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Alina Logounova
Nany Karlina
DS 855
Professor Bollapragada
Fall, 2010
Overview
MoonChem is a manufacturer of specialty chemicals that decides to examine its delivery options to its
customers. The necessary arose from concerns of inventory turnover being very low and discrepancies
between 20 percent of its customers carrying consignment inventory, but over half of the inventory of
MoonChem being in consignment with its customers. MoonChem has eight manufacturing plants, where
base chemicals are made, and forty distribution centers, where chemicals are being mixed to produce
various products and then are being shipped to its customers.
In order to examine current distribution operations, John Kresge, Vice President of Supply Chain,
decides to focus on the state of Illinois area with zip code 615, Peoria, which customers, who carry
consignment inventory, are supplied from Chicago distribution center. MoonChem’s customers’ data is
given in the table 1.a.
MoonChem ships its products by trucks, which have 40,000 pound capacity. Transportation cost is fixed
at $350.00 with additional $50.00 for each drop off. Given that MoonChem ships its products independently
to each customer, transportation cost totals to $400.00 per shipment. In addition, MoonChem sends full
truckloads to customer with consignment. In addition, each pound of inventory in consignment costs
MoonChem $1.00. The company also has a holding cost of 25%.
Examining current delivering operations, we have to consider that shipments to customers are made
independently.
There are two alternate distribution models that can be evaluated and implemented instead of the
current distribution operations, if found more efficient.
First, let’s consider the model when products are ordered and delivered jointly.
Lot sizes and costs for products being ordered and delivered jointly for all three customers:
Fixed cost (S) per order is $350.00 plus $50.00 per drop off. Therefore, total fixed cost per order is $500.00.
Based on calculations (see Appendix 2), annual cost of proposed strategy 1 of sending products
jointly to all three customers in the Peoria region to replenish consignment inventory is $7,350.
Second, let’s consider the model when products are ordered and delivered jointly for selected
customers.
Lot sizes and costs for products being ordered and delivered jointly for selected subset of customers:
Order frequencies for large, medium and small customers for the scenario of independent deliveries
were calculated to be 6.71, 4.33 and 1.94, respectively. The most frequent ordering therefore is required by
large customer. Taking order frequency of large customer as a base, relative order frequencies were
evaluated for small and medium customers being 5.48 and 12.25, respectively. By further calculations, it
was determined that small customer’s order will be shipped with every other shipment and medium
customer’s order will be included with every shipment. Recalculating ordering frequency to the respect of
fixed costs and varying costs, the order frequency for large, medium and small customers were determined
to be 7.75, 7.75 and 3.88, respectively.
Based on calculations (see Appendix 3), annual cost of proposed strategy 2 of sending products
jointly to all three customers in the Peoria region to replenish consignment inventory is $7,360. There has
been discrepancy between holding cost and ordering cost, which differ by few dollars. That can be
attributed to rounding errors. Even if the lowest of two would be taken (holding cost: $3678) to reproduce
the other one, the annual costs would come to $7,356.00.
The recommendation to MoonChem would be to adopt joint shipping for all three customers because
such delivery strategy costs less ($7,350.00 vs. independent deliveries of $10,380.00 and joint deliveries for
selected subset of customers of $7,360.00). While, joint shipping’s smaller costs intuitively make sense
because fixed costs associated with deliveries are being distributed between customers; shipping jointly to
selected subset of customers increases such costs. This can be explained by increased order costs due to
more frequent ordering pattern needed to accommodate such model for some customers and increased
holding costs for the other customer, which has to hold more inventories on hand, since its ordering
frequency is being reduced. As a consequence, the recommendation at the time would be to adopt joint
shipping to all three customers.
The proposed recommendation of adopting joint shipping for all three customers, besides dropping
ordering and holding annual costs, will also reduce the consignment inventory for the region by
approximately 29% (independent deliveries: 41,519 products per order combined from each customer, joint
delivery: 29,388 products per order).
Appendix 1
Optimal order size: Cycle Inventory: Annual holding cost:
2 DS Q
Q=
√ hC
I=
2
AHC = I*H, where H = h*C
2∗12,000∗400 6,197
Qsmall =
√ 1∗0.25
= 6,197 Ismall =
2
=3,099 AHCsmall = 3,099*0.25 = 775
2∗60,000∗400 13,856
Qmedium =
√
6,928*0.25 = 1,732
1∗0.25
= 13,856 Imedium =
2
=6,928 AHCmedium =
2∗144,000∗400 21,466
Qlarge =
2,683
√ 1∗0.25
= 21,466 Ilarge =
2
=10,733 AHClarge = 10,733*0.25 =
n* =
√ DhC
2S
AOC = ( QD )∗s
n*small =
√ 12,000∗0.25∗1
2∗400
= 1.94 AOCsmall = ( 12,000
6197 )
∗400 = 775
n*medium =
√ 60,000∗0.25∗1
2∗400
= 4.33 AOCmedium = ( 60,000
13,856 )
∗400 = 1,732
n*large =
√ 144,000∗0.25∗1
2∗400
= 6.71 AOClarge = ( 144,000
21,466 )
∗400 = 2,683
Q
∗1
AFT = 2 AMC = C*D AC = AHC + AOC
∗52
D
6,197
∗1
AFTsmall = 2 = 13.4 AMCsmall = 1*12,000 ACsmall = 775 + 775 =1,550
∗52
12,000
= 12,000
13,856
∗1
AFTmedium = 2 = 6.0 AMCmedium = 1*60,000 ACmedium = 1,732 + 1,732 =3,464
∗52
60,000
= 60,000
21,466
∗1
AFTlarge = 2 = 3.9 AMClarge = 1*144,000 AClarge = 2,683 + 2,683 = 5,366
∗52
144,000
= 144,000
Appendix 2
Order frequency: Optimal order size:
( Ds+ Dm+ Dl ) hC D
n* =
√ 2(S+ ss+sm+ sl)
Q=
n∗¿¿
12,000.00
n* =
√ (12,000+60,000+144,000)∗0.25∗1
2∗(350.00+50.00+50.00+50.00)
= 7.35 Qsmall =
7.35
= 1,633
60,000.00
Qmedium = = 8,163
7.35
144,000.00
Qlarge = = 19,592
7.35
Q
I= AHC = I*H, where H = h*C AOC = (n*) ¿ s
2
1,633
Ismall = =817 AHCsmall = 817*0.25 = 205 AOC = 7.35∗500 = 3,675
2
8,163
Imedium = =4,082 AHCmedium = 4,082*0.25 = 1,021
2
19,592
Ilarge = =9,796 AHClarge = 9,796*0.25 = 2,449
2
1,633
∗1
AFTsmall = 2 = 3.5 ACsmall = 3,675 + 3,675 =7,350
∗52
12,000
8,163
∗1
AFTmedium = 2 = 3.5
∗52
60,000
19,592
∗1
AFTlarge = 2 = 3.5
∗52
144,000
Appendix 3
Order frequency: Relative order frequency: Relative order frequency:
DhC
n* =
√ 2(S+ s)
n* = n*large = 6.71 (relative to n*)
1.22
√ 2∗(350.00+50.00)
2
= 4.33 n**small =
√ 2∗50
= 5.48 m*small =
5.48
=
∑ hCimiDi ¿
n=
√ 2∗¿ ¿
¿
Q=
D
n∗¿¿
12,000∗0.25∗1∗2+60,000∗0.25∗1∗1+144,000∗0.25∗1∗1
n=
√
= 3,093
50 50 50
2∗(350+ + + )
1 1 2
= 7.75 Qsmall =
12,000.00
3.88
60,000.00
n*small = 3.88 Qmedium = = 7,742
7.75
144,000.00
n*medium = 7.75 n*large = 7.75 Qlarge = = 18,581
7.75
Q
Q ∗1
I= AHC = I*H, where H = h*C AFT = 2
2 ∗52
D
3,093
3.093 ∗1
Ismall = =1,547 AHCsmall = 1,547*0.25 = 387 AFTsmall = 2 = 8.46
2 ∗52
12,000
7,742
7,742 ∗1
Imedium = =3,871 AHCmedium = 3,871*0.25 = 968 AFTmedium = 2 = 3.35
2 ∗52
60,000
18,581
18,581 ∗1
Ilarge = =9,291 AHClarge = 9,291*0.25 = 2,323 AFTlarge = 2 = 3.35
2 ∗52
144,000