Alko case study chopra mendil

1. Alko Inc.
GROUP 14
ANKIT MITTAL 1402016
ARPIT SINGH 1402025
DIPRONIL MONDAL 1402052
DIVYANSHU JOIYA 1402054

2. Present Status of Alko Inc.
• Alko Inc. is a leading manufacturer of lighting fixtures having three
manufacturing units in Cleveland.
• Its sales has divided US in five regions and has DC in each region.
• Past few years, the profit margin is shrinking as competition intensified.
• Company decides to restructure distribution system to achieve effective and
responsive supply chain.
Costs involved in distribution channel
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

3. Decision Constraints
• Options available:
Build a national distribution center and close all 5 DC’s
Build a national distribution and keep some DC’s open
• Cost of transportation changes but lead time remains same.
• Heavy investments for NDC and closing DC recovers $50,000.
Type of Product
No. of
parts Region 1 Region 2 Region 3 Region 4 Region 5
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36
Part 1 SD 6.98 6.48 5.26 3.48 4.49
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49
Part 3 SD 3.16 6.20 6.39 6.76 3.56
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54
Part 7 SD 1.98 1.42 2.39 3.76 3.98
Part 1- High demand
Part 2- Medium demand
Part 3- Low demand
Customers daily demand

4. Demand and Safety stocks
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
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
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
Cycle stock and required safety stock by part and region
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 1 SS 38.08 35.35 28.70 18.98 24.49 145.60
Part 3 Cycle
Inventory 7.44 12.45 18.45 18.48 22.47 79.29
Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22
Part 7 Cycle
Inventory 1.44 2.19 2.40 5.82 7.62 19.47
Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81

5. Local DCs vs NDC
Total Annual Inventory and Distribution Cost for local DCs and NDC
No of
parts Region 1 Region 2 Region 3 Region 4 Region 5
All
Regions Central
Part 1
10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $2,92,107 $2,82,208
Part 3
20 $30,463 $56,425 $66,904 $69,161 $56,259 $2,79,213 $2,15,356
Part 7
70 $49,246 $41,626 $63,051 $1,10,336 $1,24,747 $3,89,005 $2,57,600
All Parts 1,83,439 1,70,223 1,86,920 2,17,479 2,02,266 9,60,326 7,55,164
Savings
Part 1 $9,899
Part 3 $63,857
Part 3 $1,31,405
Total $ 2,05,162

6. Option 1:Part 1 is decentralized with all others centralized
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 $ 0.84 $ 0.68
Transportation cost $ 0.19 $ 0.29
Total cost part 3 $ 1.03 $ 0.97
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55
No of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $0
Part 3 20 $2,15,356
Part 7 70 $2,57,600
All Parts $1,03,729 $72,171 $56,964 $37,982 $21,260 $4,72,956
Total
system: $7,65,064
Total Annual Inventory and Distribution Cost
Savings = 960326-765064
= $ 195,262

7. Option 2:Part 1 is decentralized with all others centralized except part3 in region 5
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 $ 0.84 $ 0.68
Transportation cost $ 0.19 $ 0.29
Total cost part 3 $ 1.03 $ 0.97
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55
No of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $0
Part 3 20 $56,259 $1,87,566
Part 7 70 $2,57,600
All Parts $1,03,729 $72,171 $56,964 $37,982 $77,519 $4,45,166
Total
system: $7,93,533
Total Annual Inventory and Distribution Cost
Savings = 960326-793533
= $ 166,793

8. Option 3:Part 1,3 is decentralized with part 7 centralized
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 cost part 7 $ 1.55
No of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $1,03,729 $72,171 $56,964 $37,982 $21,260 $0
Part 3 20 $30,463 $56,425 $66,904 $69,161 $56,259 $0
Part 7 70 $2,57,600
All Parts $1,34,192 $1,28,597 $1,23,869 $1,07,143 $77,519 $2,57,600
Total
system: $8,28,921
Total Annual Inventory and Distribution Cost
Savings = 960326-828921
= $ 131,405

9. Option 4:Region 5 served from region 4
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 $ 0.84
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.22
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 1.06
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
No of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $1,03,729 $72,171 $56,964 $45,892 $0
Part 3 20 $2,15,356
Part 7 70 $2,57,600
All Parts $1,03,729 $72,171 $56,964 $45,892 $0 $4,72,956
Total
system: $7,51,714
Total Annual Inventory and Distribution Cost
Savings = 960326-751714
= $ 208,612

10. Option 5:Part 3 served from all DCs and NDC, part 1 form all
regions except Region 5, and part 7 from NDC.
Costs per unit by region and part
Region 1 Region 2 Region 3 Region 4 Region 5 Central
Inventory cost $ 0.64 $ 0.68 $ 0.69 $ 0.69
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 1 $ 0.83 $ 0.87 $ 0.88 $ 0.88
Inventory cost $ 0.45 $ 0.45 $ 0.45 $ 0.45 $ 0.45 $ 0.38
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.29
Total cost part 3 $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.67
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55
# of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 10 $1,07,670 $72,171 $56,964 $37,982
Part 3 20 $11,587 $19,389 $28,733 $28,780 $34,993 $81,468
Part 7 70 $2,57,600
All Parts $1,19,257 $91,560 $85,697 $66,762 $34,993 $3,39,068
Total
system: $7,37,337
Total Annual Inventory and Distribution Cost
Savings = 960326-737337
= $ 222,988

11. Summary
Option Investment Annual Cost
Savings from Base
Case
Rate of
return NPV(10%)
Decentralize all parts in five warehouses Base Case $ 9,60,326
Centralize all parts at NDC $ 8,50,000 $ 7,55,164 $ 2,05,162 24.1% $14,06,777
Centralize parts 3, 7, decentralize part 1 $ 6,50,000 $ 7,65,064 $ 1,95,262 30.0% $14,97,884
Centralize part 7, decentralize part3 1, 3 $ 3,00,000 $ 8,28,921 $ 1,31,405 43.8% $11,45,453
Serve region 5 part 1 from region 4 $ 6,00,000 $ 7,51,714 $ 2,08,612 34.8% $16,94,734
Centralize part 7, Part 3 served from all
DCs and NDC, part 1 form all regions
except Region 5 $ 8,50,000 $ 7,37,337 $ 2,22,988 26.2% $16,02,868

12. Lesson Learnt
The value of centralization of inventory is affected by the coefficient of
variation as well as the correlation of demand. High coefficient of
variation products with low correlation provide the biggest gains from
centralization while low coefficient of variation products with high
correlations provide the least value from centralization.

13. THANK YOU