Question 3

From the data in the exhibits, use the costs and demand information in the case to generate a (Q; r) inventory policy for each regional warehouse. Compare your estimated average inventory level to that provided in the case. Explain. (You may assume a in stock probabilityof 98 % if necessary).

We have generated the inventory policy for the two regional warehouses, which are Roma and Catanzaro. This is because we have been provided with the costs as well as demand information for both of these warehouses in detail. The (Q, r) inventory policy for both the regional warehouses has been calculated which would show us the approximate policies of all the regional warehouses. We have calculated the reorder point of the inventory policy and we have compared the inventory policies under the current system with the transit point system, which is proposed by the management. The savings in cost have also been computed for both the regional warehouses. The inventory policy for both the regional warehouses is shown below:

ROMA Warehouse (Inventory Policy)
   
Average Inventory 1,200
Demand fulfilled by warehouse 154.8
Order Cycle 7.75194
   
Current Model (values in Lire on per piece basis)  
Operating cost per order cycle 961.333
Inventory cost per order cycle 276
Transportation Cost 3166.67
Total cost per piece per order cycle 4404
   
Reorder Point  
Average daily demand 164.7
Lead Time 1
Stdev of daily demand 25.2442
z probability 98%
Reorder Point 4239.34
   
Transit Point Model  
Operating Cost (8 days) 192.267
Inventory Cost 0
Transportation Cost (1 small 1 big truck daily for 8 days) 3866.67
  4058.93
   
Saving (Lire per piece per 8 days) 345.067

 

CATANZARO Warehouse (Inventory Policy)
   
Average Inventory 780
Demand fulfilled by warehouse 58.7
Order Cycle 13.287905
   
Current Model (values in Lire on per piece basis)  
Operating cost per order cycle 1551.2
Inventory cost per order cycle 803.13333
Transportation Cost 8333.3333
Total cost per piece per order cycle 10687.667
   
Reorder Point  
Average daily demand 65.2
Lead Time 1
Stdev of daily demand 9.904191
z probability 98%
Reorder Point 698.113
   
Transit Point Model  
Scenario 1  
Operating cost per cycle 310.2
Inventory Cost 0
Transportation Cost (2 small truck daily partially loaded) 19743.59
Total cost per piece per order cycle 20053.79
Saving (Lire per piece per 8 days) -9055.923
   
Scenario 2  
Operating cost per cycle 310.2
Inventory Cost 0
Transportation Cost (1 big truck daily partially loaded) 16153.846
Total cost per piece per order cycle 16464.046
Saving (Lire per piece per 8 days) -5776.379

It could be seen that the transit point time model saves inventory cost and operating cost however, the transportation costs under this model’s inventory policy is very huge because the trucks have to go to the regional office on a daily basis. This has to be done even if the demand is not of a full truckload. When the costs saved from the inventory and operations is high than the transportation costs then the new inventory policy is more desirable.

We can see that implementing the TPE model at Roma is ideal because the distance is short and the demand is high………………………..

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