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    9 views3 pages

    Risk Pooling Case

    Uploaded by

    SaiRam
    ujj

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 3
    64. DesiotNG AND MANAGING THE SUP®LY CHAIN 3.3 RISK POOLING Consider the following case, Risk Pooling ACME, a company that produces and distributes elec tronic equipment in the Northeast of the United States, faces a distribution problem. The current distribu tion system partitions the Northeast into two markets, each of which has a single warehouse, One ware- house is located in Paramus, New Jersey, and the sec~ ‘ond is located in Newton, Massachusetts. Customers, typically retailers, receive items directly from the ‘warehouses; in the current distribution system, each customer is assigned to a single market and receives, deliveries from the corresponding warehouse. The warehouses receive items from a manufactur ing facility in Chicago. Lead time for delivery to each of the warehouses is about one week and the manu- facturing facility has sufficient production capacity to satisfy any warehouse order. The current distribution strategy provides @ 97 percent service level; that is, the inventory policy employed by each warehouse is designed so that the probability of a stockout is, 3 percent. OF course, uniilled orders are lost to the competition and thus cannot be satisfied by future deliveries ‘Since the original distribution system was designed ‘over seven years ago, the company’s newly appointed CEO has decided to review the current logistics and distribution system. ACME handles about 1,500 dif- ferent products in its supply chain and serves about 10,000 accounts in the Northeast. ACME is considering the following alternative strategy: Replace the two warehouses with a single ‘warehouse located between Paramus and Newton that will serve all customer orders. We will refer to this, proposed system as the centralized distribution sys- tem. The CEO insists that the same service level, 97 percent, be maintained regardless of the logistics, strategy employed. Obviously, the current distribution system with ‘wo warehouses has an important advantage aver the single warehouse system because each warehouse is close to a particular subset of customers, decreasing delivery time. However, the proposed change also has ‘an important advantage: it allows ACME to achieve cither the same service level of 97 pereent with much lower inventory or a higher service level with the ‘same amount of total inventory. Intuitively this is explained as follows. With ran- dom demand, it is very likely that a higher-than- average demand at one retailer will be offset by a Jower-than-average demand at another. As the number of retailers served by a warehouse goes up, tis like- lihood also goes up. Indeed, this is precisely the third principle ofall forecasts described at the beginning of Section 3.2.2: aggregate forecasts are more accurate, How much can ACME reduce inventory if the company decides to switch to the centralized system ‘but maintain the same 97 perceat service level? ‘To answer that question, we need to perform amore Figorous analysis of the inventory policy that ACME should use in both the current system and the cen- tralized system, We will explain this analysis for two specific products, Product A and Product B, although the analysis must be conducted for all products, For both products, an order from the factory costs ‘$60 per order and holding inventory costs are $0.27 ‘per unit per week. In the current distribution system, the cost of transporting a product from a warehouse to ‘customer is, on average, $1.05 per product. Its esti- ‘mated that in the centralized distribution system, the transportation cost from the central warehouse will be, on average, $1.10 per product. For this analysis, wwe assume that delivery lead time is not significantly

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