Warehouse DistributionProblem

Simio October 2016 Student Competition

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Simio Student Competition – October 2016

A Costa Rican retail company with existing locations in Latin America wishes to expand into the Caribbean and South America. It currently imports all its product from Asia. Demand varies by location and the market is very volatile at the moment so flexibility and speed to market is essential. You will be asked to present your results to the board of directors of the retail company; therefore, animation and graphical representation of results will also be important.

Currently, the company consists of a main manufacturing center in Asia and local distribution centers in Costa Rica, Guatemala, El Salvador, Uruguay, Paraguay and Jamaica. It should be assumed that all product is stored/shipped in cases and that specific SKU information is not required.

The company would like to evaluate and answer two essential questions:

* Should the company fulfill orders direct from Asia manufacturing (Scenario 1) or invest in a regional distribution center (Scenario 2)?

* For Scenario 2, determine where a distribution center could be located to fulfill the demand of customers. Take into account the expansion strategy that is taking place. Possible locations to evaluate are Miami and Panama.

Important data for this model includes the demand from the various countries, including Latin America, Caribbean and South America. The forecasted demand, as well as the initial inventory at each location, can be found in the below table. The initial inventory below suggests an approximate 15% level of safety stock, given lead times for various locations.

Country Forecasted Demand (Cases per Day) Initial Inventory (Cases) Costa Rica Triangular (0,715,1430) 23000 Guatemala Triangular (0,1143,2286) 36800 El Salvador Triangular (0,1071,2142) 34500

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Uruguay Triangular (0,715,1430) 46000 Paraguay Triangular (0,536,1072) 34500 Jamaica Triangular (0,715,1430) 23000

The distribution centers are trying to determine the best reorder point strategy. The options include a periodic strategy and a continuous strategy. In a periodic strategy, the inventory level of the distribution center is checked every ‘review period’, which may be every X days, weekly or every X weeks. If the inventory level is below a specified value, then an order is placed to increase the inventory level to a desired level. In a continuous strategy, the inventory level of the distribution center is increased (cases reordered) whenever it first falls below the reorder point. The model should be able to experiment with both the type of inventory reorder policies as well as the reorder point level for the distribution centers.

The service level of the distribution center should be measured. Service level should include the number of lost orders and the approximate lost profit when inventory is not available to fulfill an incoming demand request. The difference in service level for using a regional distribution center vs. local distribution centers should be analyzed. Backorders of product should not be considered.

Costs for manufacturing in the Asia facility are 27200 CRC per case (note all currencies are expressed in Costa Rican Colons). The sale price of a case is 245000 CRC per case, regardless of country location. There is an inventory holding cost of 140 CRC per case per week for excess inventory held at either a local distribution center or regional distribution center.

There are operational costs for fulfilling demand from a local distribution center as well as from a regional distribution center. These costs are specified in the below table. Assume that there is no extra capital cost to build the regional distribution center, as the retail company will use a 3rd party logistics company that has a current facility.

Country Operating Cost (CRC per Case) Costa Rica 32700 Guatemala 24500 El Salvador 24500 Uruguay 40800 Paraguay 40800 Jamaica 32700 Regional DC 54500

Ships can depart Asia as often as once a week in route to each of the general areas including South America, Central America and the Caribbean. Assume that there is an unlimited number of ships available and only transportation times are used for moving product. The facility in Asia carries enough inventory of cases that a lead time for manufacturing shouldn’t be a factor. Make sure to list any other assumptions you make with regards to shipping product.

The ships transport the cases in TEU, which is a Twenty Foot Equivalent Unit. The capacity per TEU is 1000 cases. Assume there is no capacity limit on the number of TEU’s a ship can hold; however, reorder quantities should be in multiples of 1000 cases (1 TEU). There is a 5450000 CRC processing cost for each reorder placed.

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The following transportation times and costs should be included in the analysis. Assume that any processing time to fulfill the orders is included in the transit time below.

Starting Location

Ending Location Transit Time (days) Transportation Cost (CRC per TEU)

Asia Central America Triangular (23,28,30) 817000 Asia South America Triangular (60,65,75) 1362000 Asia Caribbean Triangular (23,28,30) 817000 Asia Panama (Regional DC) Triangular (25,27,30) 654000 Asia Miami (Regional DC) Triangular (23,24,28) 545000 Panama Central America Triangular (2,3,4) 436000 Panama South America Triangular (23, 24, 25) 817000 Panama Caribbean Triangular (2,3,8) 436000 Miami Central America Triangular (3,4,5) 490000 Miami South America Triangular (24, 25, 28) 926000 Miami Caribbean Triangular (1,2,3) 382000

Upon arrival at the ports, incoming product is analyzed for damages. Typically, there is a small amount of cases that are damaged due to transportation issues, such as crushing, moisture, etc. The number of damaged cases is usually between 0.5 to 1.0 percent of the shipment. Due to port configurations in the various regions, such as number of cranes available, etc. there may be extra unloading delays that are more significant at one port than another. The unloading times at the various ports are listed below.

Country Average Unloading Delay per Shipment (Hours) Costa Rica 4 – 6 Guatemala 12 – 15 Salvador 10 – 12 Uruguay 4 – 6 Paraguay 5 – 8 Jamaica 8 – 9 Regional DC 20 – 24

Retail Customer Analysis

Option 1 – Local Distribution Centers If we operate with local distribution centers per country: a) What is the average total cost per year to run the distribution and what are the profits? b) How much profit are they losing to lost sales? c) How much safety stock should each distribution center keep? d) If the Supply Chain Planner was trying to react to the demand by increasing the safety

stock, how much more would it invest in material and distribution? e) If expected demand drops by 50% in Uruguay and Paraguay for8 weeks but increases in

Costa Rica and Guatemala by 30% for the same period, and you react by ordering more inventory to the new countries and stopping shipments to South America, how much do

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you lose or gain in both countries because of the new scenario? Project out 12 weeks (when demand goes back to normal)

Option 2 – Regional Distribution Center

If the Supply Chain Manager decides to open a regional distribution center in either Panama or Miami, assuming you start with the same inventory but operate without safety stock in countries:

a) How much would it cost to fulfill demands if cases go to the Regional DC and then to the country.

b) What is the optimal inventory to have in the Regional DC and how much would you be investing in material and distribution.

c) Assuming now you can react faster to variability in the demand how much would you gain from otherwise lost sales (delta of forecast and peak demand)

d) If expected demand drops by 50% in Uruguay and Paraguay for 8 weeks but increases in Costa Rica and Guatemala by 30% for the same period, and you react by rerouting the inventory from Regional DC to these countries, how much do you lose or gain in both countries because of the new scenario? Project out 12 weeks (when demand goes back to normal)

e) Where should the Regional DC be located based on the results found above?

NOTE: For both options above, explain the distribution centers reorder point strategy and how you decided upon that strategy.