LOGISTICS & SUPPLY CHAIN MANAGEMENT

CASE REPORT: “Managing Inventories at ALKO Inc.”

Submitted by

Group 7
Harshvardhan Saraswat (16PGDM079)
Rajat Gupta (16PGDM105)
Samarth Jain (16PGDM109)
Sanket Sinha (16PGDM111)
Shuvajit Saha (16PGDM116)
Case Synopsis

ALKO began in 1943 in a garage workshop set up by John Williams at his Cleveland home.
In February 1948, he obtained a patent for one of his lighting design for lighting fixtures. He
decided to produce it in his workshop and tried marketing it in the Cleveland area. The product
sold well and by 1957, ALKO had grown to a $3 million company. It’s lighting fixtures were
well known for their outstanding quality. By then, it sold a total of 5 products.

ALKO go public in 1963. Since then, ALKO has been very successful, and the company has
started distributing its products nationwide. As competition intensified in the 1980s, ALKO
introduced many new lighting fixture designs. Altough ALKO had taken great care to ensure
that product quality did not suffer, the company’s profitability began to worsen. The problem
was that margins had begun to shrink as competition in the market intensified.

The board decided to reorganized starting at the top. Gary Fisher was hired to reorganize and
restructure the company in 1999. Fisher found a company teetering on the edge. Fisher then
analyzed that the key was in the operating performance. Altough the company had always
been outstanding at developing and producing new products, it had historically ignored its
distribution system. Fisher set up a task force to review the company’s current distribution
system.

Case Analysis

The current distribution system at ALKO :

 All production occurred at 3 facilities located in the Cleveland area.
 The plants scheduled production based on DC order.
 Orders were transported from plants to the DCs in TL quantities because order sizes
tended to be large. In 2009, TL costs from the plants to DCs averaged $0.09 per unit.
 Customer placed orders with the DCs.
 Shipment from DC to customers were LTL. LTL shipping costs from DC to
customer averaged $0.10 per unit.
 DC ordered using a periodic review policy with a reorder interval of 6 days.
 Lead time 5 days between the time a DC placed an order with a plant and the time
the order was delivered from the plant.
 Holding cost $0.15 per unit per day.
 All DCs carried safety inventories to ensure a CSL of 95%.

Alternative Distribution System for ALKO :

 ALKO closed its current 5 DC.
 ALKO build a National Distribution Center (NDC) outside Chicago.
 Costs from Plant to NDC $0.05 per unit.
  Shipment cost from NDC to customer $ 0.24 per unit.
 Total replenishment for NDC still five days.
 The CSL out of NDC still continued 95%.
·
Our Solutions

We have calculated the Total Cost (Inventory Holding + Transportation Cost) for the below
mentioned scenarios:
1. All DC Decentralized (Existing)
2. All Centralized
3. Option 1 – Part 3 and 7 are centralized while Part 1 is decentralized.
4. Option 2 – Part 3 and 7 are centralized while Region 4 & 5 being sourced from 4 and Region
2 & 3 being sourced DC 2.

Option 1 Rationale:

1. Part 1 is Fast Moving Object. Hence high responsiveness is required which can be achieved from
decentralized inventory. Hence we have gone for decentralizing inventory.
2. Part 3 and 7 are relatively slow moving they have been centralized.

Option 2 Rationale:

1. Part 1 is Fast Moving Object. Hence high responsiveness is required which can be achieved from
decentralized inventory. Hence we have gone for decentralizing inventory.
2. Part 3 and 7 are relatively slow moving they have been centralized.
3. Since Region 5 and Region 4 individually have low demands, it is fruitful to combine both of
them. The same argument holds for Region 2 and 3. Furthermore, regions 4 and 5 are
geographically adjacent to each other. Similarly, regions 2 and 3 are close to each other which
makes us try out for this option.

Summary of the calculated Total Costs are below:

Method Cost
All Centralized $755,164.18
All Decentralized $960,325.72
Option 1 $765,063.52
Option 2 $665,050.38

From the calculated cost structure, we find that Option 2 is the best option for ALKO Inc.
Appendix

Exhibit 1. The annual inventory and distribution cost of the current distribution system
Decentralized Vs Centralized

Inputs
$
Holding cost 0.15 per unit and day
$
Inbound Cost 0.09 per unit
$
Outbound Cost 0.10 per unit
$
Inbound Cost (Central) 0.05 per unit
$
Outbound Cost (Central) 0.24 per unit
Review Interval 6 days
Lead Time 5 days
Target cycle service level 95.00%
$
Correlation Coefficient -

Demand (part, region)

# of parts Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92 90.91
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA 12.27
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA 12.15
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA 6.45

Demand (review interval & lead time)

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Part 1 Mean 390.28 248.71 194.26 129.91 36.96 1000.12 1000.01
23.15 21.49 17.45 11.54 14.89 NA 40.71
Part 3 Mean 27.28 45.65 67.65 67.76 82.39 290.73 290.73
Part 3 SD 10.48 20.56 21.19 22.42 11.81 NA 40.30
Part 7 Mean 5.28 8.03 8.80 21.34 27.94 71.39 71.39
Part 7 SD 6.57 4.71 7.93 12.47 13.20 NA 21.40

Outputs
Cycle stock and safety stock
Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
Part 1Cycle Inventory 106.44 67.83 52.98 35.43 10.08 272.76 272.73
Part 1 SS 38.08 35.35 28.70 18.98 24.49 145.60 66.96
Part 3 Cycle Inventory 7.44 12.45 18.45 18.48 22.47 79.29 79.29
Part 3 SS 17.24 33.82 34.86 36.88 19.42 142.22 66.28
Part 7 Cycle Inventory 1.44 2.19 2.40 5.82 7.62 19.47 19.47

Part 7 SS 10.80 7.75 13.04 20.51 21.71 73.81 35.20

Costs per unit

Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central
$ $ $ $ $ $ $
Inventory cost 0.61 0.68 0.69 0.69 1.54 0.69 0.56
$ $ $ $ $ $ $
Transportation cost 0.19 0.19 0.19 0.19 0.19 0.19 0.29
$ $ $ $ $ $ $
Total cost part 1 0.80 0.87 0.88 0.88 1.73 0.88 0.85
 $ $ $ $ $ $ $
Inventory cost 1.49 1.67 1.30 1.35 0.84 1.26 0.83
$ $ $ $ $ $ $
Transportation cost 0.19 0.19 0.19 0.19 0.19 0.19 0.29
$ $ $ $ $ $ $
Total cost part 3 1.68 1.86 1.49 1.54 1.03 1.45 1.12
$ $ $ $ $ $ $
Inventory cost 3.83 2.04 2.89 2.04 1.73 2.16 1.26
$ $ $ $ $ $ $
Transportation cost 0.19 0.19 0.19 0.19 0.19 0.19 0.29
$ $ $ $ $ $ $
Total cost part 7 4.02 2.23 3.08 2.23 1.92 2.35 1.55

Total Annual Inventory + Distribution Cost

# of parts Region 1 Region 2 Region 3 Region 4 Region 5 All Regions Central Savings
$ $ $ $ $ $ $ $
Part 1 10 103,729.22 72,171.49 56,964.39 37,982.26 21,259.74 292,107.10 282,207.76 9,899.34
$ $ $ $ $ $ $ $
Part 3 20 30,463.20 56,425.25 66,904.24 69,161.20 56,259.37 279,213.28 215,355.94 63,857.34
$ $ $ $ $ $ $ $
Part 7 70 49,246.16 41,625.86 63,050.95 110,335.74 124,746.63 389,005.34 257,600.48 131,404.86
$ $ $ $ $ $ $
All Parts 183,438.58 170,222.61 186,919.57 217,479.21 202,265.74 960,325.72 755,164.18

Cost Savings (correlation Coefficient vs Lead Time)

$205,162 0 0.5 0.1

$ $ $
3 178,985.13 33,349.40 143,155.17
$ $ $
5 205,161.54 44,155.18 165,550.02
$ $ $
10 261,658.39 67,477.42 213,885.11

Savings: $ 205,161.54
Exhibit 2: Option 1 - Part 1 is decentralized with all others centralized.

Demand (part, region)

# of parts Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Demand (review interval & lead time)

Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 Mean 390.28 248.71 194.26 129.91 36.96
Part 1 SD 23.15 21.49 17.45 11.54 14.89
Part 3 Mean 290.73
Part 3 SD 40.30
Part 7 Mean 71.39
Part 7 SD 21.40

Outputs
Cycle stock and safety stock
Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1Cycle Stock 106.44 67.83 52.98 35.43 10.08
Part 1 SS 38.08 35.35 28.70 18.98 24.49
Part 3 Cycle Stock 79.29
Part 3 SS 66.28
Part 7 Cycle Stock 19.47
Part 7 SS 35.20

Costs per unit

Region 1 Region 2 Region 3 Region 4 Region 5 Central
Inventory cost $ 0.61 $ 0.68 $ 0.69 $ 0.69 $ 1.54
Transportation cost $ 0.19 $ 0.19 $ 0.19 $ 0.19 $ 0.19
Total cost part 1 $ 0.80 $ 0.87 $ 0.88 $ 0.88 $ 1.73
Inventory cost $ 0.83
Transportation cost $ 0.29
Total cost part 3 $ 1.12
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55

Total Annual Inventory + Distribution Cost

# of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1 10 $103,729 $72,171 $56,964 $37,982 $21,260 $0

Part 3 20 $215,356
Part 7 70 $257,600
All Parts $103,729 $72,171 $56,964 $37,982 $21,260 $472,956
Total Cost $765,064
Costs Savings
All decentralized: $960,326 $195,262
All parts
centralized: $755,164 -$9,899
Exhibit 3: Option 2 - region 5 served from region 4, region 3 served from region 2 and Part 3
and 7 serviced from NDC.

Demand (part, region)

# of parts Region 1 Region 2 Region 3 Region 4 Region 5 All Regions
Part 1 Mean 10 35.48 22.61 17.66 11.81 3.36 90.92
Part 1 SD 6.98 6.48 5.26 3.48 4.49 NA
Part 3 Mean 20 2.48 4.15 6.15 6.16 7.49 26.43
Part 3 SD 3.16 6.20 6.39 6.76 3.56 NA
Part 7 Mean 70 0.48 0.73 0.80 1.94 2.54 6.49
Part 7 SD 1.98 1.42 2.39 3.76 3.98 NA

Demand (review interval & lead time)

Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1 Mean 390.28 442.97 166.87
Part 1 SD 23.15 27.68 18.84
Part 3 Mean 290.73
Part 3 SD 40.30
Part 7 Mean 71.39
Part 7 SD 21.40

Outputs
Cycle stock and safety stock
Region 1 Region 2 Region 3 Region 4 Region 5 Central
Part 1Batch Stock 106.44 67.83 35.43
Part 1 SS 38.08 45.53 30.99
Part 3 Batch Stock 79.29
Part 3 SS 66.28
Part 7 Batch Stock 19.47

Part 7 SS 35.20

Costs per unit

Region 1 Region 2 Region 3 Region 4 Region 5 Central
Inventory cost $ 0.61 $ 0.42 $ 0.66
Transportation cost $ 0.19 $ 0.19 $ 0.22
Total cost part 1 $ 0.80 $ 0.61 $ 0.88
Inventory cost $ 0.83
Transportation cost $ 0.29
Total cost part 3 $ 1.12
Inventory cost $ 1.26
Transportation cost $ 0.29
Total cost part 7 $ 1.55

Total Annual Inventory + Distribution Cost

# of parts Region 1 Region 2 Region 3 Region 4 Region 5 Central

Part 1 10 $103,729 $50,527 $37,838

Part 3 20 $215,356

Part 7 70 $257,600
All Parts $103,729 $50,527 $37,838 $472,956
Total Cost $665,050

Costs Savings
All decentralized: $960,326 $295,275
All parts
centralized: $755,164 $90,114
Option 1: $765,064 $100,013