Llenroc Plastics Europe:
EU/US International Operations Collaboration
January 1995
revised: January 1996
revised: January 1997
Peter Jackson1
Pierre Semal2
revised: February 2000, 2001, 2003
Ph. Huang3, B Kleiner4, P. Semal
Acknowledgments
Llenroc Plastics is a case study carried out by John A. Muckstadt and Peter L. Jackson at
ORIE, Cornell University, Ithaca, NY. This original case was reported in: "Llenroc Plastics: A
case study in Manufacturing and Distribution Systems Integration", Technical Report N. 898,
Cornell University, March 1990. Llenroc Plastic Europe is an adaptation of this case study to
Europe.
Abstract
Llenroc Plastics is a case study originally carried out by John A. Muckstadt and Peter L.
Jackson, ORIE, Cornell University, Ithaca, NY. The original case was reported in: "Llenroc
Plastics: A case study in Manufacturing and Distribution Systems Integration", Technical
Report N. 898, Cornell University, March 1990. Llenroc Plastic Europe is an adaptation of this
case study to Europe.
Llenroc Plastics Europe is a comprehensive case study in redesigning the manufacturing and
distribution systems for a medium-sized manufacturer of high pressure decorative laminates.
A series of six cases examines, in turn: (Case 1) the transportation system for a regional
warehouse, (Case 2) the inventory policies of a regional warehouse, (Case 3) the design of a
pan-european distribution system, (Case 4) the operational improvements of a bottleneck
manufacturing operation, (Case 5) the work flow and layout improvement of a non-bottleneck
operation, and (Case 6) the redesign of the manufacturing planning and control system. The
cases are integrated by a common concern to reduce cost and inventory investment and to
improve quality and customer service. The collaborations will focus on Case 1 and Case 3.
1Cornell
University, Ithaca, NY, USA.
Catholique de Louvain, LLN, Belgium.
3 Virginia Tech, Virginia, USA.
2Université
1
Llenroc Plastics
Introduction
Background
The Llenroc Plastics corporation is one of several major manufacturers of high
pressure decorative laminates (HPDL). These laminates are found in counter tops in kitchens
and bathrooms, are used as wall surfaces in homes, mobile homes, and offices, and are used
by furniture manufacturers to fabricate tables, desks, and cabinets for both home and office
use. They are very popular due to their low price, high durability and wide variety of colors
and patterns.
The HPDL market is not large. It is expected to be approximately 480 million ECU's
this year. This market is divided into three segments: direct sales (for OEMs, 22%),
residential (served by distributors, 35%), and commercial specifications (large projects, 43%).
Llenroc Plastics has historically concentrated on direct (32%) and residential sales (60%) with
only 8% of its business in the commercial specifications segment. Overall, Llenroc's
projected current year sales are 81.6 million ECU's. Future market growth in real terms is
expected to be about 4% per year, with most of it coming in the specification segment.
The major competitors in this market are Wilson and Formica. As you will observe in
Table 0.1, these companies dominate the industry in terms of market share, per unit
production and distribution costs, and production capacity. Furthermore, they presently
dictate the industry standards for product variety, quality, and customer service.
Consequently, all financial and operational decisions must consider the impact they will have
on the company's relative competitiveness. Table 0.2 summarizes the company's current
gross margin.
The rest of the introduction is devoted to a description of the manufacturing and
distribution operations and an overview of the project.
Table 0.1. Comparative Market Share and Cost Analysis
Company
Market
Raw
Factory
Share
Material
cost
(%)
ECU/sqf
ECU/sqf
Wilson
39
0,180
0,107
Formica
26
0,182
0,132
Llenroc
17
0,183
0,130
Nevamar
10
0,189
0,148
Micarta
4
0,192
0,146
Freight
ECU/sqf
0,016
0,017
0,022
0,020
0,023
Table 0.2. Gross Margin: Average Costs per Square Feet
Raw Material
ECU 0,183
Labor and Overhead
ECU 0,130
Manufactured Cost
ECU 0,313
Freight
ECU 0,022
Delivered Cost
Sales Price
Gross Margin
2
ECU 0,335
ECU 0,530
ECU 0,195
Manufacturing Operations
Let's take a brief look at Llenroc's manufacturing operations. At the present time,
Llenroc has one main manufacturing plant located in London, UK. All the products they
manufacture and sell are laminates. Each piece of HPDL consists of several layers of
different types of paper, which are each impregnated with resins and pressed together at high
temperatures. Four types of paper are used in the process. The top layer, which is used
primarily for protection, is colorless and transparent and is called the overlay paper. The
second layer is a single sheet of decorative paper, which provides the color and pattern to the
surface. The third layer consists of 2 - 4 sheets of Kraft paper. The decorative paper is
impregnated with melanin resins while the Kraft paper is impregnated with phenolic resins in
the manufacturing process. The exact number of sheets of Kraft paper and the weight of the
individual sheets of the paper depend on the desired strength of the final product.
Here is a description of the complete manufacturing process. The first step is the
receipt and storage of rolled paper. The rolls of paper are received from the suppliers in 3, 4
or 5 feet widths (note that because the manufacturing plant is in UK, the usual length unit for
the company is the foot, which is about 0.3 meter). These rolls arrive by truck or rail. Rail
transport is used primarily to receive large rolls of Kraft paper. After storage, paper is
withdrawn from stock in rolls. A prescribed amount of paper is removed from a roll and
treated with an appropriate resin. The exact resin content varies among different types of
paper. The precise resin mix is required to guarantee a high quality final product. Once it
completes the treating process, the impregnated paper is cut into individual sheets, which are
8, 10 and 12 feet in length. Altogether, there are 9 standard sizes of paper that emerge from
the treating operation, ranging from 3 x 8 to 5 x 12 square feet (sqf). Once the paper is cut to
length it is generally stored in racks according to pattern, color, and size. Currently there are
180 different colors and patterns in the product line, each available in the 9 standard sizes.
The individual sheets are then assembled into so-called "books" prior to pressing. A
book contains all the paper required to make two final pieces of laminate plus some additional
paper. Figure 0.1 shows the construction of a typical book. The name "book" comes from the
fact that the resultant assembly is symmetric in content with the exterior pieces of paper
called the cover paper. The extra sheets of paper added in the assembly process are
required to protect the remaining paper during the pressing operation.
In Llenroc's plant, there are six presses used, each of which has limitations on the
sizes of the material that it can press. Furthermore, the number of books per press load also
varies among these presses. More detailed data on the presses will be provided
subsequently.
While there are differences, the presses operate in essentially the same manner.
Each press has a series of openings. The number of openings depends on the press. Each
opening in each press has capacity for only ten laminates (5 books). The precise manner in
which these loads for each opening are constructed will be discussed in one of the cases.
Once an entire load is constructed and placed in a press, the press cycle begins. This batch
pressing process takes about one hour to complete.
Following the pressing operation, the individual laminates are stacked onto pallets
and moved in multiple press loads to a finishing area, called the fabrication room. The final
trim and sanding operations, as well as some inspections, are performed there.
Finally, each piece is inspected, stacked, and then sent to the finished goods
warehouse racks for storage or shipping. The storage area consists of a high bay storage
and retrieval system and a set of storage racks for high demand rate material. Figure 0.2
gives a summary of this operation sequence.
3
Figure 0.1 Construction of a Press Book
Plate
Release
Overlay
Cover (Print)
2-4 Kraft (treated)
Untreated Kraft
Untreated Kraft with special release on back
2-4 Kraft (treated)
Cover (Print)
Overlay
Release
Plate
Figure 0.2 Manufacturing operations
Receiving
Storage
Treating
Cut
Storage
Assembly
Pressing
Finishing
Inspection
Storage
Distribution System and Operations
The distribution system consists of one central warehouse, located in London with the
manufacturing facility, and seven other regional warehouses. These warehouses are located
in Copenhagen, Hamburg, Munich, Milano, Brussels, Lyon, and Madrid. The national sales
regions are depicted in the map shown in Figure 0.3. Table 0.3 contains the data showing
annual sales for each region. These warehouse locations were not chosen with great care.
They were established primarily based on the Marketing Department's feeling that "the closer
we are to our customers the better." However, cost and service issues were not adequately
addressed when the location decisions were made.
The market can be conveniently segregated into two groups, Original Equipment
Manufacturers (OEMs) and others. The OEM business refers to the direct sales business
mentioned earlier. All other segments are served by a network of distributors scattered
throughout Europe. Independent of customer type, the finished goods flow to the customer
occurs as follows.
Once manufactured as described previously, the laminates are normally placed into the
finished goods stock at the central warehouse. In some instances where backlogs exist, the
finished product goes directly to the shipping department. Orders are received at the central
warehouse from one of two sources, OEMs or regional warehouses. Distributors place their
orders with a designated regional warehouse. All customers receive their stock from their
4
designated regional warehouse. OEMs and other customers receive their inventory from their
assigned regional warehouse. The flow of material that occurs is depicted in Figure 0.4.
The flow of information concerning inventory and shipping occurs somewhat differently. The
regional warehouses provide aggregate data on a daily basis to the central warehouse. Some
of the data concerns shipments to individual customers, which is used primarily for preparing
invoices and tracking customer service. The second type of data is orders for replenishment
stock. Whenever a regional warehouse's inventory position for an item reaches a reorder
point, an order is placed automatically requesting a shipment be made to that regional
warehouse.
The central sales facility located in London monitors all OEM accounts directly. The OEMs
place their orders with London. Inventory is held in the appropriate regional warehouse "to
provide excellent service to these highly important customers." Once an OEM order is placed,
an electronic message is sent from the central warehouse to the regional warehouse that
contains all the pertinent information. It takes about two days from the time an order is placed
until the regional warehouse receives these shipping instructions from the central location's
information system.
Shipments are made in full truckload quantities from the central warehouse to each regional
warehouse so that transportation costs are kept as low as possible. Furthermore, each
regional warehouse operates its own trucking fleet to serve its region. Shipments from the
regional warehouses are made to customers on the day after the order is known to the
distribution system. The truck dispatcher does his best to give his customers next day service
while keeping transportation costs as low as possible.
Table 0.3 Sales regions
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Sales Region
Break-bulk Point
Responsible
Warehouse
Finland
Sweden
Norway
Denmark
North Germany
East Germany
Central Germany
South Germany
Austria
Switzerland
North Italy
South Italy
Benelux
North France
SW France
SE France
East Spain
West Spain
Portugal
Ireland
Scotland
England
Helsinki
Stockholm
Oslo
Copenhagen
Hamburg
Berlin
Stuttgart
Munich
Wien
Bern
Milano
Roma
Brussels
Paris
Bordeaux
Lyon
Barcelona
Madrid
Lisboa
Dublin
Edinburgh
London
Copenhagen
Copenhagen
Copenhagen
Copenhagen
Hamburg
Hamburg
Munich
Munich
Munich
Munich
Milano
Milano
Brussels
Brussels
Lyon
Lyon
Madrid
Madrid
Madrid
London
London
London
*
*
*
*
*
*
*
*
*
*
*
*
5
Weekly
Volume
(sqf)
45642
155781
155781
6435
17216
5397
72208
18104
110128
408528
53929
46035
594912
97624
144917
380924
31953
293713
145765
76532
174128
69425
Weekly
Volume
(FTL)
0,40
1,35
1,35
0,06
0,15
0,05
0,63
0,16
0,96
3,55
0,47
0,40
5,17
0,85
1,26
3,31
0,28
2,55
1,27
0,67
1,51
0,60
Figure 0.3 Sales regions
Manufacturing Plant

Central Warehouse

Regional Warehouses

Break Bulk Point

OEMs and Distributors
6
Figure 0.4 Flow of material in Llenroc's Distribution System
7
CASE 3
The Warehouse Location Problem
1. Overview
Llenroc Plastics' distribution system consists of the central warehouse, located in London ,
and 7 regional warehouses (Copenhagen, Hamburg, Munich, Milano, Brussels, Lyon, and
Madrid). Each warehouse operates independently. As we have discussed in the previous
cases, these warehouses presently are not operating either efficiently or effectively. Due to
the inventory and transportation problems, customers have been receiving poor service. You
have examined some of the causes and proposed some ways to rectify these problems at a
regional warehouse. In this case, we will examine a broader issue: how many warehouses
should there be and where should they be located.
This is an important problem for Llenroc to address properly for several reasons. First, we
know that Llenroc must improve its service to its customers. Second, Llenroc must reduce
cost. Inventories are too high. There is approximately 7 million Ecu's of inventory at the seven
regional warehouses, measured in cost. Furthermore, there is about 2 months worth of
finished goods stock at the central warehouse as well. The operating costs are also high. It
costs an average of approximately 2 million Ecu's per year to operate a regional warehouse.
Finally, there are also excessive transportation costs.
Your task is to redesign the warehousing and distribution system. You must consider all the
relevant costs: warehousing, inventory, and transportation costs. If you propose closing an
existing warehouse, you should include the termination costs listed in Table 3.1. Use a five
year planning horizon and a 15% cost of capital to compare alternatives. You must also
improve substantially the service you provide to customers.
To simplify your task, we have divided the country into 22 sales regions. These regions are
illustrated in the map in Figure 0.3. Rather than considering the detailed demand by
customer, we have aggregated the demand by region so as to reduce the computational
burden. Table 0.3 (or 3.1) lists the regions and shows the sales volume measured in square
feet on a weekly basis for each region.
Llenroc's management has helped to reduce the scope of the location problem. By
considering where customers are located, the availability of reliable local trucking companies,
the network of motorways, and operating costs, management has narrowed the search for
suitable warehouse locations to the following cities: Copenhagen, Hamburg, Berlin, Munich,
Wien, Milano, Brussels, Lyon, Barcelona, Madrid, Edingurgh and London. As mentioned,
there are existing Llenroc warehouses in eight of these cities. The existing and potential
warehouse locations are marked with an asterisk in Table 0.3.
You must select which of these cities is to house a warehouse. For each warehouse, you
must select which of the 22 sales regions it must support. A sales region can only be served
by one warehouse. Do you think it is appropriate ?
You must estimate transportation costs. To accomplish this goal, you must develop an
approximate transportation plan for the system. This plan will provide possible routes that will
be followed by carriers to deliver products to customers. Although we will not stipulate what
routes should be taken by carriers once the plan is put into operation, it is essential that we
accurately estimate in advance what transportation costs and customer service levels will
result from the plan's implementation.
To simplify your analysis, assume that each sales region has associated with it a central
break-bulk point. These break-bulk locations are indicated in Table 0.3. All shipments to that
region come to the break-bulk point using long haul carrier. At the break-bulk point, the
shipments to individual customers are separated and a local short haul carrier is used to
8
move the laminates to their final customer destinations. Since these break-bulk points are
predetermined, the warehouse location decision has no effect on total short haul costs.
Nevertheless, you should include these costs in your total cost report. The transportation plan
consists of a specification of the routes that the long haul carriers will follow to move
laminates from the regional warehouses to the break-bulk points in each region. The long
haul cost is based on truckload-kilometers. The contractual cost to drive one truck (115000
sq. feet capacity) for one kilometer is 1.09 Ecu.
This routing problem differs from that considered in Case 1 because of the use of contract
long haul carriers. In this case, it is not necessary to plan round trips. The contract carrier
truck is contracted for a pre-specified route and Llenroc is charged 1.09 Ecu per kilometer for
the length of the route from the warehouse to the furthest point on the route. (It is not
necessary to pay for the truck's return to the warehouse: that is the contract carrier's
problem.)
In addition to the transportation from the regional warehouses to the to the break-bulk points,
the transportation from the central warehouse in London to the regional warehouse must be
evaluated too. Here direct routes are assumed.
Once all the routes are determined, the pipeline stock, that is the amount of products on the
road, can be computed. The cycle stock and the safety stock must be estimed too.
You must also extend the analysis of Case 2 to develop an overall inventory plan. That
is, specify the inventory policy to be used at each regional warehouse for each category of
items, A, B and C. Specify the criteria that will be used to decide whether or not a part should
be stocked, what the frequency of orders will be, and what should be the appropriate cycle
and safety stock levels.
The relevant data for this analysis can be found in the spreadsheet Table2_2.XLS. These
data reflect demand rates and standard deviation to mean ratios (coefficient of variation) for
regional and national weekly demand. As you would expect, the national demand rates are
higher and the coefficient of variation is lower for national versus regional demand. What does
this imply about safety stock levels? When examining these data, observe that the coefficient
of variation is high for most items. Hence, you may want to consider methods for reducing the
relative variability.
Once you have proposed a design for a warehousing system and established an inventory
stocking policy, you must evaluate its impact on customer service. Recall that our
fundamental goal is to improve Llenroc Plastic's service to its customers. What service will
the planned system provide? How will you measure it?
9
Assignment Overview
Your task is to set up a warehouse system that keeps costs low while keeping customer
satisfaction high.
3.1 Formulate as precisely as possible the objective(s) you will aim at during the design of the
network: objective function(s), constraint(s), design variables, etc.
3.2 Perform a detailed analysis of the different contributions to your main objectives. For
example, the reduction of the costs is a main objective. Therefore, you should detail what are
the different components or contributors to the cost figures. This analysis should be
qualitative and if possible quantitative. This approach is also necessary for the other important
objectives (customer service, …) of your network design.
3.3 At this point, you should study generic scenarios. Their quantitative evaluation will guide
you in the design of real solutions.
Once you have a clear methodology, you can implement it by answering the following
questions successively.
3.4 Choose a set of warehouses to use from 12 possible sites. These warehouses are spread
across the nation. Your decision should be based on a number of factors: location of the
warehouse, location of demand, and the cost of running a warehouse. In this model, the cost
of running a warehouse is based on a fixed cost plus a cost that varies with volume. You
must also assign regions to these warehouses.
Your decisions define the warehouse, long haul transportation between the central
warehouse and the regional warehouses and the corresponding pipeline inventory costs. This
is the most important decisions of the assignment.
3.5 Decide which routes to use to ship the products from the regional warehouse to the breakbulk points. Geography and customer service must be taken into account.
Your decisions define the second part of the long haul transportation (from the regional;
warehouse to the break-bulk point) costs and the corresponding pipeline inventory costs.
3.5 bis Optional. Perform an ABC classification of the products and define for each class the
safety stock and the order size (cycle lot size).If you do not do the assignment, please re-use
the values preset in the software.
Your decisions define inventory costs and some aspects of customer service.
3.6 Discuss the strength and the weakness of your plan both from an economic, a marketing
and a social point of view.
10
Appendix C
Description of WCOSTEU.XLS
WCOSTEU.XLS is an Excell spreadsheet designed to simulate the inter-relationships among
transportation costs, warehouse costs, and inventory costs in the warehouse system. In this
spreadsheet, you will select warehouses, decide which regions to assign to each warehouse,
define routes to transport laminates to each region's break-bulk point, and complete the
inventory picture by entering safety stock months of supply. When these tasks are complete,
you will have a fairly complete picture of Llenroc's warehouse system.
This section is arranged in the same order as the spreadsheet, with one section for each
spreadsheet screen. After experimenting with the spreadsheet, the relationships between
transportation, warehouses, and inventory should be clear. For an in-depth explanation of the
inventory models used for safety, cycle, and pipeline stock, see Appendix F.
A.1. Warehouse Cost Model(A21)
The warehouse costs are determined by adding a fixed base cost to a volume dependent
variable cost that represents labor and lease costs.
The variable cost is derived from a piecewise linear function given by cut-off points:( for a
graphical representation of these costs, look at WCOSTEU.XLC).
If the annual Volume V (in then the cost is:
million) is in the range:
The cost range is
then:
Cut 0:
0
[0]
Cut 1: ] 0 - 32]
V * 0.06+ 1.0
[1.00 - 2.92]
Cut 2: ] 32 - 64]
(V - 32) * 0.05 + 2.92
[2.92 - 4.52]
Cut 3: ] 64 - 128]
(V - 64) * 0.04 + 4.52
[4.52 - 7.08]
Cut 4: ]128 -
(V - 128) * 0.02 + 7.08
[7.08 -
0
]
]
A.2. Warehouse allocation
To enter your decisions for task 1.1 in the spreadsheet, first find the appropriate row for a
particular warehouse, then enter the numbers of the regions allocated to it in that row. Use
Figure 0.3, a map of the regions, as a reference. If a warehouse is not used, be sure its row
contains only green zeros. You may allocate all 22 regions to one warehouse, spread the
regions among all 12 warehouses, or use any combination between these two extremes.
Make sure all regions have been allocated by checking the total square feet allocated. It
should read 161,464,121.
11
B.1. Transportation cost model (H21)
Transportation Costs (in ECU/week) are made of 3 components :
(a) Central Warehouse --> Regional Warehouse,
model )
( long haul cost
(b) Regional Warehouse --> Break-Bulk point,
model )
( long haul cost
(c) Break-bulk point --> retailer / customers,
( short haul cost model )
Long haul model :
1.09 ECU per truck per kilometer
for (a) : number of trucks = weekly demand / truck capacity
for (b) : number of trucks = total number of routes followed every week
Short haul model :
Cost(region) = weekly demand * haul rate cost (region)
weekly demand in square feet
haul rate cost (region) in ECU / square feet
B.2. Long haul costs: Regional - Break-Bulk Point
On these screens, routes are chosen to transport weekly supplies of laminates from the
regional warehouses (chosen on the screen above) to the break-bulk points in each region.
There are a total of twenty possible routes; you may use each route more than once by
entering the appropriate number in the "times used" cell.
It is important to remember that since Llenroc uses a common carrier in Case 3, round trips
are not necessary. Also, Llenroc is charged Ecu 1.09 per kilometer, no matter how many
square feet of laminate are on the truck. Therefore, it is to your advantage for each truck to
leave the warehouse as full as possible.
Work with one warehouse at a time when choosing routes. Using the map of the regions,
pick a likely route. Enter this route in the speadsheet by entering the region numbers, in
order, in the leftmost column of the route, with the region that has the warehouse in the first
green cell. Then enter the square meterage carried to the corresponding region in the middle
column. If the truck is not carrying any laminates for the region that contains the warehouse,
then the first cell in that column should be zero. The spreadsheet will look up the distance
from the last region you were in to the one you are in now ( the first distance will always be
zero). Finally, enter the number of times a truck will travel this route in the "times used" cell
for each route.
It is somewhat tricky to find routes that use most of the truck capacity. One way to do this is
to choose the regions you would like included in a route, add up the weekly demands for
these regions (the demands are listed in both Table 3.1 and in the spreadsheet) and divide by
115,000 (capacity of a truck in sq ft). This is the number of trucks needed to cover the
regions on your chosen route. If the number is an integer or slightly below, then you have
chosen a good route that has the truck filled nearly to capacity at the beginning of the route.
The integer value is the number of times a truck will cover this route. The square footage
entered in the middle column is the demand /integer value.
12
Once you have entered all your routes, check the totals to the right of the twentieth route to
be certain all demand has been shipped . The cost of the pipeline stock for each route is
computed and listed under the transportation cost (see Appendix F).
13
B.3. Short Haul Costs
Short haul costs are incurred to transport laminates from the break-bulk point to the customer.
These costs are computed on a cost per square meter rate that varies from region to region.
These costs are not affected by your choice of warehouse locations and routes. The costs
per square meter are listed one screen to the right.
B.4 Long Haul Transportation: Central(London) - Regional
Since laminates that are distributed from regional warehouses must get there from London ,
additional pipeline stock and transportation costs are incurred. This screen computes how
much it costs to transport laminates to all the regional warehouses.
C. Cycle, Safety, and Pipeline Stock
This screen brings together all the data pertaining to the inventory system. You must enter
the Fraction of Annual Sales values, which comes from an ABC classification, and the
SSMOSi values. MOS stands for month of supply. An SSMOSi value is simply the total safety
stock expressed as a percentage of the monthly demand for each type of products (ABC). A
procedure to determine these values was already requested in Case 2. The Appendix F
describes a procedure for the calculation of these values.
Given these data, the spreadsheet computes the ECU value of the various types of inventory.
D. Totals: Annual Summary
This last screen brings together all the cost information that the spreadsheet has generated.
The report is on an annual basis, so transportation costs are multiplied by 52. Since 20%
interest is charged on the inventory, it is a very significant cost for a high level of safety
stock. This screen will help you decide the economic feasibility of your proposed warehouse
system design.
As you become familiar with this spreadsheet, the relationships between the components will
become clear. For example, more warehouses lead to a larger safety stock inventory. What
relationships can you discover or anticipate between changes in:
Number and location of warehouses,
Allocation of regions to warehouses,
Long Haul routes, and
Fill Rates,
and changes in:
Long Haul transportation costs,
Long Haul pipeline stock,
Short Haul transportation costs,
Transportation Costs from London to regional warehouses,
Pipeline stock from London to regional warehouses,
Annual warehouse operating costs,
Cycle stock,
Safety stock,
Customer Service, and Lead times
If you can explain how all these factors are interrelated, you will be able to create and justify a
reasonable warehousing system. Use the spreadsheet to try several different solutions for
comparison.
Note that the spreadsheet does not compute lead times, fill rates, or customer service. You
must develop your own techniques for measuring these quantities.
14
Table 3.1 Termination cost for the warehouses.
Warehouse Sales Region
Volume
Volume
per Region
per
(sqf) warehouse
Copenhague Finland
1
2373384 18909228
Sweden
2
8100612
Norway
3
8100612
Danemark
4
334620
Hamburg
North
5
895232
1175876
Germany
East Germany
6
280644
Munich
Central
7
3754816 31666336
Germany
South
8
941408
Germany
Austria
9
5726656
Swizerland
10 21243456
Milano
North Italy
11
2804308
5198128
South Italy
12
2393820
Brussels
Benelux
13 30935424 36011872
North France
14
5076448
Lyon
SO France
15
7535684 27343732
SE France
16 19808048
Madrid
East Spain
17
1661556 24514412
West Spain
18 15273076
Portugal
19
7579780
London
Ireland
20
3979664 16644420
Scotland
21
9054656
England
22
3610100
15
Terminati
on cost
(ECU)
1985469
123467
2691639
389860
4501484
2050780
1838581
1248332
Appendix D
Inventory Calculations
Three major cost categories are considered in Case 3, the Warehouse Location
Problem: transportation costs, warehousing costs, and inventory holding costs. The inventory
category is important for two reasons: (1) inventory investment is very sensitive to the
warehouse location decision, and (2) investment in inventory is one of the major asset
categories of the firm. This case requires a rough estimate of the economic amount of
inventory investment required to provide good customer service in Llenroc Plastic's national
distribution system. This note is intended to guide you through some procedures to make that
estimate.
There are three components to inventory investment:
Pipeline Stock
Cycle Stock
Safety stock
The spreadsheet developed for this case, WCOSTEU.XLS, uses the following models
to compute the three components of inventory.
Pipeline Stock
Pipeline stock refers to the inventory in transit from the central warehouse to the
regional warehouses, from the regional warehouses to the break-bulk points, and from the
break-bulk points to the customers. The spreadsheet WCOSTEU.XLS calculates pipeline
stock in the following way. Based on your assignment of regions to warehouses, it computes
the average weekly volume of stock, measured at cost, moving from the London central
warehouse to each regional warehouse. It multiplies this volume by the estimated time
required to complete the trip, measured in weeks. The total of these figures across all
regional warehouses is the pipeline stock in transit from the central warehouse to the regional
warehouses.
Next, based on your design of routes to move stock from the regional warehouses to
the break-bulk points, the spreadsheet computes the distance travelled from each warehouse
to each break-bulk point. It converts each distance to a travel time measured in weeks, and
multiplies this time by the volume of stock moving to the break-bulk point, measured at cost,
and by the number of times per week each route is used. The total of these figures across all
routes is the pipeline stock in transit from the regional warehouses to the break-bulk points.
Note that the total amount of pipeline stock will depend on the location of your
warehouses and your choice of routes to satisfy regional demand. The current version of the
spreadsheet does not estimate the pipeline stock in transit from the break-bulk points to the
customers.
Cycle Stock
Cycle stock is estimated using the following order sizes (A items = 0.5 months, B
items = 1 month, and C items = 3 months), the Fraction of Annual Sales values, and total
annual sales in cost. You may use any values for Fraction of Annual Sales that make sense.
That is, you may change the ABC classification that you proposed in Case 2. Cycle stock is
computed as follows:
16
Cycle stock =  i=A,B,C (1/2 Qi * Fractioni * total annual sales at cost)
where i = A, B, C.
This equation multiplies the average amount of inventory on hand by the value of that
inventory. Note that cycle stock will not be affected by your warehouse location decisions.
Safety Stock
Safety stock represents a major investment in the distribution system and it will be
affected by your choice of warehouse locations and by your operational strategy. If you
choose to have many regional warehouses and carry safety stock in all items to achieve high
fill rates, and back up each of these items with safety stock at the central warehouse, then the
interest carrying charges will be a significant line item in your cost report.
The spreadsheet WCOSTEU.XLS uses the following simple model to compute safety
stock:
Safety stock = 1/12  i=A,B,C (SSMOS(i) X Fraction of Annual Sales(i)
x
Annual Sales at Cost) ,
where SSMOS(i) is the average safety stock measured in months of supply for inventory
class i = A,B,C. You are responsible for providing the SSMOS(i) figures to the WCOSTEU
spreadsheet. Estimating such factors for a multi-location distribution system is a non-trivial
task and deserves careful treatment. We propose here the following procedure. Let us
assume that Table 2.2 represents a typical pattern of demand for a regional warehouse.
These values are also given in TABLE2_2.XLS. Then, we perform an ABC categorization of
the table and select a representant for each class. For each such a product, we determine the
safety stock required to reach a predefined customer service level. Finally we express this
safety stock in percent of the monthly demand of this product. We asume then that all the
product of this class required the same percentage of safety stock. This computation is
performed for each class representant. This allows us to determine the safety stock for a
typical regional warehouse. For the central warehouse, the computation can be performed
again, assuming the typical national demand distribution given in TABLE2_2.XLS too.
For the required data, assume a lead time of 2 weeks from the manufacturing plant to the
central warehouse. The lead time for the regional warehouse depends on the fill rate at the
central warehouse and on your distributrion system. Also, assume lead time demand to be
normally distributed for A and B items and double-exponentially distributed (Laplace
distribution) for C items. For the lot sizes Q, here is a reasonable choice expressed in terms
of months of supply: 1/2 month for A, 1 month for B, and 3 months for C.
17