Inventory, Distribution and Value-Added Activities Analysis

1. Inventory, Distribution and Value-Added Activities Analysis Dr. Gerald Evans Dr. Gail DePuy Dr. John Usher Maria Chiodi University of Louisville

2. System Under Study • The N. Glantz and Sons Distribution System for signage supplies, consisting of Vendors, one Distribution Center (located in Louisville), and 19 Branch Offices (located throughout the US). • Approximately 5000 SKUs. • (s,S) inventory policy in use at each branch and at the DC. • Regular shipping schedule for shipments from the DC to the branches.

3. Primary Questions Being Addressed • Should the DC be enlarged? • Should the Branch Offices order stock through the DC, or directly from the vendor (for specific SKUs)? • Are value-added operations at the DC economically viable?

4. Secondary Questions Being Addressed • Should another DC be constructed (e.g., on the West Coast)? • What should the reorder points and reorder quantities be (at each branch and at the DC) for each SKU? • Is there a better shipping schedule?; if so, what would it be? • How would changes in demand patterns at the branches affect the optimal values for the control variables?

5. Research Methodologies • Because of the complex relationships (nonlinear, not of a closed-form) between the control variables and the performance measures of the system, and because of the “time-dynamic” behavior of the system, simulation model(s) are being constructed to represent the system operation. • In addition, an Excelspreadsheet model, is being developed to allow a static analysis addressing one of the majorquestions: should the branches order directly from the DC or from the vendors? The spreadsheet model will also aid in the verification of the simulation model.

6. Arena Simulation Model(s) • The Arena (Version 8) simulation software package is being used to construct a prototypical simulation model; this model will represent the movement of one SKU from one vendor through the system. • Following verification and validation of the prototypical model, additional data (for additional part types and vendors) will be utilized to construct a full-scale simulation model of the Glantz Distribution System.

7. Prototypical Simulation Model: Submodels • Submodels incorporated within the prototypical model are used to represent the following processes as parts of the overall system operation: • Customer orders at Branches. • Branch orders to the DC. • Branch orders to Vendor. • DC orders to Vendor. • Vendor shipments to DC. • Vendor shipments to Branches. • DC shipments to Branches. • Time advancement (keeping track of Day of Week and Day of Simulation).

8. Prototypical Simulation Model: Input Parameters (which stay constant through the simulation run) • Number of Branches. • Customer demands at Branches. • Shipping costs (Vendor to DC, Vendor to Branches, DC to Branches). • Transit times (Vendor to Branches, Vendor to DC). • Shipping Schedule (DC to Branches). • Inventory Carrying Charges (at DC and at Branches). • SKU characteristics (purchase price (nonlinear relationship allowed), selling price, volume (used to determine capacity requirements)). • Lost sales cost per unit. • Fixed ordering cost.

9. Prototypical Simulation Model: Input Control Variables (which stay constant through the simulation run) • Reorder points and reorder levels at each Branch and at the DC. • Fraction of orders made by the Branch to the DC (as opposed to the vendor) for each Branch. • Shipping Schedule (from DC to Branches).

10. Prototypical Simulation Model: Outputs (which require initial values, but which vary through the simulation run) • Day of Week and Day of Simulation. • Indicator variables for Branches and DC to represent whether or not there is an outstanding order for the respective Branch or DC. • Inventory Levels, Inventory Volumes (capacity used), and Value of Inventory at each Branch, at the DC, and in-transit from the DC to any of the Branches. • Number of times that an order requested by a Branch cannot be supplied by the DC because of insufficient inventory level. • Accumulated Sales Dollars at each Branch. • Accumulated Lost Sales Cost at each Branch. • Accumulated Transportation Costs for shipments to each Branch categorized by shipments from the DC to that Branch and by shipments from the Vendor to that Branch. • Accumulated Transportation Costs for shipments from the Vendor to the DC. • Accumulated Fixed Ordering Costs for each Branch and for the DC. • Accumulated Purchased Parts Cost for each Branch and for the DC. • Inventory Carrying Charges for each Branch, for the DC, and in transit from the DC to one of the Branches.

11. Prototypical Simulation Model: Main Performance Measures Output Net System Profit = Sales Dollars for All Branches - Total Lost Sales Cost over All Branches – Total Ordering Cost - Total Shipping Cost - Total Purchased Parts Cost -System Inventory Carrying Charges. Maximum Capacity required for inventory storage at each Branch and at the DC.