17 Technical question KLF Electronics is an American manufac

17· Technical question: KLF Electronics is an American manufacturer of electronic cquipment. 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, ypically 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. Typically, it takes about two weeks to satisfy an order placed by any of the regional warehouses. Currently, KLF provides their customers with a service level of about 90 percent. In recent years, KLF has seen a significant increase in com- petition and huge pressure from their customers to improve the service level and reduce costs. To improve the service level and reduce costs, KLF would like to consider an alternative distribution strategy in which the five regional warchouses are replaced with a single, central warehouse that will be in charge of all customer orders. This warehouse should be one of the existing warehouses. The company CEO insists that whatever distribution strategy is used, KLF will design the strategy so that service level is increased to about 97 percent.

Solution

1. In this case, the demands from all warehouses are positively correlated. Therefore the benefits derived from proposed system would not be considerable and new centralized system wouldn’t be attractive.

2. However according to question one because of positively coloration the centralized system didn’t
seem attractive but according to these table, centralized system would save 60% of Average inventory
also by decreasing the inventory carrying cost and ordering cost this system would have less total cost.
The cost of centralized system in all warehouses is less than the cost of decentralized system, and
the Total cost in Los Angeles warehouse is less than the other warehouses, therefore Los Angeles should
be used as a centralized warehouse.
week AVG STD CV Q
Inbound per Unit
outbound per unit
Inbound Inbound
Ave Inv SR=90% L=2
Carrying Cost
Ordering cost
TC
Atlanta 39.7 12.8 0.32 590.8 12 13 476 515.67 362.63 453.29 369.262 2176.8
Boston 41.3 12.3 0.3 603.1 11.5 13 475.33 537.33 368.77 460.97 376.939 2219.3
Chicago 46.9 21.1 0.45 642.5 11 13 516.08 609.92 388.49 485.62 401.592 2401.7
Dallas 48.1 13.2 0.27 650.5 9 13 432.75 625.08 392.46 490.58 406.554 2347.4
Los Angeles 45.9 11.3 0.25 635.7 7 13 321.42 596.92 385.05 481.32 397.289 2182
Centralized 222 37.1 0.17 1397         765.95 957.43 873.406
Service Level 90%- lead time 2 weeks
Centralize Atlanta Boston Chicago Dallas LA Inbound Atlanta Boston Chicago Dallas LA Inbound
Carrying +Holding
TC
Atlanta 13 14 14 15 17 12 515.67 578.67 656.83 721.3 780.6 2663 1830.8 7758.8
Boston 14 13 22 15 17 11.5 555.33 537.33 1032.2 721.3 780.6 2552 1830.8 8021
Chicago 14 22 13 15 16 11 555.33 909.33 609.92 721.3 734.7 2441.1 1830.8 7813.4
Dallas 15 15 15 13 22 9 595 620 703.75 625.1 1010 1997.3 1830.8 7391.1
LA 17 17 16 22 13 7 674.33 702.67 750.67 1058 596.9 1553.4 1830.8 7173.7
Total cost in decentralized system
    2176.8+2219.3+2401.7+2182=11327
Average Inv (Decentralized) = 362.3+368.8+388.5+392.5+385.2= 1897.4
Average Inv (centralized) = Q/2+ Z*STD*SQRT (L) = (1397.5/2) + (1.28*37.1*SQRT (2)) =766
Improvement= (1897.4-766)/1897.4 = 0.6
By changing the system from decentralized to centralized company could save 60% in average inventory.
3. Service level 97% - lead time2 weeks
Centralized Atlanta Boston Chicago Dallas LA Inbound Atlanta Boston Chicago Dallas LA Inbound
Carrying +Holding
TC
Atlanta 13 14 14 15 17 12 515.67 578.67 656.83 721.3 780.6 2663 1870.2 7798.2
Boston 14 13 22 15 17 11.5 555.33 537.33 1032.2 721.3 780.6 2552 1870.2 8060.4
Chicago 14 22 13 15 16 11 555.33 909.33 609.92 721.3 734.7 2441.1 1870.2 7852.8
Dallas 15 15 15 13 22 9 595 620 703.75 625.1 1010 1997.3 1870.2 7430.5
LA 17 17 16 22 13 7 674.33 702.67 750.67 1058 596.9 1553.4 1870.2 7213.1
service Level 97% - Lead Time 0.5 week
Centralized Atlanta Boston Chicago Dallas LA Inbound Atlanta Boston Chicago Dallas LA Inbound
Carrying +Holding
TC
Atlanta 13 14 14 15 17 18 515.67 578.67 656.83 721.3 780.6 3994.5 1808.5 9074
Boston 14 13 22 15 17 17.25 555.33 537.33 1032.2 721.3 780.6 3828.1 1808.5 9280.5
Chicago 14 22 13 15 16 16.5 555.33 909.33 609.92 721.3 734.7 3661.6 1808.5 9017.1
Dallas 15 15 15 13 22 13.5 595 620 703.75 625.1 1010 2995.9 1808.5 8371.9
LA 17 17 16 22 13 10.5 674.33 702.67 750.67 1058 596.9 2330.1 1808.5 7931.6
Inv Level= Q/2+ Z*STD*SQRT (L)
Inv Level (service Level 97% - lead time 2 weeks) = (1397.5/2) + (1.88*37.1*SQRT (2)) =797.5
Inv Level (service Level 97% - lead time 0.5 week) = (1397.5/2) + (1.88*37.1*SQRT (0.5)) =748
Improvement = (797.5-748)/797.5= 0.06
By decreasing lead time to 0.5 week we can have 6% saving in average inventory
Los Angeles warehouse
(7931.6-7213.1)/ 7213.1=0.1
It means that in the service level of 97%, by decreasing the lead time from 2 weeks to 0.5 week, the Total
cost in will increase by 10%
I don’t recommend this strategy because this strategy will increase the cost about 10% (718.5$) and by
that the company could save just 6% in average inventory.
The service level Vs Inventory level graph is nonlinear and has lower slop in higher service level,
increasing the service level from 90% to 97% wouldn’t be reasonable