Moon Chem Case
The vice-president of Moon Chem, a manufacturer of speciality chemicals would like to conduct a study on the policy of providing consignment inventory to its customers in the Midwest region. The aim of this study is to analyze different options for distribution available in the Peoria region and to conclude with the optimal distribution policy. Successful results following this study would allow the company to introduce the consignment inventory strategy nationwide.
A careful study of the Peoria region identified small, medium and large customers in the region. Details of these customers and their consumption habits are shown in the following table: Customer Type Number of Customers Consumption (pounds per month) Small Medium Large 12 6 2 1000 5000 12000 The strategy which has been used until now includes sending full truckloads of 40. 000 pounds to each customer to replenish their consignement inventory. Each truck being used costs 400$ no matter how wether the truck is fully loaded or not.
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Now also multiple stops and drop-offs are being considered with basic costs of 350$ followed by costs of 50$ for each drop-off. To find out wether this solution would be cheaper costs of both options have to be compared. The current strategy of MoonChem is to send full truckloads to each customer to replenish their consignment inventory. The current annual cost of MoonChem’s strategy of sending full truckloads to each customer in the Peoria region to replenish consignment inventory is $156, 383. 33.
Alternatives options were tested to identify what is the best alternative for MoonChem. The first option is that MoonChem delivers its product to his customers separately. The second option is that MoonChem jointly delivers its product to his customers. The third option is that MoonChem delivers its products jointly for a selected subset of products (Tailored Aggregation). The total annual cost for Option 1 is $21,441. 31. The total annual cost for Option 2 is $19,395. 88. Tailored Aggregation Option shows that the total annual cost is $24,877. 34.
Therefore, our team recommends that Option 2 (Combined Orders) is the best option for MoonChem since it incurred the lowest annual cost. Its main disadvantage is that it is not selective enough in deciding what should be ordered together. Therefore, it is possible that some of MoonChem’s customers will not have enough chemicals in stock or will have too much in stock. The impact of our recommendation on consignment inventory for MoonChem is an improvement Factoring in the number of each class of costumers: $5,120×12+$5,600×6+$6,440×2= §107,920 Truck 1 (small + large)= Truck 2 (medium)=