Cheerla-Moon Chem Case study PDF

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Department of Industrial and Systems EngineeringNorthern Illinois UniversityISYE 566 Analysis and Design of Supply Chain System Fall Semester, 2019 CASE STUDY 1Submitted by Agnelo Daniel Thomas – Z Pranali Ramesh Jagtap – Z Sai Sri Ramya Cheerla – Z Vishnuvarthan Jayakumar – ZCase StudyDelivery Stra...

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Department of Industrial and Systems Engineering Northern Illinois University

ISYE 566 Analysis and Design of Supply Chain System Fall Semester, 2019 CASE STUDY 1

Submitted by Agnelo Daniel Thomas – Z1878962 Pranali Ramesh Jagtap – Z1863304 Sai Sri Ramya Cheerla – Z1863163 Vishnuvarthan Jayakumar – Z1883086

Case Study Delivery Strategy at Moon Chem John Kresge, vice president of supply chain, was very concerned as he left the meeting at Moon Chem, a manufacturer of specialty chemicals. The year-end meeting evaluated financial performance and discussed the fact that the firm was achieving only two inventory turns a year. A more careful look revealed that more than half the inventory Moon Chem owned was in consignment with its customers. This was very surprising, given that only 20 percent of its customers carried consignment inventory. John was responsible for inventory as well as transportation costs. He decided to take a careful look at the management of consignment inventory and come up with an appropriate plan. Moon Chem Operations Moon Chem, a manufacturer of specialty chemicals, had eight manufacturing plants and 40 distribution centers. The plants manufactured the base chemicals, and the distribution centers mixed them to produce hundreds of end products that fit customer specifications. In the specialty chemicals market, Moon Chem decided to differentiate itself in the Midwest region by providing consignment inventory to its customers. The company wanted to take this strategy national if it proved effective. Moon Chem kept the chemicals required by each customer in the Midwest region on consignment at the customers’ sites. Customers used the chemicals as needed, and MoonChem managed replenishment to ensure availability. In most instances, consumption of chemicals by customers was stable. Moon Chem owned the consignment inventories and was paid for the chemicals as they were used. Distribution at Moon Chem Moon Chem used Golden trucking, a full-truckload carrier, for all its shipments. Each truck had a capacity of 40,000 pounds; Golden charged a fixed rate given the origin and destination, regardless of the quantity shipped on the truck. Moon Chem sent full truckloads to each customer to replenish its consignment inventory. The Illinois Pilot Study John decided to take a careful look at his distribution operations. He focused on Illinois, which was supplied from the Chicago distribution center. He broke up Illinois into a collection of zip codes that were contiguous, as shown in Figure 11-9. He restricted attention to the Peoria region, which was classified as zip code 615. A careful study of the Peoria region revealed two large customers, six medium-sized customers, and twelve small customers. The annual consumption at each type of customer was as shown in Table 11-4. Golden charged $400 for each shipment from Chicago to Peoria, and Moon Chem’s policy was to send a full truckload to each customer as needed. John checked with Golden to find out what it would take to include shipments for multiple customers on a single load. Golden informed him that it would charge $350 per truck and add $50 for each drop-off for which Golden was responsible. Thus, if Golden carried a truck that had to make one delivery, the total charge would be $400. However, if a truck had to make four deliveries, the total charge would be $550. Each pound of chemical in consignment cost Moon Chem $1, and Moon Chem had a holding cost of 25 percent. John wanted to analyze a few

different options for distribution available in the Peoria region to decide on the optimal distribution policy. One was to aggregate all 20 customers into each truck going to Peoria. The other was to separate the 20 customers into two groups with one large, three medium, and six small customers in each group. Each group would then be aggregated into a single truck going to Peoria. The detailed study of the Peoria region would provide the blueprint for the distribution strategy that Moon Chem planned to roll out nationally. 1. What is the annual cost of Moon Chem’s strategy of sending full truckloads to each customer in the Peoria region to replenish consignment inventory? Solution: Sending full truck load capacity. Our objective function is to find Total cost. Total cost = Holding cost + Order cost (No material cost was considered) In this problem the annual total cost which is, Annual holding cost + Annual ordering cost Here the given problem has Consumption order by each customer as: Customer Type

Number of customers

Small Medium Large

12 6 2

Consumptio n (per month) 1,000 5,000 12,000

Annual consumption (D) 12000 60000 144000

To find Annual holding cost. Holding cost: hCQ ∕ 2 h = 0.25 (given) C = Consignment cost = 1$ Q = Lot size for each type of customer = 40,000 Since, the lot size is same for all type of customer in this question. (i.e. 40000) The holding cost for each type of customer is 5000. Customer type

Annual Holding cost

Small

5000

Medium

5000

Large

5000

Ordering cost: Ordering cost: SD/Q S = Ordering cost = $400 (given) D= Consumption from each customer type. Q= Lot size = 40,000 By using the formula for each type of customer Customer Type

Annual Ordering cost

Small

120

Medium

600

Large

1440

Total cost: Customer Type

Total Cost

Small

5120

Medium

5600

Large

6440 17160

Total Cost The tabular column for problem 1 is shown below:

Customer Type Small

Consumptio n (per month)

12

Medium Large

Number of Customer s

6 2

Annual consumption (D)

1,000 5,000 12,000

Order size,Q i

Annual Holdin g cost

Annual Orderin g cost

Orde r Freq

Total Cost

12000

40,00 0

5000

120

0.30

5120

60000

40,00 0

5000

600

1.50

5600

144000

40,00 0

5000

1440

3.60

6440

Total Cost=

17160

The total cost is $17,160. 3

The cycle inventory is calculated by

Qi ∑ i =1 2

and is found to be 60,000 units.

2. Consider different delivery options and evaluate the cost of each. What delivery option do you recommend for Moon Chem? Solution: Alternative 1: Lots are ordered and delivered independently for each product In this approach, each product is ordered independently of the others. This scenario is equivalent to applying the EOQ formula to each product when evaluating lot sizes. We take S = 400$. Here our objective function is to find the total cost. Total cost = Holding cost + Order cost (No material cost was considered) In this problem the annual total cost which is, Annual holding cost + Annual ordering cost Here the given problem has Consumption order by each customer as: Customer Type

Number of Customers

Consumption (per month)

Annual consumption (D)

Small

12

1,000

12000

Medium

6

5,000

60000

Large

2

12,000

144000

To find Annual holding cost. Three parameter that we use are EOQ, Consignment cost and holding cost. EOQ: Economic Ordering Quantity.

√

2 SD hC S: 400$ (given) D: Consumption from each customer type. h: 0.25 (holding cost) (given). C: Consignment cost = 1$ (given). EOQ values for three types of customers:

EOQ:

Customer Type

EOQ(Q*)

Small

6197

Medium

13856

Large

21466

hCQ (Q = EOQ) 2 Using this formula, we can find the Holding cost for three types of customers. Holding cost:

Customer Type

Holding cost

Small

774.60

Medium

1732.05

Large

2683.28

Annual Ordering Cost: For annual ordering cost we consider the following parameters: Annual consumption, EOQ and ordering cost. Here, Ordering cost: SD/Q S = Ordering cost = 400$ (given) D= Consumption from each customer type. (Q= EOQ) Using this formula, the ordering cost for three types of customers is: Customer Type

Ordering cost

Small

774.60

Medium

1732.05

Large

2683.28

So, finding the total cost: Total cost for all three customers: Customer Type

Total Cost

Small

1549.19

Medium

3464.10

Large

5366.56

TOTAL

10379.86

The tabular column for alternative 1 is shown below:

The total cost is calculated by adding both the annual order cost and annual holding cost and is found to be $10379.86 3

The cycle inventory is calculated by

∑ Qi i =1

and is found to be 20760 units.

2 Alternative 2: Aggregation with Capacity Constraint Truck capacity = 40,000 pounds Holding cost, h = 0.25 Unit cost per product, Ci = $1 The order cost per drop off = $50 Common order cost, S = $350 The combined order cost from three suppliers is given by ¿ S =S +s 1 +s 2+ s 3= $ 350+ $ 50+$ 50+$ 50=$ 500 The demand for each type of customer is given in the table: Customer Type Number of Customers Consumption (per month) Annual consumption (D) Small

12

1,000

12000

Medium

6

5,000

60000

Large

2

12,000

144000

The optimal order frequency n* is given by,

¿

√

n=

3

Di h Ci ∑ i=1 2S

¿

Where, Di = Annual demand h = holding cost Ci = Unit cost per product

( 12,000∗0.25∗1 )+ ( 60,000∗0.25∗1 )+ ( 144,000∗0.25∗1 ) ( 2∗500 ) ¿ n =7.75 The quantity ordered from each supplier is Q and is given by the formula: Di Q i= ¿ n Where, Di = Annual demand and n* = optimal order frequency The quantity ordered for each type of customer is calculated as below: ¿

√

n=

Customer type

Qi

Small

1633

Medium

8165

Large

19596

Annual order cost is given by, S ¿∗n¿ OC= no . of type of customers Where, S* = combined order cost from three suppliers n* = optimal order frequency Annual holding cost is given by, hC Q HC= i i 2 Where, h= Holding cost Ci = Unit cost per product Qi = Quantity ordered for each type of customer The annual ordering cost and holding cost is calculated as below: Customer Type Annual OC Annual HC Small

1224.74

204.12

Medium

1224.74

1020.62

Large

1224.74

2449.49

The tabular column for alternative 2 is shown below:

Now, check if the total capacity per truck of each type of customers is within the capacity of the truck. The total capacity per truck of each type of customers is calculated by Q i∗3 and is given below: Customer Type Total capacity per truck Small

4899

Medium

24495

Large

58788

As we can observe, the total capacity per truck for large type of customers is more than the truck capacity of 40,000 pounds. Therefore, the order frequency must be increased to ensure that the order quantity from each supplier is 40,000/3 = 13,333. So, the order frequency increased to 144,000/13,333 = 10.8. The limited truck capacity results in an optimal order frequency of 10.8 orders per year instead of 7.35 orders per year when truck capacity was ignored. The limited truck capacity will increase the annual order cost per supplier to $1800 and decrease the annual holding cost per supplier to $1667.

The total cost is calculated by adding both the annual order cost and annual holding cost and is found to be $7140.90. 3

The cycle inventory is calculated by

∑ Qi i =1

and is found to be 14697 units.

2 Alternative 3: Lots are ordered and delivered jointly for a selected subsets of products / Tailored aggregation Truck capacity = 40000 pounds Holding cost, h = 0.25 Unit cost per product, Ci = $1

The order cost per drop off = $50 Common order cost, S = $350

The demand for each type of customer is given in the table: Customer Type

Number of Customers

Small

12

1,000

12000

Medium

6

5,000

60000

Large

2

12,000

144000

Consumption (per month) Annual consumption (D)

As a first step, identify the most frequently ordered product, assuming each product is ordered independently. In this case, a fixed cost of S + si is allocated to each product. For each product i evaluate the ordering frequency: n´

=

√

h C i Di 2 ( S+si)

This is the frequency at which product i would be ordered if it were the only product being ordered (in which case a fixed cost of S + s i would be incurred per order). Let n´ be the frequency of the most frequently ordered product, i* ; that is, n´i is the maximum amongst all n´ i ( n´ = n´i = max { n´ i , i = 1,…., l}). The most frequently ordered product is i*, which is included each time an order is placed. By using the above formula, we calculate the n´ for each type of customers; ¿

¿

Customer n´ Small

1.94

Medium 4.33 Large For all products i

≠

i

¿

6.71

, evaluate the ordering frequency: n´ i=

√

h Ci D i 2 si

n´ i represents the desired order frequency if product i incurs the product-specific fixed cost s i only each time it is ordered.

Customer

n´

Small

5.48

Medium 12.25 Large

18.97

Our goal is to include each product i ≠ i* with the most frequently ordered product i* after an integer number of orders. For all i ≠ i*, evaluate the frequency of product i relative to the most frequently ordered product i* to be m i , where m i=⌈ n´ / n´ ⌉ In this case, ⌈⌉ is the operation that rounds a fraction up to the closest integer. Product i is ¿ included with the most frequently ordered product i every m i orders. Given that the most i∗¿ = 1. frequently ordered product i¿ is included in every order, m¿

Customer

m

Small

2

Medium

1

Large

1

Having decided the ordering frequency of each product i, recalculate the ordering frequency of ¿ the most frequently ordered product i to be n, where si /m i 3

S +∑ ¿ i=1

¿ 2¿ 3

hC i mi D i ∑ i=1 ¿ ¿ n = √¿

¿

√

n=

( 0.25∗1∗2∗12,000 ) + (0.25∗1∗1∗60,000 ) + (0.25∗1∗1∗144,000)

[ [(

2∗ 350+

¿

) ( ) ( ) ]]

50 50 50 + + 2 1 1

n =7.75

n¿ and the quantity ordered for each mi hC i Q i . The holding cost is calculated as . 2

For each product, evaluate an order frequency of type of customer as Q i=

Di ni

ni =

ni

Qi

Annual Holding Cost

3.87 7.75 7.75

$3,098 $7,746 $18,590

387 968 2324

Consider the annual holding cost as the lowest holding cost found in the above table. The annual ordering cost is calculated as: 3

OC=( n¿∗S ) +∑ ni∗s i i=1

The annual ordering cost is found to be $3679.33 while the total cost is the sum of the annual holding cost and the annual ordering cost which is equal to $4066.63. 3

The cycle inventory is calculated by

∑ Qi i =1

and is found to be 14717.

2 Hence, by comparing the total costs of alternative 1, alternative 2 and alternative 3, we can conclude that alternative 3 (tailored aggregation) is the most economical as it has the least total cost of $4066.63. Therefore, we would recommend tailored aggregation model as the delivery option to MoonChem. 3. How does your recommendation impact consignment inventory for MoonChem? Solution: Considering the third alternative: Tailored aggregation model as my recommended model for distributing chemicals to all three types of customers. The total cost of supplying the chemicals over the customers in Tailored aggregation model is $4066.63. This has total cycle inventory of 14,717 units of chemical as in inventory. Our first way of transporting chemical was in a full truckload, which had an annual total cost of over $17,160 with an annual inventory over 60,000 units.

There is a huge cost difference over two models. The percentage difference is calculated as follows: T C FT −T CTA × 100 % decrease in Annual Total Cost: T C FT TCFT = Annual total cost of Full truck load = $17,160 TCTA = Annual total cost of Tailored Algorithm = $4066.63

(

¿

)

17,160 −4066.63 ∗100 17,160

¿ 0.7630∗100 % decrease in annual total cost = 76.3% Eventually the Inventory is also decreased: ´I FT − I´ TA ×100 ´I

(

FT

)

´I FT = Inventory of Full truck load = 60,000 ´I TA = Inventory of Tailored Algorithm = 14,717 ¿

60,000 −14,717 ∗100 60,000 ¿ 0.7547∗100

% decrease in inventory = 75.47 % Therefore, Moon chem company can save 76.3% in annual total cost and 75.47% in total cycle inventory....