Mega-Save is a large retail grocery chain based in St. Louis, Missouri. Mega-Save stocks some of its retail stores from a regional distribution warehouse in the St. Louis suburb of Maryland Heights, handling a variety of dry, refrigerated, and frozen food items there. These items are ordered and received from vendors, then shipped out to retail locations as those stores place their own orders with the distribution warehouse. Both the retail stores and the warehouse run 24/7/360.
One high-volume item is pre-packaged boneless skinless chicken breast. During 2016 in the United States per capita consumption of chicken was over 90 pounds according to the National Chicken Council. The Council further says Americans devour 1.25 billion chicken wings during the Super Bowl alone. Thus chicken is a critical item for Mega-Save and every other grocery retailer, making availability for the shopper extremely important. A large safety stock of frozen chicken breast is kept at the Mega-Save warehouse. However, management is concerned that the safety stock held may be too large. They need assistance setting a proper level.
Mega-Save receives this product frozen from a vendor and typically holds it a short time at the warehouse before shipping it on to retail locations. There the individual packages are thawed in display cases for customers to purchase. To better understand the safety stock problem the manager of the Maryland Heights warehouse has pulled data on recent weekly orders for chicken breast over past weeks and order cycle lead time length of the vendor. That data is given in the embedded spreadsheet below.
Frozen chicken breast is delivered to the Maryland Heights facility in 40-pound cases by refrigerated truck. It is held in a large industrial freezer and ultimately shipped out to retail stores in those same cases. Ordering costs of $7500 are high owing mostly to the cost of transporting the frozen product as well as time and labor needed to unload trucks. Though the amount is difficult to estimate accurately, Mega-Save assigns a $80 annual cost for holding a case of frozen chicken breast at the warehouse for one year. (Of course this is a theoretical cost since the time chicken is held typically isn’t this long.) Though frozen chicken is a global commodity and prices fluctuate, a general wholesale value for the product in the warehouse is $1.07 per pound.
a. Determine the amount of safety stock and its wholesale value which should be held at the warehouse to support a 98% service level to the downstream retail store.
b. If EOQ is used to set the size of orders placed with the vendors how often (on average) will orders be placed?
c. Your data shows one very long chicken shipment lead time resulting from inclement weather. There’s a discussion among Mega-Save’s supply chain professionals as to whether that shipment should be dropped from the data since it represents a very extreme case. If you drop this shipment from the data how does that impact your projected value of safety stock needed?
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