Our objective is to analyze the distribution network in order to minimize annual system wide costs that subject to a 95% customer service level for ALKO. Integrated Minds considered a scenario approach and looked at net present values to factor inventory costs and quality over the planning horizon. Striving to increase margins and expose various network characteristics and uncertainties, Integrated Minds analyzed many factors.
ALKO was founded on the basis of quality. This principle is indirectly leading to more buffer inventory throughout the supply chain to account for high rejects in shipping. With inventory hiding the real issue, ALKO is not able to achieve the margins desired for their 100 products they offer to the market. In order to remain competitive within their industry, reactive measures must be taken.
Integrated Minds analyzed holding costs, NPV options, and looked at external and internal factors to manage the uncertainty in the supply chain. Replenishment time, product availability, cycle service levels and fill rates were taken into consideration. A key driver was the uncertainty of safety inventory under the periodic review that ALKO performed every 6 days.
Integrated Minds recommends that ALKO combine parts1, 3 and 7 into a NDC in year one, while closing regions 5 RDC. Year two and three will see Alko close all regional DC’s moving the entire operation into a NDC in Chicago.
In 1943 John Williams created Alko Inventories. After a patent in 1948 for a lighting fixture, John decided to produce the item himself and by 1957 Alko was a $3 million company. Since then Alko has continued to grow and now distributes products nationwide. However with increasing competition, profitability has suffered. As a last ditch effort to save his company, John Williams hired Gary Fisher to lead the restructuring and reorganization of Alko.
Fisher has reviewed the current standing of Alko and some possibilities for salvaging the company but has not been able to make a decision without a more thorough analysis of Alko’s numbers. This report will further break down Alko as a company and with a more in depth analysis of the demand by region as well as highlight a five year strategy recommendation for Alko to follow in order to reduce variation and maintain and increase efficiency (Chopra, 322).
Currently, Alko is facing additional pressure from their competition; Lightoiler has been offering a steady flow of new products, expedited shipping and has even been able to increase their prices. Alko is only expected to see stable sales over the next few years with potential for a plus or minus 5% growth however they seem to be “bleeding money” and are looking for an immediate solution in order to start spending and operating more efficiently. Alko is also facing excessive costs for expedited TL shipping, something that is in need of drastic reduction especially since the cost of capital is expected to increase over the coming years because of tighter federal monetary policies (SCM 479 HW 4 Supplemental Information). It has also been recognized that the number of defective products is growing out of control. This is something that is in need of immediate assessment and evaluation in order to cut excessive spending.
Currently Alko has a product line of about 100 products and all of their production takes place at three locations they have near Cleveland, Ohio. Alko’s current policy is to stock all of their items at each Distribution center that they have located in 5 regions throughout the United States (Chopra, 322). Current plant capacity allows for “reasonable” orders to be produced in 4 days, in addition to one day in transit to the Distribution center leaves a 5 day replenishment lead time. The Distribution centers in the 5 regions order every 6 days using a periodic review while maintaining their safety stock levels to ensure a customer service level of 95% (Chopra, 323).
With many external factors affecting Alko it is important to assess these threats and look for areas of opportunity that allow for strength and improvement. First, Alko’s closest competitor has been offering new and redesigned products annually as well as adding direct shipping as an option to their customers. They have even begun offering two day shipping; something Alko is not currently capable of offering to their customers. Lightoiler has even been able to raise their prices after opening their new centralized warehouse (SCM 479, HW 4 Supplemental Information). However, Alko can use their competitions price increases to their advantage and look to becoming the low costs leaders with the potential to gain or at least maintain their market share.
Their competition is by far their biggest threat but not to be forgotten is the number of defective products has been increasing from the inspection performed from the supplier deliveries, the inspections as the plants as well as the distribution centers. It has been recommended by quality to increase safety stock of items to account for the defects but the real problem that needs to be addressed is the quality of the products coming from the supplier (SCM 479, HW 4). It is also known that historically Alko has ignored its distribution system. They currently use a 3PL but it is uncertain if Alko redesigns their network whether they will be able to function efficiently or not. Alko does have an opportunity to reduce their transportation costs and increase their efficiency by redesigning their network and working towards are more centralized distribution system.
Alko can use a redesign of their distribution strategy in order to function more efficiently and cut unnecessary costs (SCM 345). If they are able to identify problems with suppliers, new suppliers with higher quality products could be used which would allow for fewer defects, reducing costs that are currently being used for additional safety stock which has brought additional holding costs of $.15 per unit per day (Chopra, 323, SCM 355, SCM 432, SCM 440).
One of the biggest weaknesses that Alko is facing is having ignored their Distribution network. An initial look at their Regional design shows inefficiency in having developed too many Distribution centers. It is key to optimize their operating performance in order to increase efficiency (Chopra, 322). They will have to consider either combining some of their Distribution centers or consider creating a completely centralized system in order to reduce transportation costs and increase efficiency (SCM 345).
It is important to increase their efficiency and cut costs where they are able, it will also allow them to satisfy the needs of their customers with the capability of offering expedited shipping for the ones with that desire (SCM 479). Looking to the future, Alko needs to decide whether their goal is for growth or to become more efficient. It would be a huge issue if their marketing department is looking to spend large amounts of money on increasing sales but with their reorganization they are looking to only maintain their current customer base and get a hold of their out of control costs and move toward a more efficient running organization.
A strength that Alko has had is their outstanding ability to develop and produce new products. This is important in maintaining their growth and continuing to appeal to their customers. They will have to look into increasing their quality, not only to reduce their costs but maintain their customer service level of at least 95% (SCM 440). Another strength for Alko is that they have been in business for many years. They have had decades to build their reputation for reliable, quality products. Alko can use their reputation as a selling point for their future products as well as in their advertising as a way to gain additional customers (MKT 300). They are also expected to continue having a possible 5% growth over the next few years which will mean stable demand and better capability to produce more accurate forecasts (SCM 432).