2/28/2022

Steel-frame Furniture
Company (A&B)
Hasmukh Gajjar

Company Background
It is a nationally reputed manufacturer of furniture
Distribution network
It sells directly to its customers through its 75 showrooms located across
country
Product mix
10 product lines with several minor variants within each line.
Production Facility
Single production facility located in western region
Capacity
Plant has sufficient production capacity and warehouse capacity to store
finished goods

1
 2/28/2022

Current Distribution Network

North
20 showrooms

West Plant East

20 showrooms 15 showrooms

South
20 showrooms

Current Inventory Policy at Showrooms(SRs)

Continuous Policy (EOQ, ROP)
Desired fill-rate at each SR = 99.9 percent
 Product line demand at each SR
Normally distributed
Expected weekly demand = mD= 24 units
Std. deviation of weekly demand = sD= 4 units
Inventory carrying cost = Ch = INR 1800 per unit per year
Ordering cost = Co = INR 675
1 year = 50 weeks

2
 2/28/2022

Lead time data

Region Mean Lead time Std. Deviation of Lead time

mLT sLT
West 0.5 weeks 0.2 weeks
North 1 week 0.3 weeks
South 1 week 0.3 weeks
East 2 weeks 0.4 weeks

Part(A)

3
 2/28/2022

Continuous Inventory Policy at a typical Northern SR

Continuous Policy Parameters i.e. Decisions?

Imax
Q
Q
Q

ROP

SS

LT t1 TIME
Imin
Order Order Order
Placed Received Placed

EOQ, ROP

4
 2/28/2022

Distribution of Demand during Lead-time(DDLT)

Continuous Inventory Policy at a typical Northern SR

How to compute Reorder point ?
Demand and Lead time both are varying i.e. stochastics
Desired fill rate = 99.9% percent
Approach for ROP computations?
 Given Fill rate Expected shortages per cycle(ESC)  ESC corresponding to Std.
Normal Distribution, i.e. L(z)  z value from Table  Safety Stock ROP

5
 2/28/2022

Continuous Inv. Policy at a typical Northern SR

Reorder point
Expected shortages per cycle(ESC) = (1-FR)*Q =

Compute standard loss function value L(z)

z value from Table

Safety Stock

ROP

Continuous Inv. Policy at a typical Northern SR

Annual cost ?
Annual ordering cost?

Annual inventory holding cost?

Annual purchase cost?

6
 2/28/2022

Part(B)

Proposed Distribution Network

20 showrooms
North RW

15 showrooms
West Plant East RW
20 showrooms

South RW 20 showrooms

RW: Regional Warehouse

7
 2/28/2022

Purpose of Proposed Structure

To reduce the growing cost of holding inventory

To provide better service level

To take advantage of economies of scale in transportation

Inventory Policy at Regional Warehouse(RW)

Periodic Review Policy (Target Inventory, cycle time)
Each RW be replenished once a week from the plant
i.e. cycle time = T = 1 week
Each RW should maintain adequate inventory to satisfy SR requests
immediately
RW service level: restricts to one stock out in two years for each product line
RW operating cost : INR 20,000 per month excluding cost of holding
inventory
Each SR in a given region will now place order to its respective RW
No change in policy at SR i.e. SR will follow continuous review policy

8
 2/28/2022

Transportation cost and Lead time data for Northern Region

Region Transportation Mean Std. Deviation

Cost (INR/unit) Lead time of Lead time
mLT sLT
Plant to SR in North 100 1 week 0.3 weeks
Plant to RW in North 60 1 week 0.1 weeks
RW to SR (North) 10 0.5 weeks 0.2 weeks

Evaluation of Proposal of setting up a Regional Warehouse(RW)

 Relevant costs?
Costs at North RW
Annual operating cost (Includes ordering cost)
Annual Inventory holding cost
Annual transportation cost
Costs at each SR
Annual ordering cost
Annual Inventory holding cost
Annual transportation cost
Total cost of the proposed network proposed in Part(B) vs. Total cost
of the current network given in Part(A)

9
 2/28/2022

Periodic Review Policy at RW

What are the periodic review policy parameters?
Cycle time = T = 1 week(given) and Target Inventory(TI) or Order up-level (OUL)

TI

Q1 Imax
Q2
Q3
Q1
Q2 Q3
SS
Imin
LT LT LT
T T
Order
Order Order Order Order Order
Received
Placed Placed Received Placed Received

Aggregate Weekly Demand at North RW

Aggregate weekly demand at North RW
Given each SR follows normally distributed weekly demand with mean of 24
units and std. deviation of 4 units
There are 20 SRs in North
Mean and Std. Deviation of Aggregate weekly demand?

10
 2/28/2022

Demand during (T+LT)

Mean ?

Std. Deviation?

Periodic Review Policy at RW

Safety Stock Computations?
Approach: Given CSLZ Safety stock
 Restricted to one stock-out in two years!!
Based on the above information, how much is the CSL?

Corresponding z value?

Safety stock?

Target Inventory?

11
 2/28/2022

Periodic Review Policy at RW

Annual Operating Cost?

Annual inventory holding cost?

Annual transportation cost?

Continuous Review Policy at SR

SR uses same policy as before but now place orders to RW
Will there be a change in EOQ ? Why?
Will there be a change in Safety Stock? Why?
Revised Safety Stock?
Annual Costs
Annual ordering cost
Annual Inventory holding cost
Annual transportation cost

12