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Midterm Exam

Problem 1 (10 points) 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. Customers, typically retail outlets, receive items directly from the regional warehouse in their market area. 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. Typically, it takes about two weeks to satisfy an order placed by any of the regional warehouses. In recent years, KLF has seen a significant increase in competition and huge pressure from their customers to improve service level and reduce costs. To improve service level and reduce costs, KLF would like to consider an alternative distribution strategy in which the five regional warehouses are replaced with a single, central warehouse that will be in charge of all customer orders. Describe how you would design a new logistics network consisting of only a single warehouse. Provide an outline of such an analysis: What are the main steps? Specifically, what data would you need? What are the advantages and disadvantages of the newly suggested distribution strategy relative to the existing distribution strategy ? SOLUTION (Question 3 Discussion Questions Chapter 3 on Textbook) This solution is part of the material that came with the book and it was posted online
The decision that a single warehouse will be built has been made up-front. Therefore, we only need to focus on the location and capacity of the warehouse, and determine how much space should be allocated to each product in the warehouse. The main steps of the analysis are outlined below. 1. Data collection Location of retail stores, existing warehouses (5 warehouses located in Atlanta, Boston, Chicago, Dallas and Los Angeles), manufacturing facilities (a single manufacturing facility in San Jose), and suppliers. ii. Candidate locations for the new warehouse. iii. Information about products, i.e., their sizes, shapes and volumes. iv. Annual demand (past actuals and future estimates) and service level requirements of the retail stores. v. Transportation rates by available modes. vi. Transportation distances from candidate warehouse locations to retail stores. vii. Handling, storage and fixed costs associated with warehousing. Fixed costs should be expressed as a function of warehouse capacity. viii. Fixed ordering costs, order frequencies and sizes by product or product family. 2. Data aggregation. Demand needs to be aggregated based on distribution patterns and/or product types. Replace aggregated demand data points by a single customer. 3. Mathematical model building.
_________________________________________________________________________________________ Professor: Marisela M. Hing Page 1 of 5

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Midterm Exam

4. Model validation based on existing network structure. 5. Selection of a few low cost alternatives based on the mathematical model. For the final decision, incorporate qualitative factors that were disregarded in the mathematical model, e.g., specific regulations, environmental factors, etc. ii. Optionally, build a detailed simulation model to evaluate these low cost candidate solutions. 6. Decide where to locate the centralized warehouse.. With the centralized warehouse, service level will increase (less stock-outs) and inventory holding costs will decrease due to risk pooling. Also, fixed costs associated with warehousing will typically decrease, and inbound transportation costs from the manufacturing facility to the warehouse should be less than the sum of the previous inbound transportation costs. However, we will incur increased outbound transportation costs from the central warehouse to the retailers. In summary, the essential design tradeoff is between transportation costs on one hand, and inventory holding costs and service level requirements on the other. i.

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Midterm Exam

Problem 2 (10 points) A TV reseller stocks two brands of 42 TVs; LG and Sony. Annual demands for the brands brands are 15000 for LG TVs and 1500 for Sonys. Assume that each model costs the reseller \$100. A fixed transportation cost of \$60 is incurred each time an order is delivered. For each brand ordered and delivered on the same truck, an additional fixed cost of \$10 is incurred for receiving & storage. The reseller incurs a holding cost of 20 percent (annually per unit cost). To simplify the analysis here assume there is no lead-time. a) Evaluate the lot sizes that the manager at the reseller should order if lot for each brand are ordered & delivered independently. b) What would be the optimal lot size for each brand if the manager decides to aggregate and order both brands each time he places an order. c) Compare the strategies in a) and b) in terms of total cost (Calculate the costs). Is the result expected? Explain. SOLUTION a) Economic Order Quantity: 2 KD Q* = h Demand (D) Fixed ordering cost (K)
Transportation + receiving and storage

## Holding cost (h) EOQ: Q* (use formula) Round (Q*)

The manager at the reseller should order 324 LGs and 102 Sonys if lots for each brand are ordered & delivered independently. b) Aggregate Economic Order Quantity: Here the information about the two brands is aggregated. Let Da be the aggregate demand, Ka the aggregate fix cost and Qa* the aggregated economic order quantity: 2 K a Da Qa * = h Aggregate Demand (Da) Fixed ordering cost Ka
Transportation + receiving and storage

## _________________________________________________________________________________________ Professor: Marisela M. Hing Page 3 of 5

Midterm Exam

If the manager decides to aggregate and order both brands each time he places an order, the manager should order 363 TVs each time. To find how many of each type to order each time you could use the following reasoning 1. Find how many aggregate orders there will be in a year: Number of aggregate orders in a year: Na=Da/Qa*= 45.41476 2. Then you could find how many TVs of each type there should be in each order to satisfy the annual demand of each brand (DLG and DSony): Q(LG)= DLG/Na=15000/45.41476=330.2891330 Q(Sony)= DSony/Na=1500/45.41476=33.0289133 If the manager decides to aggregate and order both brands each time he places an order, the manager should order in total 363 TVs, 330 LG and 33 Sony. c) The formula for the relevant cost is
TRC (Q ) = ordering _ cos t + holding _ cos t = KD hQ + Q 2

In the first strategy (independent brand orders) the total relevant cost is:
TRC (Q LG ) + TRC (QSony ) = KD LG hQ LG KDSony hQ Sony + + + Q LG 2 QSony 2

## 70 *15000 20 * 324.037 70 *1500 20 * 102.495 + + + = 6480.741 + 2049.39 = 8530.131 324.037 2 102.4695 2

In the second strategy (aggregate brand orders) the total relevant cost is:
TRC (Qa ) =
=

K a Da hQa + Qa 2

## 80 *16500 20 * 363.318 + = 7266.31 363.318 2

The aggregate strategy is more efficient in terms of relevant cost. The aggregate strategy could be viewed as a case of risk pooling in products which may be a way to reduce costs. In this specific case of aggregation although ordering cost is higher (receiving and storage of two brands) there are less number of orders through the year which reduce the transportation costs.

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Midterm Exam

Problem 3 (6 points) Given the four stage supply chain in the figure, what happen to the variability in orders across the supply chain?

a) Decrease from retailer to factory if using decentralized demand information b) Increase from retailer to factory if using decentralized demand information c) Decrease from retailer to factory if using centralized demand information d) Increase from retailer to factory if using centralized demand information

Problem 4 (9 points) Match the definition and characteristics of different distribution strategies Strategy
A. Direct shipment B

Definition
Items are distributed from suppliers to retail through warehouses Items are distributed from suppliers to retail through warehouses but with short time in warehouses. Items shipped from the supplier to retail store without going through warehouses C A,C C A A B,C

Characteristics
Wal-Mart classic example Lead times are reduced Significant start-up investment Prevalent in the grocery industry JC Penney classic example Take advantage of risk-pooling