Alko Case Solution V1

Context: Alco a US based company founded in 1943, started with the business of making lighting fixtures. It went public in 1963 and since then it has introduced many new lighting fixtures. It been very successful in distributing its products nationwide until recently company when it found that the company’s profitability has began to worsen due to intensified competition in spite of the great product quality. It hired Gary Fisher to identify the problem and restructure the company. He identified that the company’s distribution is eating into the company’s profitability and therefore needs to be analyzed in great detail. The company’s current distribution system had 5 Distribution Centres (DCs) serving entire demand across US through three production plants. However, this led to holding inventory for each type of product at each DC and significantly increasing the inventory holding costs. Therefore, quantitative and qualitative analysis needs to be done to check the feasibility of having a common National Distribution Centre (NDC) or combining the demand of certain regions or products to have an optimized solution to minimize the total cost by trading off the increased distribution cost and warehouse cost with reduced inventory holding cost

Calculating the annual inventory and distribution cost of the current distribution system:
In the current system, the Product types 1, 3 and 7 are distributed from 5 Regional Distribution centers. The mean demand per day and the standard distribution for each region is given product wise. There are 10 products having similar mean demand and standard deviation to type 1, 20 products for type 2 and 70 for type 3.
The Periodic Review policy is being used by the company and hence the Mean demand during L+T periods has been calculated as: σ L+T = σ * √ (T + L), (Where T=6 days and L = 5 days)
The safety stock for each type is calculated using the service level in the formula: SS = z value * σ L+T
Next we find out