Delivery Strategy at Moonchem_Aggregation Problem

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

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Overview1) Introduction of Moonchem

2) Problem Overview

3) Questions

4) Solution Strategy & Illinois Pilot Study

5) Operational Data

5.1) Moonchem’s Existing Distribution Strategy

5.2) Alternative 1: “No Aggregation” Model

5.3) Alternative 2: “Complete Aggregation” Model

5.4) Alternative 3: “Tailored Aggregation” Model

6) Inference & Recommendation

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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”

If found to be profitable, Moonchem plans to launch it on a national level.


Milsch, Majumdar, Machendran, Mensah 4

Moonchem’s 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 Moonchem’s 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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2) Problem Overview


1) What is the current Annual Cost of Moonchem’s 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?

3) How does your recommendation impact consignment for Moonchem?

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3) Questions


ITR = (Annual Sales Value of Goods Sold) / (Average Inventory Value)

Moonchem can’t 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) Solution Strategy


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 Type Number of Customers

Total Consumption

(lb/month)

Small 12 1000

Medium 6 5000

Large 2 12000

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4) Illinois Pilot Study


Logistics Contractor: Golden Trucking Truck Capacity: 40,000 lbs

Full Truckload, Single Customer Drop-off

Full Truckload, Multiple Customers Drop-off

Transportation Cost $ 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) Operational Data


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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Milsch, Majumdar, Machendran, Mensah 1011/15/2012



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


5.2) Alternative 1 – “No 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 + AOC11/15/2012

5.3) Alternative 2 – “Complete Aggregation” Model


5.3) Alternative 2 – “Complete 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


5.4) Alternative 3 – “Tailored Aggregation” Model



Existi

ng Dist

ribution St

rateg

y

No Aggreg

ation M

odel

Complete A

ggreg

ation M

odel

Tailo

red Agg

regati

on Model

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Total Costs Total Cycle Inventory


“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 would in turn result in a higher ITR for

Moonchem in the long run.

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THANK YOU FOR YOUR ATTENTION!

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Delivery Strategy at Moonchem_Aggregation Problem

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