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[answered] Managing inventories at New Light inc. New Light began in 1


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Managing inventories at New Light inc.

 

New Light began in 1943 in a garage workshop set up by Roy Williamson at his Denver home.

 

Roy had always enjoyed tinkering, and in February 1948 he obtained a patent for one of his

 

designs for lighting fixtures. He decided to produce it in his workshop and tried marketing it in

 

the Denver, CO. area. The product sold well, and by 1957 New Light had grown to a $3 million

 

company. Its lighting fixtures were well known for their outstanding quality. By then, it sold a

 

total of five products. In 1963, Roy took the company public. Since then, New Light has been

 

very successful, and the company has started distributing its products nationwide. As

 

competition intensified in the 1980s, New Light introduced many new lighting fixture designs.

 

The company?s profitability, however, began to worsen despite the fact that New Light had taken

 

great care to ensure that product quality did not suffer. The problem was that margins had begun

 

to shrink as competition in the market intensified. At this point, the board decided that a

 

complete reorganization was needed starting at the top. Tim Jones was hired to reorganize and

 

restructure the company. When Jones arrived in 2014, he found a company teetering on the

 

edge. He spent his first few months trying to understand the company business and the way it

 

was structured. Jones realized that the key was in the operating performance. Although the

 

company had always been outstanding at developing and producing new products, it had

 

historically ignored its distribution system. The belief within the company was that once you

 

make a good product, the rest takes care of itself. Jones set up a task force to review the

 

company?s current distribution system and come up with recommendations. The current distribution system

 

The task force noted that New Light had 100 products in its 2014 line. All production occurred

 

at three facilities located in the Denver, CO. area. For sales purposes, the contiguous United

 

States was divided into five regions. A DC owned by New Light operates in each of these

 

regions. Customers placed orders with the DCs, which tried to supply them from product in

 

inventory. As the inventory for any product diminished, the DC in turn ordered from the plants.

 

The plants scheduled production based on DC orders. Orders were transported from plants to the

 

DCs in TL quantities because orders sizes tended to be large. On the other hand, shipments for

 

the DC to the customer were LTL. New Light used third party trucking company for both

 

transportation legs. In 2014, TL cost from the plant to DCs averaged $0.09 per unit. LTL

 

shipping cost from a DC to a customer averaged $0.10 per unit. On average, five days were

 

necessary between the time a DC placed an order with a plant and the time the order was

 

delivered from the plant.

 

The policy in 2014 was to stock each item in every DC. A detailed study of the product line has

 

shown that there were three basic categories of products in terms of the volume sales. They

 

were categorized as type High, Medium, and Low. Demand data for a representative product in each category is shown in table 1. Product 1, 3, and 7 are representative of High, Medium, and

 

Low demand products, respectively. Of the 100 products that New Light sold, 10 were of type

 

High, 20 of type Medium, and 70 of type Low. Each of their demand was identical to those of

 

the representative products 1, 3, and 7, respectively.

 

The task force identified that plant capacities allowed any reasonable order to be produced in

 

four days. Thus, a plant shipped out an order four days after receiving it. After one day in

 

transit, the order reached the DC. The replenishment lead time was thus five days. The holding

 

cost incurred was $0.15 per unit per day whether the unit was in transit or in storage. All DCs

 

carried safety inventories to ensure a CSL of 95 percent. Alternative distribution systems

 

The task force recommended that New Light build a national distribution center (NDC) outside

 

Denver. The task force recommended that New Light close its five DCs and move all inventory

 

to the NDC. Warehouse capacity was measured in terms of the total number of units handled per

 

year (i.e. the warehouse capacity was given in terms of the annual demand supplied from the

 

warehouse). The cost of constructing a warehouse is shown in table 2. However, New Light

 

expected to recover $50,000 for each warehouse that it closed. The CSL out of the NDC would

 

continue to be 95%. Given that NDC is close to Denver, the inbound transportation cost from

 

the plants to the NDC would fall to $0.05 per unit. The total replenishment lead time for the

 

NDC would still be five days (four days for production + one day in transit). Given the

 

increased average distance, however, the outbound transportation cost to customers from the

 

NDC would increase to $0.24 per unit.

 

Other possibilities the task force considered include building a national distribution center while

 

keeping the regional DCs open. In this case, some products would be stocked at the regional

 

DCs, whereas others would be stocked at the NDC. Jones? decision

 

Tim Jones pondered the task force report. It had not detailed any of the numbers supporting the

 

decision. He decided to evaluate the numbers before making his decision. Questions

 

1. What is the annual inventory and distribution cost of the current distribution system?

 

2. What are the savings that would result from following the task force recommendation and

 

setting up an NDC? Evaluate the savings as the correlation coefficient of demand in any

 

pair of regions varies from 0 to 0.2, 0.4, 0.6, 0.8, and 1.0. Do you recommend setting up

 

an NDC?

 

3. Suggest other options that Jones should consider. Evaluate each option and recommend a

 

distribution system for New Light that would be most profitable.

 

4. Note: Show all work or attach spreadsheet for computation. Table 1. Distribution of daily demand at New Light

 

Part1 Mean

 

Part 1 Std. dev.

 

Part 3 Mean

 

Part 3 Std. dev.

 

Part 7 Mean

 

Part 7 Std. dev. Region1

 

35.48

 

6.98

 

2.48

 

3.16

 

0.48

 

1.98 Region2

 

22.61

 

6.48

 

4.15

 

6.20

 

0.73

 

1.42 Region3

 

17.66

 

5.26

 

6.15

 

6.39

 

0.80

 

2.39 Region4

 

11.81

 

3.48

 

6.16

 

6.76

 

1.94

 

3.76 Region5

 

3.36

 

4.49

 

7.49

 

3.56

 

2.54

 

3.98 Table 2. Construction costs for NDC

 

Units sold

 

Dollars 200,000

 

300,000 400,000

 

800,000 600,000

 

1,000,000 800,000

 

1,300,000 1,000,000

 

1,350,000 1,200,000

 

1,400,000

 


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