Case Study – Delivery Strategy

Referencing Styles : Harvard | Pages : 22

Case Study – Delivery Strategy at MoonChem John Moon was very concerned as he left the meeting at MoonChem, a manufacturer of specialty chemicals. The year-end meeting had evaluated financial performance and discussed the fact that the firm was achieving only two inventory turns a year. A more careful look revealed that over half the inventory MoonChem owned was consignment inventory with its customers. This was very surprising given that only 20 percent of its customers carried consignment inventory. John Moon was Vice President of Supply Chain and thus responsible for inventory as well as transportation. He decided to take a careful look at how consignment inventory was managed and come up with an appropriate plan. MOONCHEM OPERATIONS MoonChem is a manufacturer of specialty chemicals used in a variety of industrial applications. MoonChem has eight manufacturing plants and forty distribution centres. The plants manufacture the base chemicals and the distribution centre’s mix them to produce hundreds of end-products that fit customer specifications. In the specialty chemicals market, MoonChem has decided to differentiate itself in the Southeast region by providing consignment inventory to its customers. MoonChem would like to take this strategy national if it proves effective. MoonChem keeps the chemicals required by each customer in the Southeast region on consignment at the customer’s sites. Customers use the chemicals as needed and MoonChem ensures replenishment to ensure that the customers do not run out of inventory. In most instances, consumption of chemicals by customers is very stable. MoonChem is paid for the chemicals as they are used. Thus, all consignment inventories belong to MoonChem. DISTRIBUTION AT MOONCHEM MoonChem currently uses Golden trucking, a full truckload carrier for all its shipments. Each truck has a capacity of 40,000 kg and Golden charges a fixed rate given the origin and destination, irrespective of the quantity shipped on the truck. Currently MoonChem sends full truckloads to each customer to replenish their consignment inventory. THE PARADISE PILOT STUDY John decided to take a careful look at his distribution operations. He decided to focus on the Paradise area of the Southeast region as a pilot study. The Paradise area is supplied from a distribution centre in Heaven. A careful study of the Paradise area revealed two large customers, six medium-sized customers, and twelve small customers. The annual consumption of each type of customer is as shown in the table below. Golden currently charges $400 for each shipment from Heaven to Paradise and MoonChem’s policy is to send a full truckload to each customer when replenishment of consignment inventory is 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 they would continue to charge $350 per truck and would then add $50 for each drop-off that Golden was responsible for. 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. Table 1: Customer Profile for MoonChem in the Paradise area Customer Type Number of Customers Consumption (Kg per Month) Small 12 1000 Medium 6 5000 Large 2 12000 Each kg of chemical in consignment cost MoonChem $1 and MoonChem had a holding cost of 25 percent per annum. John wanted to analyse different options for distribution available in the Paradise area to decide on the optimal distribution policy. The detailed study of the Paradise area would provide the blueprint for the distribution strategy that MoonChem planned to roll out nationally. Question 2: Consider the following delivery options and evaluate the cost of each. 1. Deliver appropriately sized loads (EOQ) separately to each customer 2. Deliver to 6 small, 3 medium, and 1 large customer on each truck 3. Deliver with varying frequencies to each segment. This is similar to strategy 3 but small customers will miss out every second delivery. Problems Part 1: The following information relates to a company’s aggregate production planning activities: Quarter Demand Forecast 1 75,000 2 100,000 3 75,000 4 125,000 Beginning Workforce = 35 workers Production per Employee = 1,250 units per quarter Hiring Cost = $500 per worker Firing Cost = $1,000 per worker Inventory Carrying Cost = $20 per unit per quarter 1. If a chase demand strategy is used then the number of workers hired at the start of quarter 2 would be a. 10 b. 20 c. 35 d. 80 Dr Yousef Amer – School of Engineering 72 of 123 University of South Australia 2. If a chase demand strategy is used then the total firing cost for the plan would be a. $10,000 b. $15,000 c. $20,000 d. $25,000 3. If a level production strategy is used then the required quarterly output would be a. 75,000 b. 87,350 c. 93,750 d. 125,000 4. If a level production strategy is used then the number of workers required for the plan would be a. 35 b. 75 c. 100 d. 125 5. If a level production strategy is used then the inventory at the end of quarter 3 would be a. 18,750 b. 12,500 c. 25,650 d. 31,250 6. If a level production strategy is used then the cost of the level production plan (inventory costs plus hiring and firing costs) would be a. $20,000 b. $645,000 c. $1,250,000 d. $1,270,000