Factory VGSoM, IIT Kgp Krushers

8/2/2019 Factory VGSoM, IIT Kgp Krushers

1/17

VINOD GUPTA SCHOOL OF

MANAGEMENT,IIT KHARAGPURTEAM: KRUSHERS

Name : Ratan Ranjan

eMail:[email protected]

Phone: 07797257044

Name: Sachin Choudhary

eMail:

[email protected]

Phone: 09635152521
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


2/17

Option 1:

Implementing the following policy changes:-

1. Greater enforcement by the warehouse managers of maintaining only sufficient inventories in the warehouses to meetthe companys target service level of 99%

Impact:

Current inventory level at end of 2009 = $ 4.44 million (Since the whole case involves inventory in North American warehouses and

in transit); From Table 6 in case.

Projected inventory level at end of 2010 is given in Appendix 2 (Assumption 1).

North American warehouses and in transit at end of 2010 = $ 5.33 million.

All values are projected demand for year 2010

Griffin 500ml Beaker Erlenmeyer 500 ml flask Row total

No. of W/H 8 8

Demand 65.04 19.56

Standard Deviation 25.68 13.08

Target Fill (service level) 0.99 0.99Optimal Stock 124.78 49.99

Optimal Stock in all W/H 998.24 399.91

Cost of optimal inventory $3,953.05 $1,823.59 $5,776.64

Weightage 68% 32%

Total cost of optimal inventory for 100% units $3,953,049.83 $6,078,617.43 $10,031,667.26

Total cost of optimal inventory for 100% units with

weightage $2,705,139.38 $1,918,915.92 $4,624,055.29


3/17

Optimal stock = NORMINV (service level, Average bi weekly demand, SD of Average bi weekly demand)

Because Q* = F-1 (Cu / (Cu + Co) as given in case.

Cost of optimal inventory = Optimal Stock * cost price.

Weightage = Cost of optimal inventory of one product/(Cost of optimal inventory for both products)

Ex. Weightage (Griffin 500ml Beaker) = $3,953.05 / $5,776.64

Total cost of optimal inventory for 100% units with weight age =

Ex. Total cost of optimal inventory for 100% units with weight age (Griffin 500ml Beaker)=

68% * $3,953,049.83

Therefore total cost of inventory with 99% service level = $4,624,055.29

2. Discontinuation of the practice of allowing salespeople to maintain trunk stockImpact:-

Removing trunk cost kept with sales people will not increase the service level because the trunk stock is already considered for

calculating service level. However as correctly pointed out, this will reduce the responsiveness of sales people and they will lose the

hard earned customers. We can easily reduce the service level further because industry standard is well below 99% at 93% thus

ensuring efficiency and responsiveness.

3. Creation of daily reports and weekly summaries on inventory movements for every warehouse.Impact:-


4/17

For better management of inventory it is necessary that reports and weekly summaries are prepared for every warehouse. However

daily report will increase the workload and make report generation redundant. Reports every 3 days will serve the purpose and any

skewed data can then be studied once in a while.

4. Periodic physical audits and control procedures for all warehouse stocks.Impact:-

Periodic physical audits of stocks are very necessary for checking the veracity of period and weekly inventory movement report

generated by warehouse. This is necessary for maintaining service level and checking if sales manager are maintaining more than

required trunk costs.


5/17

Option 2:

Consolidating warehouse

In the current setup of eight warehouses, product is transferred to the customer in two stages. First products get transported to seven

warehouses from Waltham. In second stage these products get transferred to the customer from all the eight warehouses.

Consolidating warehouse will have one central warehouse at Waltham.

Produ

ct

Catego

ry

Containers

(bottles/flasks)

Measuring

devices(

beakers,pipettes,

cylinders)

Fittings (stoppers,

adapters) Funnels

Handlers (forceps,

stirrers, trays) Tubes Other

Units

sold

(000s) 2321 1283 442 185 1732 4420 18

Expect

ed

units

sale in

2010

(000s) 2785.2 1539.6 530.4 222 2078.4 5304 21.6

Weigh

t

pound

/ unit 0.25 0.13 0.09 0.16 0.05 0.06 0.13

Cost calculation of transportation for the current setup is given in table below.


6/17

Table 3: Cost of

transportation with

consolidating

warehouses in waltham

with winged fleet (option

2)

Container

s

(bottles/f

lasks)

Measuring

devices(

beakers,pip

ettes,cylind

er)

Fittings

(stoppers,

adapters)

Funnels

Handlers

(forceps,

stirrers,

trays)

TubesOth

erRemarks

Across 1 region fee ($ per

order) 12.00 5.00 5.00 5.00 5.00 5.00 5.00

Across 2 region fee ($ per

order) 16.00 12.00 12.00 12.00 12.00 12.00

12.0

0

Within region fee ($ per

order) 5.00 16.00 16.00 16.00 16.00 16.00

16.0

0

Weight Fee ($ per pound) 1.16 1.16 1.16 1.16 1.16 1.16 1.16

Weight (pound / unit) 0.25 0.13 0.09 0.16 0.05 0.06 0.13

Avg customer orderweight (pound) 9.80 9.80 9.80 9.80 9.80 9.80 9.80

Total Demand ('000) 2785.20 1539.60 530.40 222.00 2078.40 5304.00

21.6

0

Demand for one territory

('000) 348.15 192.45 66.30 27.75 259.80 663.00 2.70

Demand for Central

Region (3

warehouse)('000) 1044.45 577.35 198.90 83.25 779.40 1989.00 8.10

Demand for West Region

(2 warehouse) ('000) 696.30 384.90 132.60 55.50 519.60 1326.00 5.40

Demand for East Region

(3 warehouse) ('000) 1044.45 577.35 198.90 83.25 779.40 1989.00 8.10

Total Fixed Costs across 1

Region (central)(in $ '000) 319.73 36.82 9.54 6.65 18.69 63.42 0.54

Demand*(pound/unit)*

(cost per order)/(Avg.

customer order)

Total weight fee across 1

Region (central) (in $

'000) 302.89 83.72 21.69 15.13 42.49 144.20 1.22

Demand*(pound/unit)*

(weight fee)


7/17

Total Fixed Costs across 2

Region (west)(in $ '000) 284.20 58.91 15.26 10.65 29.90 101.48 0.86

Total weight fee across 2

Region (west) (in $ '000) 201.93 55.81 14.46 10.09 28.33 96.14 0.81

Total Fixed Costs Within

Region (east)(in $ '000) 133.22 117.83 30.53 21.29 59.81 202.96 1.72

Total weight fee Within

Region (east) (in $ '000) 302.89 83.72 21.69 15.13 42.49 144.20 1.22

Total Cost (in $ '000) 1544.86 436.80 113.16 78.94 221.71 752.40 6.37

Total Cost for all products

(in $ '000) 3154.26

When product transported and distributed from a consolidate central warehouse, for transportation purpose the network gets divided

up in three region central, East and West warehouses based on geographical location. Freight of different region will be as per the

annexure given in the case. Cost calculation of transportation for the centralised warehouse setup is given in table below.

Eastern region (3 warehouses) central region (3 warehouses) western region (2 warehouses)

Total Transportation Cost = $ 3,154,257.78


8/17

Option 3:

Outsourcing Warehousing to Global Logistics

In case of outsourcing warehouse function to M/S Global, all goods would have to first be shipped from Waltham to Atlanta using

standard bulk shipment option. After this all order-fulfilment and inventory-control functions would be administered by Global

Logistics.

Cost calculation of transportation in case of outsourcing of warehouse function to Global Logistics is given in table below.

Table 3: Cost of

transportation with

Outsourcing

Warehousing toGlobal Logistics

(option 3)

Container

s

(bottles/flasks)

Measuring

devices(

beakers,pip

ettes,cylinder)

Fittings

(stoppers,

adapters)

Funnels

Handlers

(forceps,

stirrers,trays)

TubesOth

er

Remarks

Cost of delivery

fromAtlanta to: (per

10 pound)

Southeast ($) 16.69 16.69 16.69 16.69 16.69 16.69

16.6

9

Northeast ($) 18.91 18.91 18.91 18.91 18.91 18.91

18.9

1

Central ($) 22.25 22.25 22.25 22.25 22.25 22.25

22.2

5

Southwest ($) 24.48 24.48 24.48 24.48 24.48 24.48

24.4

8

Northwest ($) 25.59 25.59 25.59 25.59 25.59 25.59

25.5

9

Weight / unit (pounds) 0.25 0.13 0.09 0.16 0.05 0.06 0.13

Avg customer order

weight (pounds) 9.80 9.80 9.80 9.80 9.80 9.80 9.80


9/17

Total Demand ('000) 2785.2 1539.6 530.4 222 2078.4 5304 21.6

Demand / sales

territory ('000) (total

8 territory ) 348.15 192.45 66.3 27.75 259.8 663 2.7

Cost for bulkshipments / pound ($) $0.40 $0.40 $0.40 $0.40 $0.40 $0.40 $0.40

Total Shipment cost to

Atlanta

$

278.52

$

76.98

$

19.94

$

13.91

$

39.07

$

132.60

$

1.12

Total Demand in

following regions

('000)

Southeast (1 sales

territory) 348.15 192.45 66.3 27.75 259.8 663 2.7

Northeast (3 sales

territory) 1044.45 577.35 198.9 83.25 779.4 1989 8.1

Central (2 sales

territory) 696.3 384.9 132.6 55.5 519.6 1326 5.4

Southwest (1 sales

territory) 348.15 192.45 66.3 27.75 259.8 663 2.7

Northwest (1 sales

territory) 348.15 192.45 66.3 27.75 259.8 663 2.7

Total shipment cost ($

000) depending on

regional demand

Southeast (1 sales

territory)

$

148.23

$

40.97

$

10.61

$

7.40

$

20.80

$

70.57

$

0.60 Average weight ofcustomer demand is 9.8

pounds which is almost

equal to 10 pounds for

which the costs are

given. Hence number of

orders calculated using

9.8 pounds and cost

assigned of 10 pounds.

Northeast (3 sales

territory)

$

503.84

$

139.26

$

36.08

$

25.17

$

70.68

$

239.87

$

2.03

Central (2 sales

territory)

$

395.22

$

109.24

$

28.30

$

19.74

$

55.45

$

188.16

$

1.59

Southwest (1 sales

territory)

$

217.42

$

60.09

$

15.57

$

10.86

$

30.50

$

103.51

$

0.88

Northwest (1 sales $ $ $ $ $ $ $


10/17

territory) 227.27 62.82 16.27 11.35 31.88 108.20 0.92

Total Cost, product

wise ($ 000)

$

1,770.50

$

489.35

$

126.77

$

88.44

$

248.39

$

842.91

$

7.14

Total Cost ($ 000)

$

3,573.50

Total cost of transportation in case ALEL outsource warehouse function to Global Logistics will be $ 3,573,502.33


11/17

Option 4:

Reducing the target service level

Impact:

The best bet of reducing the target service level will be reducing it to the optimal service level for the two representative products as

mentioned in the case (from Appendix 1).

The calculations involved in this section are the same as those in part 1 of option 1.

Griffin 500ml

Beaker Erlenmeyer 500 ml flask

No. of W/H 8 8

Demand 65.04 19.56

Standard Deviation 25.68 13.08

Target Fill (service level) 0.958 0.953

Optimal Stock 109.41 41.46


Cost of optimal inventory $3,466.22 $1,512.63 $4,978.84

Weightage 70% 30%

Total cost of optimal inventory for 100% units $3,466,215.04 $5,042,097.40 $8,508,312.43

Total cost of optimal inventory for 100% units with

weightage $2,413,139.69 $1,531,846.24 $3,944,985.93

Total cost of maintaining inventory = $3,944,985.93


12/17

Option 5:

Combining options 3 and 4

As mentioned in case outsourcing warehousing to global logistics will enable ALEL get rid of inventory write-offs ie. Insurance (1%)

and warehouse operation cost (15%).

Both these expenses will be eliminated resulting in decrease of cost for both the represented products. There will be new underage cost

(10 % of cost) and overage cost (0.54% of cost). The new fill rate is calculated in the below table.

Present details Outsourcing to global logistics

Griffin 500ml

Beaker

Erlenmeyer 500 ml

flask

Griffin 500ml

Beaker

Erlenmeyer 500 ml

flask

Unit cost 3.96 4.56 3.3264 3.8304Unit price 8.8 9.5 8.8 9.5

Insurance cost 0.0396 0.0456

Cost of capital 0.5544 0.6384 0.465696 0.536256

Warehouse

operation 0.594 0.684

Gross margin 4.84 4.94 5.4736 5.6696

Underage cost 0.48 0.49 0.54736 0.56696

Overage cost 0.02 0.03 0.01796256 0.02068416

Fill rate 95.81% 95.15% 96.82% 96.48%

Note: When transportation is given to Global logistics only one (1) central warehouse will be required.

Table below gives the optimal level of inventory required for above calculated fill rate.


13/17

Griffin 500ml

Beaker

Erlenmeyer 500

ml flask

No. of W/H 1 1

Average bi weekly demand 520.08 156.36

Standard deviation of Average bi weeklydemand 61.2 31.2

Target Fill (service level) 96.82% 96.48%

Optimal Stock 633.63 212.81


Cost of optimal inventory $2,107.70 $815.15 $2,922.85

Weightage 72% 28%

Total cost of optimal inventory for 100%

units $2,107,695.77 $2,717,179.42 $4,824,875.19

Total cost of optimal inventory for 100%

units with weightage $1,519,880.28 $757,794.45 $2,277,674.73


14/17

Comparison of all the options mentioned in the question

Option 1 Implementing the Proposed policy Changes + All 8 warehouses and winged fleet

Option 2 Consolidating Warehouses + Expected inventory with 1 warehouse

Option 3 Outsourcing Warehousing to Global Logistics + Inventory with 1 warehouseOption 4 Reduced service level (optimal) + All 8 warehouses and winged fleet

Option 5 Outsourcing Warehousing to Global Logistics + Reduced service level (New optimal)

Option 1 Option 2 Option 3 Option 4 Option 5

Inventory Level $ 4,624,055.29 $ 2,867,164.38 $ 2,867,164.38 $ 3,944,985.93 $ 2,277,674.73

Transportation Cost $ 2,844,776.74 $ 3,154,257.78 $ 3,573,502.33 $ 2,844,776.74 $ 3,573,502.33

Total Cost $ 7,468,832.04 $ 6,021,422.16 $ 6,440,666.71 $ 6,789,762.67 $ 5,851,177.06

Hence, we can see by comparison that OPTION 5 is the best alternative.


15/17

Appendix 1

2010

Griffin 500ml

Beaker

Erlenmeyer 500

ml flask Comments

Units sold 13521.6 4066.820% increasefrom 2009

Percent of all units sold 0.10% 0.03%

Annual carrying costs (%) 14% 14%

Unit price $8.80 $9.50

Unit cost $3.96 $4.56

Cost of underage $0.48 $0.49

Cost of overage $0.02 $0.03

Optimal service level 95.80% 95.30%

Average bi-weekly demand (8warehouses) 65.04 19.56

20% increasefrom 2009

Standard deviation of bi-weekly demand(8 warehouses) 25.68 13.08


Average bi-weekly demand (2warehouses) 260.04 78.24


Standard deviation of bi-weekly demand(2 warehouses) 45.96 23.4


Average bi-weekly demand ( 1warehouse) 520.08 156.36 20% increasefrom 2009Standard deviation of bi-weekly demand(1 warehouse) 61.2 31.2



16/17

Appendix 2:

Dec-09 Dec-10 Comments

Raw materials/WIP inventory 2.18 2.616

20% increase from

2009Finished goods inventory

Manufacturing site 0.20 0.2420% increase from2009

North American warehouses andin transit 4.44 5.33

20% increase from2009

Overseas warehouses and intransit 1.90 2.28

20% increase from2009

Total finished goods 6.54 7.8520% increase from2009

Total inventory 8.72 10.4620% increase from2009


17/17

Assumptions:

1) Inventory also increases by 20% in the next year corresponding to increase in sales.2) Mapping of region and warehouses depending on the location given in the map earlier in the document.

Winged fleet

Eastern Region Waltham + Toronto + Chicago

Central Region Denver + Dallas + Atlanta

Western

Region Phoenix + Seattle

Global LogisticsSoutheast Atlanta

Northeast Chicago, Toronto, Waltham

Central Dallas + Denver

Southwest Phoenix

Northwest Seattle

Costs for the different regions were also considered for taking decisions.

3) For calculating transportation cost for GLOBAL Logistics average weight of customer demand is 9.8 pounds which isalmost equal to 10 pounds for which the costs are given.

Hence number of orders calculated using 9.8 pounds and cost assigned of 10 pounds.

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