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Overview
1) Introduction of Moonchem 2) Problem Overview 3) Questions 4) Solution Strategy & Illinois Pilot Study 5) Operational Data 5.1) Moonchems Existing Distribution Strategy 5.2) Alternative 1: No Aggregation Model 5.3) Alternative 2: Complete Aggregation Model 5.4) Alternative 3: Tailored Aggregation Model 6) Inference & Recommendation
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1) Introduction of Moonchem
Moon Chemical Co. Ltd. (Moonchem) established in 1996 in Yangzhou, China Leading manufacturer of :
a) Industrial Chemicals, b) Specialty Chemicals (e.g. Cosmetic Chemicals), c) Food Additives, d) Pharmaceutical Chemicals etc.
8 Manufacturing Plants & 40 Distribution Centers worldwide. In the Specialty Chemicals market, Moonchem has differentiated the US Midwest
2) Problem Overview
Moonchems Year-end Business Review reveals the new inventory strategy of
Consignment Inventory has achieved a low Inventory Turnover Ratio (ITR) of 2, in spite of having a stable Product Demand from the Customers.
Over 50% of Moonchems Inventory has been classified as Consignment
Inventory.
However, only 20% of their total number of customers use Consignment Inventory. Mr. John Kresge, VP of Supply Chain Department, decided to look how
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3) Questions
1) What is the current Annual Cost of Moonchems Strategy of sending full truckloads to each customer in the Peoria region to replenish consignment inventory?
2) Consider different delivery options and evaluate the costs of each. What delivery option do you recommend for Moonchem?
3) How does your recommendation impact consignment for Moonchem?
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4) Solution Strategy
ITR = (Annual Sales Value of Goods Sold) / (Average Inventory Value)
Moonchem cant directly influence the demand from its customers But it can decrease the Average Inventory value by decreasing : Cycle Inventory subsequently the Total Annual Costs incurred.
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Small
Medium Large
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5000 12000
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5) Operational Data
Logistics Contractor: Golden Trucking
Truck Capacity: 40,000 lbs
Full Truckload, Single Customer Drop-off Transportation Cost $ 400/truck Full Truckload, Multiple Customers Drop-off $350/truck + $50/ drop-off
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Q* = *(2*D*S)/(h*C)+
n = D / Q* Annual Holding Cost, AHC = (Cycle Inventory) *h*C = (Q*/2)*h*C Annual Ordering Cost, AOC = (D / Q*) * S Total Annual Cost, TC = AHC + AOC
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QL = DL/(n*)
QM = DM/n*
QS = DS/n*
TC = AHC + AOC
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Step 3: Ordering frequency of the type of customer placing the most frequent orders
are recalculated. Step 4: Ordering frequency of all types of customers are identified
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$70,000
$60,000
$50,000 $40,000 $30,000 $20,000 $10,000 $0 Existing No Complete Tailored Distribution Aggregation Aggregation Aggregation Strategy Model Model Model Total Costs Total Cycle Inventory
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Complete Aggregation Model is the most suitable Distribution Strategy which Moonchem should implement. It would result in a 57.18% reduction in Total Costs and 75.5% reduction in the Total Cycle Inventory, which would in turn result in a higher ITR for Moonchem in the long run.
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