Reference no: EM133960361

Question

TVs Are Us

TVs Are Us (TRS) is a successful small chain of four retail stores each operating as a profit center. Their best seller is a 50 inch UHD TV retailing for $725 which represented a mark-up of 25% above what TRS paid the distributer. Annual TV revenues for each store were of similar size and amounted to roughly $980,000 per store.

The relevant part of the supply chain operated as follows. Being a profit center, each store made its own inventory decisions. Stores were supplied directly from the USA regional distributor by a dedicated truck. The distributor as part of a long-term contract offered the following transportation package. A shipment of up to 500 TVs was charged a flat fee of $2,175 and was guaranteed to reach the store in two weeks after order placement. (While the stores were located at slightly different distances from the warehouse, a uniform average flat fee was agreed upon to offer uniform service to each store.) Typically, stores placed roughly three orders per year, each of about 450 TVs.

The store chain was contemplating a rather radical change to current operations.

Create regional warehouse of their own that will hold the inventory for all four stores and will deliver locally at a much lower cost and added frequency. They felt that consolidated inventory management should provide considerable savings over the current setup

What do you think about TRS central warehouse? Would it provide supply chain savings? The following questions may be helpful:

1. What order size would you recommend for a TRS store in the current supply network?

2. How many times per year should a TRS store place its order, assuming demand is steady and predictable?

3. In reality, demand fluctuates from week to week. In fact, past weekly demand at each store exhibited a standard deviation of about 12 TVs. How should the ordering policy be adjusted if each TRS store wants its stock out probability not to exceed 5%? 1%?

4. What are the supply-chain inventory savings from adopting a central warehouse? What about transportation to the individual stores?

For all the financial evaluations, assume that TRS has an annual cost of capital of 20% and stores are open 50 weeks per year.