lower cost and shorter leadtimes from two week to one
week for each segment of inbound and intermediate transportation needs. Overhead costs of
maintaining inbound transportation department could offset cost of adding new central warehouse in
long term.
Figure 1: Distribution Strategies—Current and proposed
Manufacturing Facility
Regional or Central Warehouse
Retailer
a) Current Model
b) Single Centralized Warehouse
c) Mix Model of Regional and Central Warehouse
A B C D L
A B C D L
Demand and Inventory Management Strategy
Each of the regional warehouses faces demand from the retailers in their area. Historical demand for
last 12 weeks is given in the Table 1. This sample of 12 weeks is very much representative of demand
pattern that they face. Currently, all regional warehouses uses continuous review inventory policy
where order for fixed quantity is placed when inventory level falls below reorder point. This leads to
orders coming at different times in the manufacturing facility which typically satisfy orders in 2 weeks.
KLF provides their customers with a service level of about 90 percent. It is striving to improve that but
cost savings without affecting service level is primary goal for now. KLF also wants to evaluate
possibility of implementing Periodic Review Inventory Policy (potentially in future they can synchronize
ordering time). However decision is sensitive and dependent on change in the inventory cost.
Table 1: Historical Demand for 12 weeks
Week1 Week2 Week3 Week4 Week5 Week6 Week7 Week8 Week9 Week10 Week11 Week12
Atlanta 33 45 37 38 55 30 18 58 47 37 23 55
Boston 26 35 41 40 46 48 55 18 62 44 30 45
Chicago 44 34 22 55 48 72 62 28 27 95 35 45
Dallas 27 42 35 40 51 64 70 65 55 43 38 47
LA 32 43 54 40 46 74 40 35 45 38 48 56
Transportation, Ordering, and Holding Costs
Currently with inbound transportation there is fixed ordering cost per order plus a variable
transportation cost associated with it. For outbound transportation (regional warehouse to retailer)
orders, which are typically much smaller in quantity, there is only variable transportation cost. Table 2
provides inbound and outbound transportation cost associated with current distribution system. Table 3
provides information about (outbound) transportation costs per unit product from each existing
regional warehouse to all other market areas, assuming this regional warehouse becomes the central
warehouse as described in figure 1b. In case if KLF decides to add central warehouse to serve Atlanta,
Boston, Chicago and Dallas regional warehouses, 3PL provider has agreed to provide similar cost model,
i.e. fixed ordering cost per order and variable transportation cost per unit ordered. Transportation cost
quoted by 3PL from manufacturing facility to new warehouse (or Los Angles) is $10 and from new
warehouse to other four regional warehouse is $6.
Table 4 provides ordering cost per order associated with current, single centralized warehouse and mix
model distribution system. Corresponding holding cost is also given.
Table 2: Inbound and Outbound Transportation Costs per Unit with Current System
Warehouse Inbound Outbound
Atlanta $12.00 $13.00
Boston $11.50 $13.00
Chicago $11.00 $13.00
Dallas $9.00 $13.00
Los Angles $7.00 $13.00
Table 3: Outbound Transportation Costs per Unit in Single Centralized System
Warehouse Atlanta Boston Chicago Dallas Los Angles
Atlanta $13
Boston $16 $13
Chicago $16 $10 $13
Dallas $17 $17 $17 $13
Los Angles $19 $19 $18 $10 $13
Table 4: Ordering Cost and Holding Cost (per unit per week)
Cost at ordering cost holding cost
Current System (figure 1a) Regional Warehouse $5550 $1.25
Central Warehouse (Figure 1b) Central Warehouse $5550 $1.25
Mix Model (Figure 1c) Central Warehouse $3000 $1.00
Regional Warehouse $3000 $1.25
Explanation / Answer
Hi,
Thanks for the question.
4 P's define the marketing strategy for any company or for a particular brand. This is the strategy to reach and market the product to the customers.
The 4 P's will be:
Product: As mentioned, the product for this particular scenario will be McChicken and Big Mac.
Price: Price generally should be according to the perception of the customers to see its worth. They should consider to price the product moderately not on a low price because that would give the feel as the quality compromised.
Place: That should be very evenly distributed across the outlets in the US. The product will be very popular so the company should be very efficient in the distribution.
Promotions: Mcdonald's is very aggressive in terms of the advertising mostly in the Tv advertisement or OOH branding.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.