Supply Chain

Case 14

Name(s)_______________________________________

Objective:

To show how Logistics System Total Costs are calculated.

Information:

A high-end refrigerator manufacturer near Findlay, Ohio plans to test market a new model in Detroit, Michigan.

Sales: 1st Year Forecast Demand- 700 units

Retail Demand- 5 units per day [2 units per day for Strategy II]

Product Data: Variable Manufacturing Cost/Unit- $800

Weight Per Unit- 250 pounds

Size (Packed)- 40 cubic feet/unit

Logistics Costs: A-E

A. Transport Costs:

Ohio (plant) to Michigan (warehouse). The truck rates are as follows:

Local Delivery Costs (warehouse to retail):

$30 per unit

Shipment Size Rate

Less than 3,000 lbs. $16 per cwt* 3,000 to 24,000 lbs. $10 per cwt 24,001 lbs. and over $6 per cwt

*cwt means cost per hundredweight (100 lbs.)

B. Inventory Carrying Costs:

C. Warehousing Costs: Public warehousing rates were based on the space needed for average inventory.

D. Material Handling Costs:

Large shipments require overtime labor to unload them and very small shipments underutilize

workers. The following rates apply at both the Ohio plant and Michigan public warehouse:

E. Order Costs:

Replenishment order costs are more expensive because production set up costs are involved

when order sizes change.

Costs as a % of the Average Value of Yearly Inventory

Opportunity Cost of Capital 13%

Damage, Theft & Obsolescence 4%

Inventory Taxes & Insurance 11%

Relocation & Cycle Counting 2%

If your Average Inventory Occupies:

0 to 1,600 cu. ft. --- $7.00 per cu. ft. of average inv 1,601 to 6,300 cu. ft. --- $5.00 per cu. ft. of average inv 6,301 cu. ft. & Over --- $3.50 per cu. ft. of average inv

*There is a minimum Annual Charge of $1,000

Shipment Size Rate

0 to 6,000 lbs $7.00 per unit loaded & unloaded once

6,001 lbs to 11,000 lbs $4.00 per unit loaded & unloaded once

11,001 lbs to 18,000 lbs $2.00 per unit loaded & unloaded once

18,001 lbs and Over $9.00 per unit loaded & unloaded once

Replenishment order to plant $100 per order

Retail order to warehouse $20 per order

Application: There are many strategies for moving the product from the Ohio plant to the Michigan retail location. For

example, 700 units could be shipped to the warehouse January 1 and then monthly shipments could be sent to

the store, or quarterly shipments could be sent to the warehouse and daily shipments sent to the store and so on.

There are literally billions of options. Let’s use the second option mentioned to demonstrate logistics system

total cost calculation.

The logistics costs that must be calculated are displayed in this figure.

Strategy I: Ship 4 shipments of 175 units each to the warehouse and ship 5 units per day to the retail store

Plant to Warehouse

Transport Cost= shipment size = 175 units X 250 lbs each = 43,750 lbs $6 per cwt X (43,750 lbs/100 lbs per cwt) X 4 shipments per year=

$10,500

Material Handling Cost= Shipment size = 43,750 lbs $9 per unit X 175 units X 4 shipments per year= $6,300

ICC= (.5 (Order Quantity) + SS) X (Variable Cost (Unit)) X (Carrying Cost %) .5 (175 units) X [$800 per unit + ($10,500+$6,300)] X .30 = 87.5 units X $ X .30 =

Warehouse Cost= 87.5 units X 40 cu ft per unit= 3,500 cu ft 3500 cu ft X $5.00 per cu ft=

Order Cost= $100 per replenishment order X 4 shipments (orders)= $400

Sub-Total

Warehouse To Retail

Transport Cost= Local delivery= $30 per unit X 5 units per day X 140 shipments per year

Matl Handling Cost= Shipment size = 5 units X 250 lbs = 1250 lbs $7 per unit X 5 units X 140 shipments per year=

Order Cost= $20 per retail order X 140 shipments (orders)= $2,800

Sub-Total

Logistics System Total Cost

700 Units/Year

Calculate the logistics system total cost for the following strategy. Strategy II: Ship 7 shipments of 100 units each to the warehouse and ship 2 units per day to the retail store. Demand = 700 Units

Working Days at Retail Store = 700 / 2 Day = 350

Plant to Warehouse Transport Cost=

Material Handling Cost=

ICC= A X B X C ½ (Shipment Size) X Variable Mfg + (Trans & Material Handling) X ICC %

Warehouse Cost= [ Hint: Average Inventory X Cubic Feet Packed = Cubic Feet Charged ]

Order Cost=

Sub-Total

Warehouse To Retail Transport Cost= [ Hint: Warehouse to Retail (i.e., local delivery) $30.00 Unit ]

Material Handling Cost=

Order Cost= Warehouse to Retail=

Sub-Total

Logistics System Total Cost

The total cost for Strategy II is [ higher than | lower than | the same as ] Strategy I? Explain.