EM 502 Spring 2017

OPERATIONS MANAGEMENT
CASE STUDY II - Due May 18 at 23:59
You can work in groups of at most 3.

IHK Co. is a family business that excels as a third party logistics provider for fast moving
consumer goods manufacturers. The firm has just signed a long-term contract with a major
FMCG manufacturer to deliver its products to the manufacturers local warehouses dispersed
over the country via its distribution center. Altan is the CEO of the company as he is the oldest
member of the family. The directory board, which consists of the other family members, are
worried that the current management is not well-qualified to handle such prestigious
customers due to previous failures and high costs. They insist that Altan gets help from a
consultancy firm about re-arrangement of the current logistics system.

After long meetings, IHK Co. decided to hire E&A Consultancy to analyze the companys
current operations. Initial analyses by the consultants from the company, Gokce and Tyrion,
revealed that the idle capacity of the current distribution center will not be sufficient to satisfy
the needs of the new customer and opening new facilities should be considered. They also
suggested that the logistics requirements of the new contracts should be handled separately
from the firms existing business.

According to the contract signed, IHK Co. has the right to determine the distribution center(s)
(DC) to serve local warehouses. The corresponding required supply to the DC(s) is under the
responsibility of the manufacturer. Table 1 provides information about the locations of the
local warehouses to be served. The customer (FMCG manufacturer) provided three scenarios
about the corresponding demands, which are also provided in Table 1. IHK Co. has to satisfy
the needs of the customer regardless of which scenario is realized.

After a careful analysis, the consultants observed that the current distribution center, which
is located in Ankara, has a capacity of 30,000 m3 per year that can be dedicated for the new
customer. The yearly additional cost as a result of this is estimated to be 400,000 TL.
Furthermore, the consultants argue that it is possible to open new facilities in the cities where
the local warehouses of the customer are located. The new facilities can handle a flow of
80,000 m3 per year at a cost of 500,000 TL. Altan, the CEO, thinks that the company should
not open more than two new distribution centers at this point, and each warehouse should
be assigned to a single DC.
Table 1. Warehouse locations and demand information

Demand (m3 per year )

Scenario 1 Scenario 2 Scenario 3
W/H Location
(p*=0.3) (p=0.5) (p=0.2)
Ankara 13,000 10,000 17,000
Adana 10,000 7,000 12,000
Afyon 6,000 12,000 8,000
Bursa 9,000 12,000 13,000
stanbul 20,000 15,000 30,000
Kayseri 7,500 8,000 8,000
Samsun 5,500 13,000 9,000
Trabzon 7,000 9,000 10,000
Erzurum 9,500 11,000 12,000
Diyarbakr 11,500 12,500 12,500
Antalya 10,500 12,000 15,000
zmir 10,000 13,000 13,000
Konya 6,000 11,000 8,000
Sivas 4,000 9,000 5,500
*p : probability of occurrence of the scenario

The company handles its transportation business by leasing trucks at the start of each year at
a cost of 40,000 TL per year (and 0.2 TL per kilometer per m3). Each truck can carry 40 m3 of
load at a time. All shipments are considered to be full truckloads and each vehicle can make
200 shipments per year on the average. Altan insists that trucks are leased and assigned to
the distribution centers before the exact demand is revealed. If current truck capacity is not
sufficient to cover the demand at a DC, an outside logistics provider will make the shipments
at a cost of 0.4 TL per m3 per kilometer. Assume that if a DC is located in a city, the demand of
that city cannot be satisfied by the outside logistics provider.

Gokce and Tyrion asked you to prepare a report on the following issues:

1. Propose a solution alternative that honors the constraints set by the CEO. Discuss the
solution in terms of the decisions made and the resulting cost.
2. How does your solution change when single sourcing assumption is relaxed? (in this
case, a warehouse can be supplied from more than one DC)
3. Gokce and Tyrion think that it would enhance the system performance significantly if
it were possible to lease the trucks and assign them to the distribution centers after
the demand information is received. Is their intuition correct? Discuss your results.
Your report should include:

A title page, which shows the group members names and student IDs.
The description of the analyses used, the assumptions made and the discussion of the
results should be written in detail in the main body of the report.
The report should be divided into appropriate sections and subsections.
Important data should be summarized in the main body in terms of charts and tables.
Extensive data and calculations should be placed in the appendix part.
The report should not exceed 10 pages (1.5 line-spaced, 12 pt font size).