Innovation Distribution Co. Supply Chain Risk Case

Innovation Distribution Company: A Total Cost Approach Understanding Supply Chain Risk Case

The initial purchase cost per unit paid to Dong Hai Supply is calculated as follows. The current exchange rate is 1 CNY China Yuan Renminbi = 0.14646 U.S. Dollar. As pointed out, the price per unit in Dong Hai supply is 547 ¥.

Therefore, the price per unit is 547 x 0.14646 = 80.11362.

The initial purchase cost per unit in U.S. Dollars is $80.11 (Frankel, 2013).

The average time for an order filling a TEU container to come from Dong Hai Supply in Chengdu, China to the distribution center in Alliance Fort Worth

Dong Hai Supply in Chengdu, China to the distribution center in Alliance Fort Worth

Mean

Variance

Standard Deviation

Time for processing and manufacturing order at Dong Hai

Moving Container by Rail from Chengdu to Shanghai

Loading to ship at Port of Shanghai

Pacific Ocean to Port of Long Beach

Clearing Customs and Unloading at Long Beach

Long Beach to Alliance Fort Worth

4

Total lead time for Dong Hai

43

11.9025

3.45

Actual Days for order in Transit

28

Therefore, the average time is 43 days.

ii. The average time for an order filling a TEU container to come from CousinsAg in Wahoo, Nebraska to the distribution center in Alliance Fort Worth

CousinsAg in Wahoo, Nebraska to the distribution center in Alliance Fort Worth

Mean

Variance

Standard Deviation

Time for processing and manufacturing order at CousinsAg

10

From supplier to Alliance Fort Worth

5

Total lead time for CousinsAg

15

1.2996

1.14

Actual days for order in Transit

5

Therefore, the average time is 15 days.

Question 3

The cost to ship a TEU container from Dong Hai Supply in Chengdu, China, to IDC's Alliance Fort Worth Distribution Center.

IEC charges ¥ 12,414.5 for each TEU shipped. Import tariffs and duties are $325 per TEU and shipping cost from Long Beach to AFW is $2,250.

Remember, 1 CNY China Yuan Renminbi = 0.14646 U.S. Dollar or use the $80.11 rate. Therefore, the IEC charge in dollars is 12,415.5 x 0.14646 = 1,818.23. The total cost is calculated as follows:

Transportation Cost from Dong Hai Supply to Alliance Fort Worth

TEU Shipment Charge

$1,818.23

Import tariffs and duties per TEU

$325.00

Rail Shipping Cost Long Beach to AFW

$2,250.00

Total Transportation Cost

$4,393.23

Hence, the total transportation cost for shipping a TEU container from Dong Hai Supply to AFW distribution center is $4,393.23.

Question 4

Economic order quantity (EOQ) can be delineated as the inventory order quantity level that diminishes the total cost of inventory, with regard to the most significant costs, which are carrying costs and ordering costs (Coyle et al., 2016).

i. Economic Order Quantity if we purchase everything from CousinsAg

CousinsAg

Annual Demand

21,500

Ordering Cost

$105.00

Carrying Cost

32.20%

EOQ

Thus, the EOQ is 406 units

ii. Economic Order Quantity if we purchase everything from Dong Hai Supply

Dong Hai Supply

Annual Demand

21,500

Ordering Cost

$182.00

Carrying Cost

32.20%

EOQ

Thus, the EOQ is 551 units.

Question 5

As pointed out, the objective is to maintain an in-stock probability of 97.7% for customers.

i. Units of safety stock will we need to hold if we purchase everything from Dong Hai Supply

Dong Hai Supply

Standard Deviation for Topping Up

3.45

Average days for topping up

43

Deviation of everyday sales

11

Average daily sales

58.90411

Units of Safety Stock

Thus, the units of safety stock needed to be held if everything is purchased from dong Hai Supply is 431 units.

ii. Units of safety stock will we need to hold if we purchase everything from CousinsAg

CousinsAg

Standard Deviation for Topping Up

1.14

Average days for topping up

15

Deviation of everyday sales

11

Average daily sales

58.90411

Units of Safety Stock

Thus, units of safety stock needed to be held if everything is purchased from CousinsAg is 159 units.

Question 6

i. The in-transit carrying cost per unit if we purchase everything from Dong Hai Supply

Dong Hai Supply

Actual Days in Transit

28

Cost of each Unit during transit

80.11362

Carrying Cost

32.20%

In-Transit Carrying Cost for every unit

1.978916

ii. The in-transit carrying cost per unit if we purchase everything from CousinsAg

CousinsAg

Actual Days in Transit

5

Cost of each Unit during transit

85

Carrying Cost

32.20%

In-Transit Carrying Cost for every unit

0.374932

Question 7

The average inventory level takes into account half of the average cycle stock then added to the amount of safety stock already held.

i. Average inventory level (in units) we will hold at the IDC's Alliance Fort Worth Distribution Center if we purchase everything from Dong Hai Supply

Dong Hai Supply

Average cycle stock = (Economic order quantity/2)

Units of safety stock

Average inventory level

Therefore, the average inventory level is 707 units.

ii. Average inventory level (in units) we will hold at the IDC's Alliance Fort Worth Distribution Center if we purchase everything from CousinsAg

CousinsAg

Average cycle stock = (Economic order quantity/2)

Units of safety stock

Average inventory level

Therefore, the average inventory level is 362 units.

Question 8

i. The total annual inventory carrying cost (in dollars) for the safety stock and cycle stock inventory held at the Alliance Fort Worth Distribution Center if we purchase everything from Dong Hai Supply

Dong Hai Supply

Unit Price

80.11362

Transportation Cost (Total Transport Cost/EOQ)

$7.98

In-Transit Cost

1.978916

Value for every Unit

90.06854

Average Inventory Held

Carrying Cost

32.20%

Total Annual Inventory Cost

20495.33

Therefore, the total annual inventory cost if everything is bought from Dong Hai Supply is $20,495.33

ii. The total annual inventory carrying cost (in dollars) for the safety stock and cycle stock inventory held at the Alliance Fort Worth Distribution Center if we purchase everything from CousinsAg

Transportation Cost from CousinsAg to Alliance Fort Worth

TEU Shipment Charge

$1,850.00

Import tariffs and duties per TEU

$0.00

Rail Shipping Cost Long Beach to AFW

$0.00

Total Transportation Cost

$1,850.00

CousinsAg

Unit Price

85

Transportation Cost (Total Transport Cost/EOQ)

$4.55

In-Transit Cost

0.374932

Value for every Unit

89.92985

Average Inventory Held

Carrying Cost

32.20%

Total Annual Inventory Cost

10486.27

Therefore, the total annual inventory cost if everything is bought from CousinsAg is $10,486.27.

Question 9

i. On a per-unit basis (in dollars), what is the total inventory carrying cost for the safety stock and cycle stock inventory held at IDC's Alliance Fort Worth Distribution Center if we purchase everything from Dong Hai Supply

The total annual units = 21,500 units. Therefore, the unit cost is obtained by dividing the total annual inventory carrying cost by the total annual units.

Dong Hai Supply

Total Annual Inventory Cost

20495.33

Total Annual Units

21,500

Unit Cost

0.953271

Therefore, the unit cost is $0.95

ii. On a per-unit basis (in dollars), what is the total inventory carrying cost for the safety stock and cycle stock inventory held at IDC's Alliance Fort Worth Distribution Center if we purchase everything from CousinsAg?

CousinsAg

Total Annual Inventory Cost

10486.27

Total Annual Units

21,500

Unit Cost

0.487733

Therefore, the unit cost is $0.49

Question 10

The total cost of ownership encompasses all costs including the initial purchase price, the unit transportation cost, the safety stock cost, the cycle stock and the ordering cost.

i. The total cost of ownership per unit (in dollars) if we purchase everything from Dong Hai Supply

Number of orders placed per year

39.03371

Cost to place an order

Ordering Cost per unit

0.330425

Average cycle stock (EOQ/2)

Value per unit

90.06854

Carrying Cost

32.20%

Cycle Stock Carrying Cost per unit

0.3715

Dong Hai Supply

Unit Purchase Price

$80.11

Transport Cost per Unit

$7.98

Safety Stock

1.978916

Cycle Stock

0.3715

Ordering Cost

0.330425

Total Ownership Cost

$90.77

Therefore, the total cost of ownership per unit (in dollars) if we purchase everything from Dong Hai Supply is $90.77.

ii. The total cost of ownership per unit (in dollars) if we purchase everything from CousinsAg

Number of orders placed per year

52.93549

Cost to place an order

Ordering Cost per unit

0.258522

Average cycle stock (EOQ/2)

Value per unit

89.92985

Carrying Cost

32.20%

Cycle Stock Carrying Cost per unit

0.273516

CousinsAg

Unit Purchase Price

$85.00

Transport Cost per Unit

$4.55

Safety Stock

0.374932

Cycle Stock

0.273516

Ordering Cost

0.258522

Total Ownership Cost

$90.46

Therefore, the total cost of ownership per unit (in dollars) if we purchase everything from CousinsAg is $90.46.

Question 11

Subsequent to incorporating all the risk costs, the supplier that is the least total cost

Provider of Schachtel Schmuggel Bannware is CousinsAg at $90.46 since that for Dong Hai Supply is higher at $90.77.

Question 12

Two additional risks that must be considered to better evaluate IDC's decision for the two supply chain choices -- CousinsAg and Dong Hai Supply- include the risk of having the goods becoming damaged and harmed while in transit before reaching Alliance Fort Worth distribution center. Metrics for measuring this risk can include the cost of insurance for such damages and the proportion of damaged or lost goods compared to the total shipment. The other risk is failure to meet the level of capacity. Metrics for measuring this risk can include comparing the projected demand level against the actual demand level. Another measure can be the number of stock-outs during a certain shipment (Manuj and Mentzer, 2008).

Question 13

Suggestions made to improve the supply chain procedure so as to decrease the total landed cost include reducing the transportation costs per unit and also the holding costs per unit. Another recommendation is to make use of TEU containers as they have a greater level of capacity that can decrease the total cost incurred (Frankel, 2013).

References

Coyle, J. J., Langley, C. J., Novack, R. A., & Gibson, B. (2016). Supply chain management: a logistics perspective. Nelson Education.

Frankel, R. M. (2013). The definitive guide to supply chain best practices: comprehensive lessons and cases in effective SCM. Pearson Education.

Manuj, I., & Mentzer, J. T. (2008). Global supply chain risk management strategies. International Journal of Physical Distribution & Logistics Management, 38(3), 192-223.