Global Logistics and Value Network

Global Logistics and Value Network Design

Intent: The purpose of this assignment is to enable students investigate, analyze and critique a process that allows decision making for optimizing logistics supply chain design at the tactical level which includes global logistics and distribution and warehousing design features. This may include utilizing linear programming techniques for optimizing supply chain networks. ORDER NOW

Assessment 1- Part ACase study-1- Supply chain design of X & Co.

Designing the Production Network at X & Co.

Mr Johnson, vice president of supply chain at x & co. thought that his current production and distribution network was not appropriate given the significant increase in Transportation costs over the past few years. Compared to when the company had set up its production facility in Chicago, Transportation costs had increased by a factor of More than four and were expected to continue growing in the next few years. A quick decision on building one or more new plants could save the company significant Amounts in Transportation expense in the future.

X & Co.

X & Co. was founded in the late 1970s and produced baby wipes and diaper ointment. Demand for the two products was as shown in Table 1. The company currently had one factory in Chicago that produced both Products for the entire country. The wipes line in the Chicago facility had a capacity of 5 million units, an annualized fixed cost of $5 million a year, and a variable cost of $10 per unit. The ointment line in the Chicago facility had a capacity of 1 million units, an annualized fixed cost of $1.5 million a year, and a variable cost of $20 per unit, the current transportation costs per unit (for both wipes and ointment) are shown in Table 2.

New Network Options

Johnson had identified Princeton, Chicago; Atlanta; and Los Angeles as potential sites for new plants. Each new plant could have a wipes line, an ointment line, or both. A new wipes line had a capacity of 2 million units, an annual fixed cost of $2.2 million, and a variable production cost of $10 per unit. A new ointment line had a capacity of 1 million units. An annual fixed cost of $1.5 million, and a variable cost of $20 per unit. The current transportation cost per unit are shown in Table 3. Johnson had to decide whether to build a new plant and if so, which production lines to put into the new plant.

Table 1: Regional Demand at X & Com (in ‘000s)
Zone Wipes Demand Ointment Demand Zone Wipes Demand Ointment Demand
Northwest 500 50 Lower Midwest 800 65
Southwest 700 90 Northest 1,000 120
Upper Midwest 900 120 southeast 600 70
Table 2 Transportation Costs per Unit
Northwest Southwest Upper Midwest Lower Midwest Northeast Southeast
$6.32 $6.32 $3.68 $4.04 $5.76 $5.96
$6.60 $6.60 $5.76 $5.92 $3.68 $4.08
$6.72 $6.48 $5.92 $4.08 $4.04 $3.64
$4.36 $3.68 $6.32 $6.32 $6.72 $6.60

Question

  1. what is the annual cost of serving the entire nation from Chicago?
  2. do you recommend adding any plant(S)? if so, where should the plant(S) be build and what lines should be included? Assume that the Chicago plant will be maintained at its current capacity but could be run at lower utilization. Would your decision be different if transportation costs are half of their current value? What if they were double their current value?
  3. If Johnson could design a new network from scratch (assume he did not have the Chicago plant but could build it at the cost and capacity specified in the case). What production network would you recommend? Assume that any new plants built beside Chicago would be at the cost and capacity specified under the new network options. Would your decision be different in transportation costs were half of their current value? What if they were double their current value?

ORDER NOW

Assessment 1- Part B Case Study-2- Managing Growth at Y & Co.

In December 2008, Mr. Thomson and his management team were busy in evaluating the performance at Y & co. over the previous year. Demand had grown by 80 percent. This growth, however, was a mixed blessing. The venture capitalists supporting the company were very pleased with the growth in sales and the resulting increase in revenue. Thomson and his team, however, could clearly see that costs would grow faster than revenues if demand continued to grow and the supply chain network was not redesigned. They decided to analyze the performance of the current network to see how it could be redesigned to best cope with the rapid growth anticipated over the next three years.

Y & Co.

Thomson founded Y &Co. in 2004 with a mission of supplying parents with more affordable sports equipment for their children. Parents complained about having to discard expensive skates, skis, jackets, and shoes because children outgrew them rapidly. Thomson’s initial plan was for the company to purchase used equipment and

Jackets from families and any surplus equipment from manufacturers and retailers and sell these over the Internet. The idea was well received in the marketplace, demand grew rapidly, and by the end of 2004, the company had sales of $0.8 million. By this time, a variety of new and used products were being sold, and the company received significant venture capital support.

In June 2004, Thomson leased part of a warehouse in the outskirts of St. Louis to manage the large amount of product being sold. Suppliers sent their product to the warehouse. Customer orders were packed and shipped by UPS from there. As demand grew, Y & Co. leased more space within the warehouse. By 2007, Y & Co. leased the entire warehouse and orders were being shipped to customers all over the United states. Management divided the United States into six customer zones for planning purposes. Demand from each customer zone in 2007 was as shown in Table 1. Thomson estimated that the next three years would see a growth rate of about 80 percent per year, after which demand would level off.

Table 1: Regional Demand at Y & Co. for 2007

Zone                                      Demand in 2007               Zone                      Demand in 2007

Northwest                          320,000                                 Lower Midwest               220,000

Southwest                          200,000                                 Northeast                          350,000

Upper Midwest                 160,000                                 Southeast                           175,000

The Network Options

Thomson and his management team could see that they needed more warehouse space to cope with the anticipated growth. One option was to lease more warehouse space in St. Louis itself. Other options included leasing warehouses all over the country. Leasing a warehouse involved fixed costs based on the size of the warehouse and variable costs that depended on the quantity shipped through the warehouse. Four potential locations for warehouses were identified in Denver, Seattle, Atlanta, and Philadelphia, warehouses. Leased could be either small (about 100,000 sq. ft.) or large (200,000 sq. ft). Small warehouses could handle a flow of up to 2 million units per year, whereas large warehouses could handle a flow of up to 4 million units per year. The current warehouse in St. Louis was small. The fixed and variable costs of small and large warehouses in different locations are shown in Table 2.

Thomson estimated that the inventory holding costs at a warehouse (excluding warehouse expense) was about $600, where F is the number of units flowing through the warehouse per year. This relationship is based on the theoretical observation that the inventory held at a facility (not across the network) is proportional to the square root the throughput through the facility. As a result, aggregating throughput through a few facilities reduces the inventory held as compared with disaggregating throughput through many facilities. Thus, a warehouse handling I million units per year incurred an inventory holding cost of $600,000 in the course of the year. If your version of Excel has problems solving the nonlinear objective function, use the following inventory costs:

Range of F                                           Inventory Cost

0-2 million                                           $250,000Y + 0.310F

2-4 million                                           $530,000Y + 0.170F

4-6 million                                           $678,000Y + 0.133F

More than 6 million                         $798,000Y + 0.113F

If you can handle only a single linear inventory cost, you should use $475,000Y + 0.165F. For each facility, Y=1 if the facility is used, 0 otherwise.

Y & Co. charged a flat fee of $3 per shipment sent to a customer. An average customer order contained four units. Y & Co. in turn contracted with UPS to handle all its outbound shipments. UPS charges were based on both the origin and the destination of the shipment and are shown in Table 3.

Table 2 Fixed and Variable Costs of Potential Warehouses

Small Warehouse Large Warehouse
Location Fixed Cost

($/year)

 

Variable Cost

($/Unit Flow)

Fixed Cost

($/year)

Variable Cost

($/Unit Flow)

Seattle 300,000 0.20 500,000 0.20
Denver 250,000 0.20 420,000 0.20
St. Louis 220,000 0.20 375,000 0.20
Atlanta 220,000 0.20 375,000 0.20
Philadelphia 240,000 0.20 400,000 0.20

Management estimated that inbound transportation costs for shipments from suppliers were likely to remain unchanged, no matter what warehouse configuration was selected.

Table 3: UPS Charges per Shipment (Four Units)
  Northwest Southwest Upper Midwest Lower Midwest Northeast Southeast
Seattle $2.00 $2.50 $3.50 $4.00 $5.00 $5.50
Denver $2.50 $2.50 $2.50 $3.00 $4.00 $4.50
St. Luis $3.50 $3.50 $2.50 $2.50 $3.00 $3.50
Atlanta $4.00 $4.00 $3.00 $2.50 $3.00 $2.50
Philadelphia $4.50 $5.00 $3.00 $3.50 $2.50 $4.00

Questions

  1. What is the cost Y & Co. incurs if all warehouses leased are in St. Louis?
  2. What supply chain network configuration do you recommend for Y & Co.? Why?
  3. How would your recommendation change if transportation costs were twice those shown in Table 3?

ORDER NOW

Leave a Reply