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Kabirian Trading (KT) LLC is in the business of manufacturing and marketing a brand of consumer electronic devices. KT’s customers are other business entities such as retailors and department stores that buy the device and sell to their own customers. These customers are scattered across North America which consequently makes transportation cost a major factor in the management of supply chain. KT has a single plant located in Houston, TX where the final assembly of the device is performed. The parts necessary for the assembly are produced by Chinese suppliers and are shipped to Houston in containers. KT has two design options for its downstream supply chain to deliver finished goods to customers as follows: Decentralized System: In this scenario, KT customers are classified in 5 geographical regions. A warehouse is built in each region that exclusively serves the customers of that region. Each warehouse orders supplies to the central plant independently. The central plant is located in region 1 (consequently, the lead time of ordering for the warehouse in region 1 is the shortest). The annualized cost of running each warehouse is $1,000,000. Ordering by each warehouse costs $1000/order. Inventory carrying cost is estimated at $100 per year per unit. Demand is not constant throughout the year and even varies region by region. The following table contains regional data available. Due to demand and lead time fluctuation, the warehouses may run out of stock occasionally; in this case, the sale is lost. Average Transportation Cost Region Weekly Demand Lead Time (weeks) From plant to WH/unit From WH to customer/unit Mean Standard Dev Mean Standard Dev Region 1 2000 500 1 0.2 0 1 Region 2 3000 600 1.5 0.5 0.5 2 Region 3 2500 100 1.5 0.5 0.5 1 Region 4 4000 1000 2 0.2 0.75 1 Region 5 3200 1200 4 1 1 1 Each region under this supply chain design uses an ordering policy based on EOQ/ROP with the assumption that no more 10% of the regional sale should be lost.
IIME 435: Enterprise Resource Planning in the Supply Chain Management SBE 2 Faraz Ahmed and Hera Nasir Centralized System: A big depot is built in the same designated site as warehouse 1 of the decentralized configuration. This depot places orders of the device with the central plant and directly ships customer orders of all regions. The ordering policy of the depot is again based on EOQ/ROP with the same service level as the warehouses in the previous supply chain design.