For the past few years, the profits of ALKO have shrunk because of a more active concurrence. Then, the board of directors of this company, which produces lighting fixtures, decided to hire Gary Fisher to try to find a solution to reduce the delivery costs. After having studied how the company used to work, Gary Fisher concluded that the main problem was to be found in the operating performance. Until then, the company only aimed at a good quality and competitive production and never cared much for enforcing the efficiency of the supply chain. As a consequence, Gary Fisher decided to set up a task force to try to improve it. After having studied the problem, the task force drew the following conclusion. For the moment, lighting fixtures for the whole United States are produced in 3 factories, all of them situated around Cleveland. From Cleveland, the finished products are sent to 5 regional Delivery Centers (DC). Ultimately, the goods are delivered to customers from the DC within one single day. The problem of this system is that it generates important transportation and warehousing costs.
[...] We are using the formula given by: With the standard deviation of the demand period I the interval between two orders And Z the normal distribution In our case, Z = 95% that corresponds to 1,645 in the table. The delivery lead time is different for each region, as seen in table 1. The deliveries are done every week, so that means that the interval between two orders is equal to 7. In the table 4 below, we can find the safety stock for each region and for each product. [...]
[...] Finally, the annual inventory costs are equal to the sum of the warehouse costs of the average inventory, the warehouse costs of the safety stock and the holding costs of every unit in transit. The calculation gives: 65, 02+50, 64+ = 167.55 $ / day and 167.5 *300= 50250 $ / year Per year, the annual inventory costs is equal to 50250 $ The distribution costs are equal to the sum of the transportation costs from the plant to the DC and the transportation costs from the DC to the customer calculated above, that gives: 12, 2433+12,384 = 24,63 $ / day and 24,63*300= 7389 $ / year Per year, the distribution costs is equal to 7389 $ Changes in setting up an National Distribution Centre In the new system, we are following what the task force recommended, which is to set up a National Distribution Centre instead of having 5 different Distribution Centres in each region. [...]
[...] The advantage is double for the requesting company: first of all, its delivery system would be undertaken by professionals, with high quality standards, in addition we can assume it would allow ALKO to make savings. In a wider prospect, we can even imagine that the company could relocate its production facilities to a low cost country, in order to take profit from lowers working costs. It could for example choose to relocate them to Mexico, near the border. In addition to smaller delivery costs allowed by hiring a sub-contractor, the company would make [...]
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