Delivery Strategy

at
Supply Chain Management ( IE
659)
Professor Dr. Sanchoy K. Das
Case Study Project Team 6: Mirjam Milsch
Gaurav Majumdar
Karthigeyan
Machendran
Henry Mensah

Overview
1)Introduction of Moonchem
2)Problem Overview
3)Questions
4)Solution Strategy & Illinois Pilot
Study
5)Operational Data
5.1) Moonchems Existing Distribution
Strategy
5.2) Alternative 1: No Aggregation
Model
5.3) Alternative 2: Complete
Aggregation Model
5.4) Alternative 3:
Tailored
Milsch,
Majumdar, Machendran,
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Mensah
Aggregation Model

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1)
Introduction
of
Moonchem

Moon Chemical Co. Ltd. (Moonchem) established in 1996 in

Yangzhou, China
Leading manufacturer of :

a) Industrial Chemicals,

b) Specialty Chemicals (e.g. Cosmetic Chemicals),

c) Food Additives,

d) Pharmaceutical Chemicals etc.

8 Manufacturing Plants & 40 Distribution Centers worldwide.

In the Specialty Chemicals market, Moonchem has

differentiated the US Midwest Region for trying out a new concept

of Consignment Inventory
Milsch, Majumdar, Machendran,
11/15/2012

Mensah

2) Problem Overview

Moonchems Year-end Business Review reveals the new inventory

strategy of Consignment Inventory has achieved a low Inventory

Turnover Ratio (ITR) of 2, in spite of having a stable Product
Demand from the Customers.
Over 50% of Moonchems Inventory has been classified as

Consignment Inventory.
However, only 20% of their total number of customers use

Consignment Inventory.
Mr. John Kresge, VP of Supply Chain Department, decided to look how

Consignment Inventory is being managed and to come up with an

appropriate plan to increase the ITR value.

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3) Questions
1) What is the current Annual Cost of
Moonchems
Strategy of sending full truckloads to each
customer in
the Peoria region to replenish consignment
inventory?
2) Consider different delivery options and
evaluate the
costs of each. What delivery option do you
recommend
for Moonchem?
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4) Solution Strategy
ITR = (Annual Sales Value of Goods Sold) / (Average
Inventory Value)
Moonchem cant directly influence the demand from its

customers
But it can decrease the Average Inventory value by

decreasing :
Cycle Inventory
subsequently the Total Annual Costs incurred.

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4) Illinois Pilot Study

A pilot study is conducted by
Moonchem in Illinois State in the
Peoria region (as marked in the
map) for the consignment inventory
distribution strategy analysis. The
resulting analysis is tabulated below.
Customer
Number of
Total
Type
Customers Consumptio
n
(lb/month)

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Small

12

1000

Medium

5000

Large

12000

Milsch, Majumdar, Machendran,

Mensah

5) Operational Data
Logistics Contractor: Golden Trucking
Truck Capacity: 40,000 lbs

Transportation
Cost

Full Truckload,
Single Customer
Drop-off

Full Truckload,
Multiple Customers
Drop-off

$ 400/truck

$350/truck + $50/
drop-off

Holding Cost (h) = 25% = 0.25

Unit Cost (CS=CM=CL)= $ 1 / lb

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5.1) Moonchems Existing

Distribution Strategy
Moonchem sends FULL TRUCKLOADS to each customer,
irrespective of the
customer type.

QS = QM= QL= 40,000 lbs

Order Frequency, n = D / Q
Annual Holding Cost, AHC = (Cycle Inventory) *h*C = (Q/2)*h*C
Annual Ordering Cost, AOC = (D / Q) * S
Total Annual Cost, TC = AHC + AOC

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5.1) Moonchems Existing

Distribution Strategy

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5.2) Alternative 1 No
Aggregation Model
The products are delivered independently to each type of
customer on a Just-in-Time basis where the Optimal Order
Quantity for each type of customer is predicted using the basic
EOQ Inventory Model.
Q* = [(2*D*S)/(h*C)]
n = D / Q*
Annual Holding Cost, AHC = (Cycle Inventory) *h*C = (Q*/2)*h*C
Annual Ordering Cost, AOC = (D / Q*) * S
Total Annual Cost, TC = AHC + AOC

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5.2) Alternative 1 No
Aggregation Model

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5.3) Alternative 2 Complete

Aggregation Model
Products for each type of customer being delivered jointly

in each truck.
Product Specific Order Costs, sL=sM=sS=$50
Combined Fixed Order Cost per Order (S*) =

S + sL + sM + sS = $ 350 + $50 + $50 + $50 = $ 500

n* = [(DLhCL+ DMhCM+ DShCS)/2S*]
QL = DL/(n*)

QM = DM/n*

QS = DS/n*

AHC = (QL /2)*h*CL+(QM /2)*h*CM+(QS/2)*h*CS

AOC = (n*)*(S*)
TC = AHC + AOC
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5.3) Alternative 2 Complete

Aggregation Model

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5.4) Alternative 3 Tailored

Aggregation Model
Products are delivered jointly for a selected subset of type
of customers.
Step 1: The type of Customer with the highest Ordering Frequency
is identified.
Step 2: Ordering Frequency of other types of customers are
identified as a multiple.
Step 3: Ordering frequency of the type of customer placing the
most frequent orders
are recalculated.
Step 4: Ordering frequency of all types of customers are identified

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5.4) Alternative 3 Tailored

Aggregation Model

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6) Inference & Recommendation

$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0

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Total Costs
Total Cycle Inventory

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6) Inference & Recommendation

Complete Aggregation Model is the most suitable Distribution

Strategy which
Moonchem should implement.
It would result in a 57.18% reduction in Total Costs and 75.5%
reduction in the
Total Cycle Inventory,
which
wouldMachendran,
in turn result in a higher ITR
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Majumdar,
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for

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THANK YOU
FOR YOUR ATTENTION!
QUESTIONS ?

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