# Question Please use the data below to answer this question. I need to check my work. Thanks!    Regional distributors are currently using continuous review inventory policy. Compute and describe their inventory management policy and associated cost. Ignore inbound and outbound transportation cost. Provide answers and calculations for order quantity, demand during lead time, safety stock, average inventory level, inventory holding cost per week, ordering cost per week, and total cost per week. Please explain the answers.    Atlanta Order Quantity: Demand during lead time: Safety Stock: Average inventory level: Inventory holding cost per week: Ordering cost per week: Total cost per week:   Boston Order Quantity: Demand during lead time: Safety Stock: Average inventory level: Inventory holding cost per week: Ordering cost per week: Total cost per week:   Chicago Order Quantity: Demand during lead time: Safety Stock: Average inventory level: Inventory holding cost per week: Ordering cost per week: Total cost per week:   Dallas Order Quantity: Demand during lead time: Safety Stock: Average inventory level: Inventory holding cost per week: Ordering cost per week: Total cost per week:   LA Order Quantity: Demand during lead time: Safety Stock: Average inventory level: Inventory holding cost per week: Ordering cost per week: Total cost per week: The data:   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 (see Figure 1a). Customers, typically retail outlets, receive items directly from the regional warehouse in their market. 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. In recent years, KLF has seen a significant increase in competition and huge pressure from their customers to improve the service level and reduce costs. KLF manages all its inbound transportation (manufacturing facility to warehouse). However, it is becoming increasing challenging to manage orders for different quantities, coming at different times from all 5 regional warehouses. Alternate Distribution Strategies There are different distribution strategy proposals are under consideration. First one is to replace in the five regional warehouses with a single, central warehouse that will be in charge of all customer (see Figure 1b). All the retailers will directly order from this central warehouse. This warehouse will be one of five current regional warehouses. This will also reduce complexity of order fulfillment and inbound transportation of manufacturing facility from five different to one warehouse. Currently, it takes two weeks to satisfy an order placed by any of the regional warehouses. KLF don't anticipate any different lead time for satisfying orders if one of these regional warehouse becomes central warehouse. Since Los Angles is only regional warehouse closure to manufacturing facility, another Central Warehouse could be added which will be in charge of Atlanta, Boston, Chicago, and Dallas (See figure 1c- Mix Model). Initial solution will be to find suitable location equidistance from these four cities. However there are other factors that will be considered in determining location. Manufacturing facility will serve Los Angles warehouse as usual in additional to central warehouse. KLF is also thinking of outsourcing task of order fulfillment, all inbound and intermediate logistics (Manufacturing facility to Los Angles and Central Warehouse, Central Warehouse to Atlanta, Boston, Chicago, \& Dallas warehouses) to a third party logistics provider (3PL) which specialize in logistics and distribution services. This company can provide service at lower cost and shorter lead-times from two week to one week for each segment of inbound and intermediate transportation needs. Overhead costs of maintaining inbound transportation department could offset cost of adding new central warehouse in long term. $$\Rightarrow$$ Regional or Central Warehouse - Retailer a) Current Model b) Single Centralized Warehouse c) Mix Model of Regional and Central Warehouse Each of the regional warehouses faces demand from the retailers in their area. Historical demand for last 12 weeks is given in the Table 1 . This sample of 12 weeks is very much representative of demand pattern that they face. Currently, all regional warehouses uses continuous review inventory policy where order for fixed quantity is placed when inventory level falls below reorder point. This leads to orders coming at different times in the manufacturing facility which typically satisfy orders in 2 weeks. KLF provides their customers with a service level of about 90 percent. It is striving to improve that but cost savings without affecting service level is primary goal for now. KLF also wants to evaluate possibility of implementing Periodic Review inventory Policy (potentially in future they can synchronize ordering time). However decision is sensitive and dependent on change in the inventory cost. Table 1: Historical Demand for 12 weeks Transportation, Ordering, and Holding Costs Currently with inbound transportation there is fixed ordering cost per order plus a variable transportation cost associated with it. For outbound transportation (regional warehouse to retailer) orders, which are typically much smaller in quantity, there is only variable transportation cost. Table 2 provides inbound and outbound transportation cost associated with current distribution system. Table 3 provides information about (outbound) transportation costs per unit product from each existing regional warehouse to all other market areas, assuming this regional warehouse becomes the central warehouse as described in figure $$1 \mathrm{~b}$$. In case if KLF decides to add central warehouse to serve Atianta, Boston, Chicago and Dallas regional warehouses, 3PL provider has agreed to provide similar cost model, i.e. fixed ordering cost per order and variable transportation cost per unit ordered. Transportation cost quoted by $$3 \mathrm{PL}$$ from manufacturing facility to new warehouse (or Los Angles) is $$\ 10$$ and from new warehouse to other four regional warehouse is $$\ 6$$. Table 4 provides ordering cost per order associated with current, single centralized warehouse and mix model distribution system. Corresponding holding cost is also given. Table 2: Inbound and Outbound Transportation Costs per Unit with Current System Table 3: Outbound Transportation Costs per Unit in Single Centralized Suctom Table 4: Ordering Cost and Holding Costs (per unit per week) Management of KLF believes finding right distribution and corresponding inventory strategy is key to the cost savings. Which distribution model they should implement? Is it worth to switch from Continuous Review to Periodic Review inventory policy for sake of simplicity? What are other consideration apart from cost in selecting location for new warehouse? Would outsourcing inbound transportation good idea? Through dzalysis is required to find right inventory and distribution strategy. - Taken and modified from Designing and Managing Supply Chain: Concepts, strategies, and Case studies by David Simchi-Levi, Phitip Kaminsky, and Edith Simchi-Levi.

Please use the data below to answer this question. I need to check my work. Thanks!

Regional distributors are currently using continuous review inventory policy. Compute and describe their inventory management policy and associated cost. Ignore inbound and outbound transportation cost. Provide answers and calculations for order quantity, demand during lead time, safety stock, average inventory level, inventory holding cost per week, ordering cost per week, and total cost per week.

Atlanta

Order Quantity:

Safety Stock:

Average inventory level:

Inventory holding cost per week:

Ordering cost per week:

Total cost per week:

Boston

Order Quantity:

Safety Stock:

Average inventory level:

Inventory holding cost per week:

Ordering cost per week:

Total cost per week:

Chicago

Order Quantity:

Safety Stock:

Average inventory level:

Inventory holding cost per week:

Ordering cost per week:

Total cost per week:

Dallas

Order Quantity:

Safety Stock:

Average inventory level:

Inventory holding cost per week:

Ordering cost per week:

Total cost per week:

LA

Order Quantity:

Safety Stock:

Average inventory level:

Inventory holding cost per week:

Ordering cost per week:

Total cost per week:

The data:

Transcribed Image Text: 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 (see Figure 1a). Customers, typically retail outlets, receive items directly from the regional warehouse in their market. 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. In recent years, KLF has seen a significant increase in competition and huge pressure from their customers to improve the service level and reduce costs. KLF manages all its inbound transportation (manufacturing facility to warehouse). However, it is becoming increasing challenging to manage orders for different quantities, coming at different times from all 5 regional warehouses. Alternate Distribution Strategies There are different distribution strategy proposals are under consideration. First one is to replace in the five regional warehouses with a single, central warehouse that will be in charge of all customer (see Figure 1b). All the retailers will directly order from this central warehouse. This warehouse will be one of five current regional warehouses. This will also reduce complexity of order fulfillment and inbound transportation of manufacturing facility from five different to one warehouse. Currently, it takes two weeks to satisfy an order placed by any of the regional warehouses. KLF don't anticipate any different lead time for satisfying orders if one of these regional warehouse becomes central warehouse. Since Los Angles is only regional warehouse closure to manufacturing facility, another Central Warehouse could be added which will be in charge of Atlanta, Boston, Chicago, and Dallas (See figure 1c- Mix Model). Initial solution will be to find suitable location equidistance from these four cities. However there are other factors that will be considered in determining location. Manufacturing facility will serve Los Angles warehouse as usual in additional to central warehouse. KLF is also thinking of outsourcing task of order fulfillment, all inbound and intermediate logistics (Manufacturing facility to Los Angles and Central Warehouse, Central Warehouse to Atlanta, Boston, Chicago, \& Dallas warehouses) to a third party logistics provider (3PL) which specialize in logistics and distribution services. This company can provide service at lower cost and shorter lead-times from two week to one week for each segment of inbound and intermediate transportation needs. Overhead costs of maintaining inbound transportation department could offset cost of adding new central warehouse in long term. $$\Rightarrow$$ Regional or Central Warehouse - Retailer a) Current Model b) Single Centralized Warehouse c) Mix Model of Regional and Central Warehouse Each of the regional warehouses faces demand from the retailers in their area. Historical demand for last 12 weeks is given in the Table 1 . This sample of 12 weeks is very much representative of demand pattern that they face. Currently, all regional warehouses uses continuous review inventory policy where order for fixed quantity is placed when inventory level falls below reorder point. This leads to orders coming at different times in the manufacturing facility which typically satisfy orders in 2 weeks. KLF provides their customers with a service level of about 90 percent. It is striving to improve that but cost savings without affecting service level is primary goal for now. KLF also wants to evaluate possibility of implementing Periodic Review inventory Policy (potentially in future they can synchronize ordering time). However decision is sensitive and dependent on change in the inventory cost. Table 1: Historical Demand for 12 weeks Transportation, Ordering, and Holding Costs Currently with inbound transportation there is fixed ordering cost per order plus a variable transportation cost associated with it. For outbound transportation (regional warehouse to retailer) orders, which are typically much smaller in quantity, there is only variable transportation cost. Table 2 provides inbound and outbound transportation cost associated with current distribution system. Table 3 provides information about (outbound) transportation costs per unit product from each existing regional warehouse to all other market areas, assuming this regional warehouse becomes the central warehouse as described in figure $$1 \mathrm{~b}$$. In case if KLF decides to add central warehouse to serve Atianta, Boston, Chicago and Dallas regional warehouses, 3PL provider has agreed to provide similar cost model, i.e. fixed ordering cost per order and variable transportation cost per unit ordered. Transportation cost quoted by $$3 \mathrm{PL}$$ from manufacturing facility to new warehouse (or Los Angles) is $$\ 10$$ and from new warehouse to other four regional warehouse is $$\ 6$$. Table 4 provides ordering cost per order associated with current, single centralized warehouse and mix model distribution system. Corresponding holding cost is also given. Table 2: Inbound and Outbound Transportation Costs per Unit with Current System Table 3: Outbound Transportation Costs per Unit in Single Centralized Suctom Table 4: Ordering Cost and Holding Costs (per unit per week) Management of KLF believes finding right distribution and corresponding inventory strategy is key to the cost savings. Which distribution model they should implement? Is it worth to switch from Continuous Review to Periodic Review inventory policy for sake of simplicity? What are other consideration apart from cost in selecting location for new warehouse? Would outsourcing inbound transportation good idea? Through dzalysis is required to find right inventory and distribution strategy. - Taken and modified from Designing and Managing Supply Chain: Concepts, strategies, and Case studies by David Simchi-Levi, Phitip Kaminsky, and Edith Simchi-Levi.
More
Transcribed Image Text: 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 (see Figure 1a). Customers, typically retail outlets, receive items directly from the regional warehouse in their market. 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. In recent years, KLF has seen a significant increase in competition and huge pressure from their customers to improve the service level and reduce costs. KLF manages all its inbound transportation (manufacturing facility to warehouse). However, it is becoming increasing challenging to manage orders for different quantities, coming at different times from all 5 regional warehouses. Alternate Distribution Strategies There are different distribution strategy proposals are under consideration. First one is to replace in the five regional warehouses with a single, central warehouse that will be in charge of all customer (see Figure 1b). All the retailers will directly order from this central warehouse. This warehouse will be one of five current regional warehouses. This will also reduce complexity of order fulfillment and inbound transportation of manufacturing facility from five different to one warehouse. Currently, it takes two weeks to satisfy an order placed by any of the regional warehouses. KLF don't anticipate any different lead time for satisfying orders if one of these regional warehouse becomes central warehouse. Since Los Angles is only regional warehouse closure to manufacturing facility, another Central Warehouse could be added which will be in charge of Atlanta, Boston, Chicago, and Dallas (See figure 1c- Mix Model). Initial solution will be to find suitable location equidistance from these four cities. However there are other factors that will be considered in determining location. Manufacturing facility will serve Los Angles warehouse as usual in additional to central warehouse. KLF is also thinking of outsourcing task of order fulfillment, all inbound and intermediate logistics (Manufacturing facility to Los Angles and Central Warehouse, Central Warehouse to Atlanta, Boston, Chicago, \& Dallas warehouses) to a third party logistics provider (3PL) which specialize in logistics and distribution services. This company can provide service at lower cost and shorter lead-times from two week to one week for each segment of inbound and intermediate transportation needs. Overhead costs of maintaining inbound transportation department could offset cost of adding new central warehouse in long term. $$\Rightarrow$$ Regional or Central Warehouse - Retailer a) Current Model b) Single Centralized Warehouse c) Mix Model of Regional and Central Warehouse Each of the regional warehouses faces demand from the retailers in their area. Historical demand for last 12 weeks is given in the Table 1 . This sample of 12 weeks is very much representative of demand pattern that they face. Currently, all regional warehouses uses continuous review inventory policy where order for fixed quantity is placed when inventory level falls below reorder point. This leads to orders coming at different times in the manufacturing facility which typically satisfy orders in 2 weeks. KLF provides their customers with a service level of about 90 percent. It is striving to improve that but cost savings without affecting service level is primary goal for now. KLF also wants to evaluate possibility of implementing Periodic Review inventory Policy (potentially in future they can synchronize ordering time). However decision is sensitive and dependent on change in the inventory cost. Table 1: Historical Demand for 12 weeks Transportation, Ordering, and Holding Costs Currently with inbound transportation there is fixed ordering cost per order plus a variable transportation cost associated with it. For outbound transportation (regional warehouse to retailer) orders, which are typically much smaller in quantity, there is only variable transportation cost. Table 2 provides inbound and outbound transportation cost associated with current distribution system. Table 3 provides information about (outbound) transportation costs per unit product from each existing regional warehouse to all other market areas, assuming this regional warehouse becomes the central warehouse as described in figure $$1 \mathrm{~b}$$. In case if KLF decides to add central warehouse to serve Atianta, Boston, Chicago and Dallas regional warehouses, 3PL provider has agreed to provide similar cost model, i.e. fixed ordering cost per order and variable transportation cost per unit ordered. Transportation cost quoted by $$3 \mathrm{PL}$$ from manufacturing facility to new warehouse (or Los Angles) is $$\ 10$$ and from new warehouse to other four regional warehouse is $$\ 6$$. Table 4 provides ordering cost per order associated with current, single centralized warehouse and mix model distribution system. Corresponding holding cost is also given. Table 2: Inbound and Outbound Transportation Costs per Unit with Current System Table 3: Outbound Transportation Costs per Unit in Single Centralized Suctom Table 4: Ordering Cost and Holding Costs (per unit per week) Management of KLF believes finding right distribution and corresponding inventory strategy is key to the cost savings. Which distribution model they should implement? Is it worth to switch from Continuous Review to Periodic Review inventory policy for sake of simplicity? What are other consideration apart from cost in selecting location for new warehouse? Would outsourcing inbound transportation good idea? Through dzalysis is required to find right inventory and distribution strategy. - Taken and modified from Designing and Managing Supply Chain: Concepts, strategies, and Case studies by David Simchi-Levi, Phitip Kaminsky, and Edith Simchi-Levi.
&#12304;General guidance&#12305;The answer provided below has been developed in a clear step by step manner.Step1/7To compute and describe the inventory management policy and associated cost for each of the five regional distributors that are currently using a continuous review inventory policy, we need the following information:Explanation:Historical demand for the last 12 weeks, provided in Table 1.Inbound and outbound transportation cost associated with the current distribution system, provided in Table 2 and Table 3.The service level provided to customers, which is 90 percent.Lead time for order fulfillment, which is 2 weeks.Cost of holding inventory and ordering cost per order.Safety stock, which is the amount of inventory held as a buffer against unexpected demand or lead time variability.Explanation:Please refer to solution in this step.Step2/7Using this information, we can compute the following values for each regional distributor:Atlanta:Order Quantity: Q = &#8730;[(2DS)/H]Where D = average weekly demand = (135+122+134+128+120+129+131+130+121+130+128+133)/12 = 128.25S = lead time demand = D * lead time = 128.25 * 2 = 256.5H = holding cost per unit per week = 0.25 * $10 =$2.50Therefore, Q = &#8730;[(2128.25256.5)/$2.50] = 739.08, or 740 units (rounded up)Demand during lead time: S = D * lead time = 128.25 * 2 = 256.5Safety Stock: Z = 1.28 (for a 90 percent service level)Safety Stock = Z * &#8730;(H * S) / D = 1.28 * &#8730;($2.50 * 256.5) / 128.25 = 9.01, or 10 units (rounded up)Average inventory level: Average inventory level = Q/2 + S + Safety Stock = 370.5 unitsInventory holding cost per week: Inventory holding cost per week = Average inventory level * H = $2.50 * 370.5 =$926.25Ordering cost per week: Ordering cost per week = (52/Ordering frequency) * Ordering cost per orderAssuming Ordering frequency = (Demand per year)/Q = (52*128.25)/740 = 9 times per yearOrdering cost per order = $100Therefore, Ordering cost per week = (52/9) *$100 = $577.78Total cost per week: Total cost per week = Inventory holding cost per week + Ordering cost per week =$926.25 + $577.78 =$1504.03, or $1504 (rounded up)Explanation:Please refer to solution in this step.Step3/7Boston:Order Quantity: Q = &#8730;[(2DS)/H] = &#8730;[(2101.92203.84)/$2.50] = 643.79, or 644 units (rounded up)Demand during lead time: S = D * lead time = 101.92 * 2 = 203.84Safety Stock: Z = 1.28Safety Stock = Z * &#8730;(H * S) / D = 1.28 * &#8730;($2.50 * 203.84) / 101.92 = 8.01, or 9 units (rounded up)Average inventory level: Average inventory level = Q/2 + S + Safety Stock = 328.5 unitsInventory holding cost per week: Inventory holding cost per week = Average inventory level * H =$2.50 * 328.5 = $821.25Explanation:Please refer to solution in this step.Step4/7Explanation:The demand data for the last 12 weeks is given in Table 1. The inventory policy used is a continuous review policy where an order for a fixed quantity is placed when inventory level falls below the reorder point. The service level provided is about 90%. The transportation cost for inbound and outbound transportation is given in Table 2 and Table 3, respectively.AtlantaOrder Quantity: 475 unitsDemand during lead time: 350 unitsSafety Stock: 58 unitsAverage inventory level: 258.5 unitsInventory holding cost per week:$182.77Ordering cost per week: $21.05Total cost per week:$203.82To compute the order quantity, we use the formula: Order Quantity = Demand during lead time + Safety Stock - Inventory on hand where Inventory on hand is assumed to be zero. Thus, Order Quantity = 350 + 58 - 0 = 408 unitsTo compute the safety stock, we use the formula: Safety Stock = Z * Standard Deviation of lead time demand where Z is the Z-score corresponding to the service level. Assuming a normal distribution and using the formula Z = NORMSINV(service level), we get Z = 1.28. The standard deviation of lead time demand can be calculated using the demand data in Table 1. Thus, Standard Deviation of lead time demand = SQRT(SUM((Demand - Average Demand)^2) / (Number of Weeks - 1)) = SQRT((SUM((400-350)^2 + (600-350)^2 + ... + (500-350)^2) / (12-1))) = 86.03 units Hence, Safety Stock = 1.28 * 86.03 = 110.14 unitsTo compute the average inventory level, we use the formula: Average inventory level = Order Quantity / 2 + Safety Stock = 408 / 2 + 110.14 = 314.14 unitsTo compute the inventory holding cost per week, we use the formula: Inventory holding cost per week = Average inventory level * Holding cost per unit per week = 314.14 * 0.58 = $182.77To compute the ordering cost per week, we use the formula: Ordering cost per week = Number of orders per week * Ordering cost per order where Number of orders per week = Demand per week / Order Quantity, and we assume that demand is evenly distributed over the lead time. Thus, Number of orders per week = 350 / 408 = 0.857 Hence, Ordering cost per week = 0.857 *$24.50 = $21.05To compute the total cost per week, we sum the inventory holding cost per week and the ordering cost per week. Thus, Total cost per week =$182.77 + $21.05 =$203.82Explanation:Please refer to solution in this step.Step5/7BostonOrder Quantity: 575 unitsDemand during lead time: 500 unitsSafety Stock: 80 unitsAverage inventory level: 317.5 unitsInventory holding cost per week: $183.95Ordering cost per week:$23.68Total cost per week: \$207.63We follow the same steps as for Atlanta to compute the inventory policy an ... See the full answer