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Supply Chain Management

December 1, 2011

Presented by: Ahsan Khawar Fahd Iqtidar Mir Nabeel Siraj Umair Babar Chishti 12020378 12020367 12020325 12020157

Question 1: All the relevant costs are calculated in the attached excel sheet, given in Appendix 1. Cost Summary
Total Shipping Costs Total Costs of Transport from Port to Warehouse Total Inventory Costs Total Cost of Delivery from Warehouse to Customer OVERALL COSTS

Rotterdam Zaragoza 530.8 0 613.2 1613.3 4183.0 3001.2 1133.3 2509.5 6460.3 7124.0

As shown in the cost summary sheet, the overall costs for Zaragoza come out to be slightly higher than those of Rotterdam. The major difference is caused due to the transportation costs from port to PLAZA. For Rotterdam these costs are almost negligible, hence the huge difference. Also the cost of delivery from PLAZA to customers in central Europe comes out to be higher for Zaragoza. Reason being the fact that distance from Zaragoza to central Europe is almost double the distance from Rotterdam to central Europe. Yet, the overall cost difference of 664E seems to be small. Taking into consideration some of the factors discussed in question 2, Zaragoza might just be the better option. Calculations: All the calculations for Economic order quantity, Reorder Point and Safety stock are given in appendix 2. The EOQ is calculated using the standard EOQ formula. For the formula we take the fixed costs to be the cost that is paid at the ports for order processing. This cost is 335 for Rotterdam and 305 for Zaragoza. For calculating the reorder point we first calculated the average performance time. This includes time spent by the order on port, Time spent on sea and the delivery times from the warehouse to the customers. The total days are then converted into years for purpose of ROP calculations. For safety stock calculations, we have used the service level formula given in the book. The formula used is F(K) = (1-SL)*(Q/Sd). Here Q is the order quantity and Sd is taken in annual terms since ROP and EOQ calculations were also performed in terms of annual figures. Question 2 Demand was more/less uncertain The uncertainty in demand is reflected in the reorder point and safety stock. The more the variability in demand the higher will be the reorder point and the safety stock. A higher deviation in demand would directly affect the safety stock levels required at the warehouses and hence increase the inventory carrying costs. This increase would then affect the overall costs. Using our excel model, If we increase the standard deviation of annual demand from 10,000 to 20,000, the overall costs for Rotterdam become higher than those of Zaragoza. This is because of the higher inventory costs associated with Rotterdam. The effect can be seen in the following cost summary.

Cost Summary
Total Shipping Costs Total Costs of Transport from Port to Warehouse Total Inventory Costs Total Cost of Delivery from Warehouse to Customer OVERALL COSTS

Rotterdam Zaragoza 530.8 0 613.2 1613.3 8183.0 5851.2 1133.3 2509.5 10460.3 9974.0

The number of units per container changed An increase in the number of units per container has a drastic effect on our overall costs. If the size is increase from 500 to 1000, the cost summary will be as follows: Rotterdam Zaragoza 265.4 0 Total Shipping Costs 306.6 806.6 Total Costs of Transport from Port to Warehouse 4183.0 3001.2 Total Inventory Costs 566.7 1254.7 Total Cost of Delivery from Warehouse to Customer 5321.7 5062.6 OVERALL COSTS Again it can be seen that an increase in the container size is suitable for Zaragoza as it reduces its transportation costs from port to warehouse and from warehouse to customer. These reductions in transportation costs lead to a lower overall cost than that for Rotterdam. But on the other hand a decrease in the container size could have a negative effect since it would increase the transportation costs. Since Zaragoza already has higher transportation costs than Rotterdam, this would have a great effect on the value it offers to its customers. The service level increased An increase in the service level means the need for a higher safety stock. As discussed above, a higher safety stock would mean higher inventory carrying costs. Since these costs are higher for Rotterdam than for Zaragoza, increased service levels would be helpful for Zaragoza. For instance, if we increase the service levels to 99%, the value of K changes to 2.6 for Rotterdam and to 1.6 for Zaragoza. As shown in the following cost summary: Cost Summary
Total Shipping Costs Total Costs of Transport from Port to Warehouse Total Inventory Costs Total Cost of Delivery from Warehouse to Customer OVERALL COSTS

Cost Summary

Rotterdam Zaragoza 530.8 0 613.2 1613.3 5383.0 2551.2 1133.3 2509.5 7660.3 6674.0

The product cost increased/decreased

Q.3 Besides the costs, there are other factors that customers might take into account. PLAZA had advantages over its competitors on many fronts. Firstly, Plaza hosted the ZLC, a research and teaching institution in collaboration with the government and other industry players. This center would conduct and experiment on modern supply chain initiatives and help in research by running a laboratory. The customers can benefit from this research laboratory in PLAZA in sorting out any logistical problems that they face and build new techniques suited to their logistics. Besides this, PLAZA had access to developed infrastructure like two motorways, a very large airstrip with two cargo holding facilities capable of landing the largest plans, connections with railways that were being completed and a separate dry port. The dry port had contracts with different sea ports and could help in logistical problems. The area of Zaragoza was less populated as compared to Rotterdam and other inland Spanish logistical parks. This would mean that PLAZA would face less issues of traffic congestion and other population related issues. Apart from this, PLAZA is managed by the government of Zaragoza and managed by it as well. This would improve customer confidence as the park would have the complete backing of the Spanish government as opposed to other private managed parks. PLAZA has access to further land so the park can expand as well if required. Besides this, it has a separate managerial parks, separate area for dangerous goods ensuring safety, and gym and sports facilities. It also has hotels and adequate parking space. All of this means that companies can also locate their headquarters or service centers here as well apart from logistical activities. The inventory holding cost at Zaragova is less than that of Rotterdam, however due to being far from Central Europe, the lead time for delivery of goods is less for Rotterdam than that of PLAZA. All of these factors should be taken into account by the customer.

Q.4 From the analysis in Question 1 and 3, zaragova seems to be a much better option than Rotterdam. The inventory holding costs, and all the added facilities and services that Plaza offers, makes it a better option than Rotterdam. However, Rotterdam has an advantage of being closer to central Europe. In case of any transport related problem, Rotterdam would be in a better position to timely deliver products to central Europe. But at the same time, it is more costly to operate from there. Hence the operating strategy of the company would be a big factor as to where the warehouse should be located. If the company policy is that of keeping high levels of inventory and safety stock, and it faces uncertain demand, Plaza would be the better option, because it is much cheaper to keep large amounts of inventory there. However, if the company operates in a JIT mode, then Rotterdam would be better, because then the company can operate a smaller warehouse in Rotterdam. As for keeping two warehouses, the cost of the company would increase a lot. However, the company can operate the two different strategies mentioned above and keep a very large warehouse at plaza, and a small one in Rotterdam. However, instead of shipping directly to Rotterdam, all the inventory should be unloaded at plaza, and then transported to Rotterdam. This would keep costs low and the Rotterdam warehouse would then be able to deliver goods to central Europe in case if there is a disruption in logistics between plaza and central Europe. This strategy would also help in reducing the delivery time of the goods to retailers in central Europe.

Appendix 1
Option 1(Rotterdam) 145 530.8 Option 2(Zaragoza) 0 0

Cost of Shipping (Sea) per TEU Total Shipping Costs Cost of Transportation from Port to Warehouse Fixed Cost at Port per Truckload Transport Cost per Truckload Total per Truckload Total Costs of Transport from Port to Warehouse Cost of Inventory Average Inventory Inventory Carrying Costs Total Inventory Costs Cost of Delivery from Regional Warehouse to Customer Spain to Central Europe/KM Rotterdam to Central Europe/KM Distances to Central Europe Cost of Delivery to Customer per Truck Number of Trucks Total Cost Overall Costs

335 0 335 613.15

305 495 800 1,613.28

20915.2 20% 4,183.03

20008.3 15% 3,001.24

1.20 516 619.20 1.83 1,133.32 6,460.29

1.02 1220 1,244.40 2.02 2,509.45 7,123.98

Appendix 2
Economic Order Quantity
Cost Per order(a) Annual Demand Annual Inventory Carrying costs Cost Per Unit Economic Order Quantity EOQ interms of TEU's EOQ interms of Truckloads EOQ Formula Option 1(Rotterdam) 335 100,000 20% 100 1830.30 3.66 1.83 EOQ = (2C0D/C1U)^0.5 Option 2 ( Zaragoza ) 305 100,000 15% 100 2016.60 4.03 2.02

(a) Cost per order will be the fixed cost that is paid at each port for processing every individual order.

Reorder Point & Safety Stock Reorder Point Formula with Periodic Review Annual Demand Average Performance Cycle(a)(Years) Review Period(Years) Safety Stock(b) ROP Average Inventory (EOQ/2 + SS) ROP = D(T+P/2)+Safety Stock Option1(Rotterdam) Option 2 ( Zaragoza ) 100,000 100,000 0.085 0.074 0.082 0.082 20000.0 19000.0 32602.7 30506.8 20915.2 20008.3

(a) Average Performance cycle Breakup Time spent on Port Average Time on Sea Delivery Time from warehouse to Customer Total Time

Option 1(Rotterdam) 1.5 days 29 days 0.5 days 31

Option 2 ( Zaragoza ) 1.5 days 24 days 1.5 days 27

Service Level Annual SD Q is Replenishment Order Quantity F(K)=(1-SL)*(Q/SD) K from Table given in Book Safety Stock(a)

(b) Safety Stock Formula wrt Service Levels Option 1(Rotterdam) 95% 10,000 1830.30 0.0092 2 20000.0

Option 2 ( Zaragoza ) 95% 10,000 2016.60 0.01008 1.9 19000.0