978-0134731889 Case Alko Case Study

Case Study: ALKO

Inputs

Holding cost, H = 0.15$ per unit and day

TL costs from plants to DCs = 0.09$ per unit

LTL costs from DC to customers = 0.10$ per unit

TL costs from plants to central whse. = 0.05$ per unit

LTL cost from central whse. to cust. = 0.24$ per unit

Reorder Interval, T = 6 days

Lead Time, L = 5 days

Target cycle service level, CSL = 0.95

Correlation coefficient = 0

Demand Data by Part and Region

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 Mean, R10 35.48 22.61 17.66 11.81 3.36 90.92

Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA

Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43

Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA

Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49

Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of Variation by Part and Region

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 0.20 0.29 0.30 0.29 1.34 NA

Part 3 1.27 1.49 1.04 1.10 0.48 NA

Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during Reorder Interval and Replenishment Lead Time

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 Mean 390.28 248.71 194.26 129.91 36.96 1000.12

Part 1 SD 23.15 21.49 17.45 11.54 14.89 NA

Part 3 Mean 27.28 45.65 67.65 67.76 82.39 290.73

Part 3 SD 10.48 20.56 21.19 22.42 11.81 NA

Part 7 Mean 5.28 8.03 8.80 21.34 27.94 71.39

Part 7 SD 6.57 4.71 7.93 12.47 13.20 NA

Outputs

Cycle Stock and Required Safety Stock by Part and Region Cycle Stock and Required Safety Stock by Part and Region in Days of Demand

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1Cycle Inventory 106.44 67.83 52.98 35.43 10.08 272.76 Part 1Cycle Inventory 3.00 3.00 3.00 3.00 3.00 3.00

Part 1 SS 38.08 35.35 28.70 18.98 24.49 145.60 Part 1 SS 1.07 1.56 1.62 1.61 7.29 1.60

Part 3 Cycle Inventory 7.44 12.45 18.45 18.48 22.47 79.29 Part 3 Cycle Inventory 3.00 3.00 3.00 3.00 3.00 3.00

Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22 Part 3 SS 6.95 8.15 5.67 5.99 2.59 5.38

Part 7 Cycle Inventory 1.44 2.19 2.40 5.82 7.62 19.47 Part 7 Cycle Inventory 3.00 3.00 3.00 3.00 3.00 3.00

Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81 Part 7 SS 22.50 10.61 16.30 10.57 8.55 11.37

Costs per Unit by Region and Part

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Inventory cost 0.61$ 0.68$ 0.69$ 0.69$ 1.54$ 0.69$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.19$

Total cost part 1 0.80$ 0.87$ 0.88$ 0.88$ 1.73$ 0.88$

Inventory cost 1.49$ 1.67$ 1.30$ 1.35$ 0.84$ 1.26$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.19$

Total cost part 3 1.68$ 1.86$ 1.49$ 1.54$ 1.03$ 1.45$

Inventory cost 3.83$ 2.04$ 2.89$ 2.04$ 1.73$ 2.16$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.19$

Total cost part 7 4.02$ 2.23$ 3.08$ 2.23$ 1.92$ 2.35$

Total Annual Inventory and Distribution Cost

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $292,107

Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $279,213

Part 7 70 $49,246 $41,626 $63,051 $110,336 $124,747 $389,005

All Parts $183,439 $170,223 $186,920 $217,479 $202,266 $960,326

Case Study: ALKO

Inputs

Holding cost, H = 0.15$ per unit and day

TL costs from plants to DCs = 0.09$ per unit

LTL costs from DC to customers = 0.10$ per unit

TL costs from plants to central whse. = 0.05$ per unit

LTL cost from central whse. to cust. = 0.24$ per unit

Reorder Interval, T = 6.00 days

Lead Time, L = 5.00 days

Target cycle service level, CSL = 0.95

Correlation coefficient = –

Demand Data by Part and Region

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central

Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92 90.91

Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA 12.27

Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43 26.43

Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA 12.15

Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49 6.49

Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA 6.45

Demand during Reorder Interval and Replenishment Lead Time

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central

Part 1 Mean 390.28 248.71 194.26 129.91 36.96 1000.12 1000.01

Part 1 SD 23.15 21.49 17.45 11.54 14.89 NA 40.71

Part 3 Mean 27.28 45.65 67.65 67.76 82.39 290.73 290.73

Part 3 SD 10.48 20.56 21.19 22.42 11.81 NA 40.30

Part 7 Mean 5.28 8.03 8.80 21.34 27.94 71.39 71.39

Part 7 SD 6.57 4.71 7.93 12.47 13.20 NA 21.40

Outputs

Cycle Stock and Required Safety Stock by Part and Region

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central

Part 1Cycle Inventory 106.44 67.83 52.98 35.43 10.08 272.76 272.73

Part 1 SS 38.08 35.35 28.70 18.98 24.49 145.60 66.96

Part 3 Cycle Inventory 7.44 12.45 18.45 18.48 22.47 79.29 79.29

Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22 66.28

Part 7 Cycle Inventory 1.44 2.19 2.40 5.82 7.62 19.47 19.47

Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81 35.20

Costs per Unit by Region and Part

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central

Inventory cost 0.61$ 0.68$ 0.69$ 0.69$ 1.54$ 0.69$ 0.56$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.29$

Total cost part 1

0.80$ 0.87$ 0.88$ 0.88$ 1.73$ 0.88$ 0.85$

Inventory cost 1.49$ 1.67$ 1.30$ 1.35$ 0.84$ 1.26$ 0.83$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.29$

Total cost part 3

1.68$ 1.86$ 1.49$ 1.54$ 1.03$ 1.45$ 1.12$

Inventory cost 3.83$ 2.04$ 2.89$ 2.04$ 1.73$ 2.16$ 1.26$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.19$ 0.29$

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central Savings

Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $292,107 $282,208 $9,899

Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $279,213 $215,356 $63,857

Part 7 70 $49,246 $41,626 $63,051 $110,336 $124,747 $389,005 $257,600 $131,405

All Parts $183,439 $170,223 $186,920 $217,479 $202,266 $960,326 $755,164

Cost Savings from Centralization as a function of the correlation coefficient and target cycle service level

Type 1 Only

Type 3 Only

$63,857 0.00 0.25 0.50 0.75 1.00

0.9 $45,492 $24,074 $7,384 -$6,776 -$19,294

0.91 $48,484 $26,077 $8,616 -$6,197 -$19,294

0.92 $51,736 $28,254 $9,955 -$5,569 -$19,294

0.93 $55,311 $30,647 $11,427 -$4,878 -$19,294

0.94 $59,304 $33,319 $13,071 -$4,107 -$19,294

0.95 $63,857 $36,368 $14,947 -$3,227 -$19,294

0.96 $69,207 $39,949 $17,150 -$2,193 -$19,294

0.97 $75,785 $44,352 $19,858 -$922 -$19,294

0.98 $84,528 $50,205 $23,458 $767 -$19,294

0.99 $98,308 $59,429 $29,133 $3,430 -$19,294

Type 7 Only

$131,405 0.00 0.25 0.50 0.75 1.00

0.9 $98,719 $60,890 $31,159 $5,844 -$16,582

0.91 $104,045 $64,469 $33,365 $6,880 -$16,582

0.92 $109,832 $68,357 $35,761 $8,006 -$16,582

0.93 $116,194 $72,632 $38,395 $9,243 -$16,582

0.94 $123,300 $77,407 $41,338 $10,626 -$16,582

0.95 $131,405 $82,852 $44,693 $12,202 -$16,582

0.96 $140,927 $89,250 $48,636 $14,054 -$16,582

0.97 $152,632 $97,115 $53,483 $16,331 -$16,582

0.98 $168,193 $107,571 $59,926 $19,357 -$16,582

0.99 $192,719 $124,050 $70,081 $24,128 -$16,582

Correlation Coefficient

Target Cycle Service Level

Correlation Coefficient

Target Cycle Service Level

CR – 12/3/2020 9:59 AM Page 3 Alko Case study.xlsx – Central vs. Local

Case Study: ALKO (Part 1 is decentralized with all others centralized)

Inputs

Holding cost = 0.15$ per unit and day

TL costs from plants to DCs =

0.09$ per unit

LTL costs from DC to customers = 0.10$ per unit

TL costs from plants to central whse. = 0.05$ per unit

LTL cost from central whse. to cust. = 0.24$ per unit

Reorder Interval = 6 days

Lead Time = 5 days

Target cycle service level = 0.95

Correlation coefficient = 0

Demand Data by Part and Region

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92

Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA

Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43

Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA

Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49

Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of Variation by Part and Region

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 0.20 0.29 0.30 0.29 1.34 NA

Part 3 1.27 1.49 1.04 1.10 0.48 NA

Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during Reorder Interval and Replenishment Lead Time

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1 Mean 390.28 248.71 194.26 129.91 36.96

Part 1 SD 23.15 21.49 17.45 11.54 14.89

Part 3 Mean 290.73

Part 3 SD 40.30

Part 7 Mean 71.39

Part 7 SD 21.40

Outputs

Cycle Stock and Required Safety Stock by Part and Region

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1Cycle Stock 106.44 67.83 52.98 35.43 10.08

Part 1 SS 38.08 35.35 28.70 18.98 24.49

Part 3 Cycle Stock 79.29

Part 3 SS 66.28

Part 7 Cycle Stock 19.47

Part 7 SS 35.20

Costs per Unit by Region and Part

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Inventory cost 0.61$ 0.68$ 0.69$ 0.69$ 1.54$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$

Total cost part 1 0.80$ 0.87$ 0.88$ 0.88$ 1.73$

Inventory cost 0.83$

Transportation cost 0.29$

Total cost part 3 1.12$

Inventory cost 1.26$

Transportation cost 0.29$

Total cost part 7 1.55$

Total Annual Inventory and Distribution Cost

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $0 $292,107

Part 3 20 $215,356

Part 7 70 $257,600

All Parts $103,729 $72,171 $56,964 $37,982 $21,260 $472,956

CR – 12/3/2020 9:59 AM Page 4 Alko Case study.xlsx – option1.0

Total logistic system: $765,064

Costs Savings

Benchmark: All parts in the field: $960,326 $195,262

All parts centralized: $755,164 -$9,899

$765,064 0.00 0.25 0.50 0.75 1.00

0.9 $701,631 $760,877 $807,298 $846,772 $881,717

0.91 $711,968 $773,951 $822,516 $863,814 $900,373

0.92 $723,197 $788,154 $839,049 $882,328 $920,641

0.93 $735,545 $803,771 $857,228 $902,685 $942,926

0.94 $749,335 $821,213 $877,530 $925,421 $967,815

0.95 $765,064 $841,106 $900,686 $951,351 $996,202

0.96 $783,542 $864,477 $927,890 $981,815 $1,029,552

0.97 $806,259 $893,209 $961,335 $1,019,267 $1,070,552

0.98 $836,457 $931,403 $1,005,794 $1,069,054 $1,125,054

0.99 $884,053 $991,601 $1,075,866 $1,147,523 $1,210,956

Correlation Coefficient

Target Cycle Service Level

CR – 12/3/2020 9:59 AM Page 5 Alko Case study.xlsx – option1.0

Case Study: ALKO (Part 1,3 is decentralized with part 7 centralized)

Inputs

Holding cost, H = 0.15$ per unit and day

TL costs from plants to DCs =

0.09$ per unit

LTL costs from DC to customers = 0.10$ per unit

TL costs from plants to central whse. = 0.05$ per unit

LTL cost from central whse. to cust. = 0.24$ per unit

Reorder Interval, T = 6 days

Lead Time, L = 5 days

Target cycle service level, CSL = 0.95

Correlation coefficient = 0

Demand Data by Part and Region

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92

Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA

Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43

Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA

Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49

Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of Variation by Part and Region

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions

Part 1 0.20 0.29 0.30 0.29 1.34 NA

Part 3 1.27 1.49 1.04 1.10 0.48 NA

Part 7 4.13 1.95 2.99 1.94 1.57 NA

Demand during Reorder Interval and Replenishment Lead Time

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1 Mean 390.28 248.71 194.26 129.91 36.96

Part 1 SD 23.15 21.49 17.45 11.54 14.89

Part 3 Mean 27.28 45.65 67.65 67.76 82.39

Part 3 SD 10.48 20.56 21.19 22.42 11.81

Part 7 Mean 71.39

Part 7 SD 21.40

Outputs

Cycle Stock and Required Safety Stock by Part and Region

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1Batch Stock 106.44 67.83 52.98 35.43 10.08

Part 1 SS 38.08 35.35 28.70 18.98 24.49

Part 3 Batch Stock 7.44 12.45 18.45 18.48 22.47

Part 3 SS 17.24 33.82 34.86 36.88 19.42

Part 7 Batch Stock 19.47

Part 7 SS 35.20

Costs per Unit by Region and Part

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Inventory cost 0.61$ 0.68$ 0.69$ 0.69$ 1.54$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$

Total cost part 1 0.80$ 0.87$ 0.88$ 0.88$ 1.73$

Inventory cost 1.49$ 1.67$ 1.30$ 1.35$ 0.84$

Transportation cost 0.19$ 0.19$ 0.19$ 0.19$ 0.19$

Total cost part 3 1.68$ 1.86$ 1.49$ 1.54$ 1.03$

Inventory cost 1.26$

Transportation cost 0.29$

Total Annual Inventory and Distribution Cost

# of parts

Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $0

Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $0 $279,213

Part 7 70 $257,600

Total logistic system: $828,921

Costs Savings

Benchmark: All parts in the field: $960,326 $131,405

All parts centralized: $755,164 -$73,757

$828,921 0.00 0.25 0.50 0.75 1.00

0.9 $747,122 $784,951 $814,681 $839,997 $862,423

0.91 $760,452 $800,028 $831,132 $857,617 $881,079

0.92 $774,933 $816,408 $849,004 $876,759 $901,347

0.93 $790,856 $834,418 $868,655 $897,807 $923,632

0.94 $808,639 $854,533 $890,602 $921,314 $948,521

0.95 $828,921 $877,474 $915,632 $948,124 $976,908

0.96 $852,749 $904,426 $945,040 $979,622 $1,010,258

0.97 $882,044 $937,561 $981,193 $1,018,345 $1,051,258

0.98 $920,985 $981,607 $1,029,252 $1,069,821 $1,105,760

0.99 $982,362 $1,051,031 $1,104,999 $1,150,953 $1,191,662

Correlation Coefficient

Target Cycle Service Level

CR – 12/3/2020 9:59 AM Page 7 Alko Case study.xlsx – option1.0a

Case Study: ALKO (region 5 served from region 4)

Inputs

Holding cost, H = 0.15$ per unit and day

TL costs from plants to DCs = 0.09$ per unit

LTL costs from DC to customers = 0.10$ per unit

TL costs from plants to central whse. = 0.05$ per unit

LTL cost from central whse. to cust. = 0.24$ per unit

Reorder Interval, T = 6 days

Demand Data by Part and Region

Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA

Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49

Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Coefficient of Variation by Part and Region

Demand during Reorder Interval and Replenishment Lead Time

Part 3 Mean 290.73

Part 3 SD 40.30

Part 7 Mean 71.39

Part 7 SD 21.40

Costs per Unit by Region and Part

Inventory cost 0.83$

Transportation cost 0.29$

Total cost part 3 1.12$

Inventory cost 1.26$

Transportation cost 0.29$

Total cost part 7 1.55$

CR – 12/3/2020 9:59 AM Page 8 Alko Case study.xlsx – Option 2

Part 1 10 $103,729 $72,171 $56,964 $45,892 $0

Part 3 20 $215,356

Part 7 70 $257,600

All Parts $103,729 $72,171 $56,964 $45,892 $0 $472,956

Total logistic system: $751,714

Costs Savings

Benchmark: All parts in the field: $960,326 $208,612

All parts centralized: $755,164 $3,451

Summary of investment and annual cost for various options

Option Investment Annual Cost Savings from Base Case Rate of Return NPV(10%)

Decentralize all parts in five warehouses Base Case 960,326$

Centralize all parts at NDC 850,000$ 755,164$ 205,162$ 24.1% 1,406,777$

Centralize parts 3, 7, decentralize part 1 650,000$ 765,064$ 195,262$ 30.0% 1,497,884$

Centralize part 7, decentralize parts 1, 3 300,000$ 828,921$ 131,405$ 43.8% 1,145,453$

Centralize parts 3, 7, decentralize part 1

Serve region 5 part 1 from region 4 600,000$ 751,714$ 208,612$ 34.8% 1,694,734$