FM Warehouse Case FM Co. is a contractor for the maintenance of a company who op
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Question
FM Warehouse Case
FM Co. is a contractor for the maintenance of a company who operates oil wells in GCC states. The company currently has two warehouses for spare parts one in Doha, and the other in Dubai. Local oil well maintenance service teams receive the spare parts either from Doha or Dubai warehouse. The current distribution strategy provides a 97% service level; that is the inventory policy employed by each warehouse is designed so that the probability of a stock-out is at most 3%.
There are currently 150 different spare parts that the company is keeping and the two warehouses serve a total of more than 200 service teams in the GCC. The two warehouses suffer from excessive inventory costs as well as frequent stock outs. The newly appointed COO has decided to review the current logistics and distribution system.
ACME is considering the following alternative strategy: Replace the two warehouses with a single warehouse located between Doha and Dubai that will serve all customer orders. We will refer to this proposed system as the centralized distribution system. The CEO insists that the same service level, 97 percent, be maintained regardless of the logistics strategy implemented.
Obviously, the current distribution system with two warehouses has an important advantage over the single warehouse system because each warehouse is close to a particular subset of customers, decreasing delivery lead time. I would like you to discuss what advantage does the proposed single-warehouse system bring: What would happen to the inventory levels when we combine the two warehouses? Please try to provide an intuitive explanation. [15 points]
As an aid to your understanding, let us consider a more rigorous analysis of the inventory policy that ACME should use in both the current and centralized system. We will perform this analysis for two specific parts, Spare Part A and Spare Part B. However, to fully appreciate the benefits, the analysis must be done over all parts.
The warehouses replenish both parts from the regional distributor in Turkey. Lead time for delivery to each warehouse is one week and the distributor has ample stock to satisfy any warehouse order on time.
For both parts, an order from factory costs $6000 per order. Price of Part A is $850 and Part B is $2400 and weekly inventory carrying rate is 0.5% of the part price. In the current distributions system, the cost of transporting a part from one warehouse to a customer is, on average, $20, per Part. It is estimated that, the transportation cost from the central warehouse, it will be, on average, $24.0, per part. For this analysis, we assume the delivery lead time is not significantly different in the two systems.
The following tables provide historical data for Parts A and B, respectively. The tables include weekly demand information for each part for the last eight weeks in each market area. Observe that Part B is a slow moving item; the demand for Part B is fairly small relative to the demand for Part A.
Part A
Week
1
2
3
4
5
6
7
8
Doha
33
45
37
38
55
30
18
58
Dubai
46
35
41
40
26
48
18
55
Total
79
80
78
78
81
78
36
113
Part B
Week
1
2
3
4
5
6
7
8
Doha
0
3
3
0
0
1
3
0
Dubai
2
4
3
0
3
1
0
0
Total
2
6
3
0
3
2
3
0
From the given data, you will need to compute the average, standard deviation, and coefficient of variation (C.V.) of each part’s demand at each warehouse as well as its total demand in the two warehouses. (CV=std.dev / average) [5 points]
Recall that the standard deviation measures the absolute variability of the demands, while C.V. measures variability relative to average demand. For instance, you will see that the standard deviation for Part A is higher than that of Part B, however Part B has a much higher coefficient of variation. This distinction between the two parts plays an important role in the final analysis.
Simply assume that based-stock policies with a review period of two weeks for Product A and 4 weeks for Product B are being implemented for each part at each warehouse. With the given policy parameters, compute:
- Base Stock Level [5 points for eachp]
- Safety Stock Level (SS) [5 points for each part]
for each part at each warehouse. Also compute the average inventory levels for each part at each warehouse using these quantities. [5 points for each part]
Now suppose that the two warehouses are closed and a central warehouse is opened. The demand at the central warehouse for each part will be the sum of its demand at the two warehouses. (NOTE: The standard deviations are not going to be the sum of the two standard deviations. In excel, you have to recompute the standard deviation.)
Compute the same quantities for the centralized warehouse. [7.5 points for each part]
Compare the total average inventory levels in the existing two-warehouse setup to the average inventory levels in the centralized warehouse. Why did average inventory levels decline? [10 points]
Note that the transportation costs increased by $0.50, when warehouses are centralized. Do the inventory reduction benefits compensate the transportation cost increases for these Parts? [5 points]
Compute the reduction rate in inventories for each part (reduction rate= reduction/average demand) when switched from the two-warehouse to centralized warehouse. Which one has a higher rate? Why? [10 points]
There seems to be no correlation between the demands in Doha warehouse and Dubai warehouse. For example, when the sales of Part A increases in Doha, it may decrease in Dubai warehouse and vice versa. However, suppose that the demand in both warehouses is positively correlated, i.e. when one increases the other also increases. What would be the impact of centralization in that case? Discuss. Support your results with an example. You may construct the example from the data provided. [10 points]
Good Luck!!
Week
1
2
3
4
5
6
7
8
Doha
33
45
37
38
55
30
18
58
Dubai
46
35
41
40
26
48
18
55
Total
79
80
78
78
81
78
36
113
Explanation / Answer
a) A single warehouse system will bring the advantage of centralized monitoring to the system. Currently 150 items are being stored at 2 warehouses, hence the inventory of the 150b items have to be maintained at both the warehouses. If we have single warehouse, the inventory of 1 item has to be maintained at just one location, hence we have to maintain less inventory, leading to lower inventory carrying costs, also, the inventory monitoring will become easy, as all the customers are being serviced from a single location, hence all the customer requirements are being received by the single warehouse, hence it will be easier to establish the total inventory requirements for the 150 parts and hence the stock outs and thus the stock out costs will be less. Also, since we are ordering for all the customers form a single location, the number of orders will be reduced as the same part earlier was being ordered by both the locations, which now will be covered in just a single order; hence the ordering cost of inventory reduces. Since we will be ordering more volume per order than before, as the orders will be to fulfil the demand of both the warehouses, we can even get the volume discount benefits on our order quantities form the suppliers.
The inventory level of the centralized warehouse will be higher than the individual warehouses as demands of the two warehouses are consolidated, but the cumulative inventory will be much lower at the centralized warehouse, as the safety stock that was being maintained individually at both the warehouses will be decreased in the centralized warehouse, as they were earlier maintaining individual safety stocks, which now will be calculated based on the cumulative inventory, hence less safety stock and less cumulative inventory.
b)
d) Safety Stock:
Weekly Demand Information Part A Week 1 2 3 4 5 6 7 8 Avg Std Dev CV Doha 33 45 37 38 55 30 18 58 39.25 13.18 0.34 Dubai 46 35 41 40 26 48 18 55 38.63 12.05 0.31 Total 79 80 78 78 81 78 36 113 77.88 20.71 0.27 Part B Week 1 2 3 4 5 6 7 8 Avg Std Dev CV Doha 0 3 3 0 0 1 3 0 1.25 1.49 1.19 Dubai 2 4 3 0 3 1 0 0 1.63 1.60 0.98 Total 2 6 3 0 3 2 3 0 2.38 1.92 0.81Related Questions
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