Innovation Distribution Co Supply Chain Risk

A Total Cost Approach to Understanding Supply Chain Risk

Using the current exchange rate, what is the initial purchase cost per unit (in U.S. dollars) paid to Dong Hai Supply? (Do not include transportation costs.)

The exchange rate between the U.S. Dollar and the Chinese Renminbi is:

Dollar = 6.92 CNY China Yuan Renminbi

CNY China Yuan Renminbi = 0.1445 U.S. Dollar

The quoted price by Dong Hai Supply at the factory is 547 China Yuan Renminbi. Therefore, the initial purchase cost per unit is

The initial purchase cost is $79.04 for every unit (Frankel, 2013).

What is the average time for an order filling a TEU container to come from Dong Hai Supply in Chengdu, China, to IDC's Alliance Fort Worth Distribution Center? From CousinsAg in Wahoo, Nebraska, to IDC's Alliance Fort Worth Distribution Center?

Dong Hai Supply to Alliance Fort Worth Distribution Center

Dong Hai Supply order processing time = 15 days

From Chengdu rail to Port of Shanghai = 1 day

Loading at the Port of Shanghai = 4 days

Transit on ocean between Port of Shanghai to Port of Long Beach = 16 days

The unloading period at Port of Long Beach = 3 days

Time from Rail Port of Long Beach to Alliance Fort Worth = 4 days

Therefore, the total lead time for the supplier is 43 days.

For Chinese Supplier

Mean

Variance

Standard Deviation

Dong Hai Supply order processing time

15

0

From Chengdu rail to Port of Shanghai

1

0.4

Loading at the Port of Shanghai

4

2

Transit on ocean between Port of Shanghai to Port of Long Beach

16

8

The unloading period at Port of Long Beach

3

1.5

Time from Rail Port of Long Beach to Alliance Fort Worth

4

0

43

11.9

3.449638

Actual Days in Transit

28

The standard deviation as calculated above is 3.45 days.

ii. From Cousins Ag to Alliance Fort Worth Distribution Center

Cousins Ag order processing time = 10 days

Rail from Wahoo to Alliance Fort Worth = 5 days

Therefore, total lead time is a period of 15 days.

For United States Supplier

Mean

Variance

Standard Deviation

Cousins Ag order processing time

10

1

Rail from Wahoo to Alliance Fort Worth

5

0.3

15

1.3

1.140175

Actual Days in Transit

5

Therefore, the average time for an order filling a TEU container to come from Dong Hai Supply to the distribution center in Alliance Fort Worth is 43 days whereas from Wahoo, Nebraska to the distribution center in Alliance Fort Worth is 15 days.

3. Using the current exchange rate, what is the cost (in U.S. dollars) to ship a TEU container from Dong Hai Supply in Chengdu, China, to IDC's Alliance Fort Worth Distribution Center?

China

United States

TEU cost from Chengdu Shanghai to Long Beach

Import tariffs and duties

Rail Cost from Port of Long Beach to Alliance Fort Worth

Transportation Cost

Therefore, the total cost altogether is $1,793.90 + $325 + $2,250 = $4,368.90

4. What is the economic order quantity (use unit price only; do not include transportation costs) if we purchase everything from CousinsAg? From Dong Hai Supply?

The Economic Order Quantity is the number of units that a firm ought to add to its inventory with every particular so as to minimize the total costs of inventory, which include shortage costs, holding costs and ordering costs (Shim and Siegel, 1999). The following calculation outlines the EOQ for Cousins Ag and Dong Hai Supply.

Dong Hai

Cousins Ag

Price per unit

80.11

85

Annual Demand

21,500

21,500

Ordering Cost

Carrying Cost

32.20%

32.20%

Economic Order Quantity

The economic order quantity for Dong Hai is different from that of Cousins Ag owing to the variances in the unit cost as well as the ordering cost. In particular, for the Dong Hai supply chain, the lower unit price is because of the greater unit quantities. What is more, based on the EOQ model, having a higher ordering cost will give rise to greater lot sizes and orders that are less regular (Shim and Siegel, 1999). Therefore, the EOQ for Dong Hai Supply is 551 units whereas that of Cousins Ag is 406 units.

5. How many units of safety stock will we need to hold if we purchase everything from Dong Hai Supply? From CousinsAg?

Safety stock takes into account the level of additional stock that is preserved and kept in place to alleviate the risk of experiencing a shortage in raw materials or total stock outs altogether, owing to qualms in levels of supply and demand (Shim and Siegel, 1999). As pointed out, the objective is to maintain an in-stock probability of 97.7% for the consumers (Frankel, 2013).

Dong Hai

Cousins Ag

Average Daily Sales

58.90411

58.90411

Deviation of Daily Sales

11

11

Average Replenishment Cycle

43

15

Standard Deviation of Replenishment

3.45

1.14

Safety Stock Units

Therefore, the safety stock units for Dong Hai Supply is 431 units whereas that for Cousins Ag is 159 units. The significant variance between these two levels of units is owing to the substantial difference in the transit time for the supply chains.

6. Inventory carrying costs are based on the value of the product at the time it is held in inventory. What is the in-transit carrying cost per unit (in dollars and cents) if we purchase everything from Dong Hai Supply? From CousinsAg?

The Annual In-Transit Inventory Cost is calculated using the following formula:

Annual in-transit inventory cost = The Annual In-Transit Inventory Level in Units x Mean Value per Unit of Inventory x Carrying Cost of In-Transit Inventory

Dong Hai Supply

Cousins Ag

Actual Days in Transit

28

5

Cost of Unit during Transit

80.11

85

Other additional costs

0

0

Carrying Cost

32.20%

32.20%

Total

In-transit Carrying Cost for every Unit

1.978827

0.374932

The actual days in transit for Dong Hai are 28 days whereas those for Cousins Ag are 5 days, which indicates a significant variance between the two. The in-transit carrying cost for Dong Hai Supply is $1.98 for every unit whereas that for Cousins Ag is $0.37 for every unit.

7. What average inventory level (in units) will we hold at the IDC's Alliance Fort Worth Distribution Center if we purchase everything from Dong Hai Supply? (Be sure to consider both safety stock and cycle stock.) From CousinsAg?

The average inventory is obtained by adding up the average cycle stock and the safety stock units. Average inventory level can be delineated as the average number of days that an organization takes to retail all of its inventory. The average cycle cost is calculated by dividing the economic order quantity by 2.

Dong Hai

Cousins Ag

EOQ

Average Cycle Cost

Safety Stock Units

Average Inventory

Therefore, the average inventory held at Alliance Fort Worth if the firm purchases everything from Dong Hai Supply is 707 units whereas if everything is bought from Cousins Ag, the average inventory held is 362 units.

8. Inventory carrying costs are based on the value of the product at the time it is held in inventory. When the product is sitting in the IDC Alliance Fort Worth Distribution Center, its value is a combination of purchase price plus any transportation costs to get it from the supplier to the DC plus in-transit carrying costs. What is 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? From CousinsAg?

In question 7 above, the average inventory is calculated in units, which are 707 units for Dong Hai while for Cousins Ag the number of units is 362 units. This question considers the average inventory calculated in dollars, taking into account the inventory carrying cost and the value for every unit at Alliance Fort Worth.

The value for every unit is obtained by adding the unit price, the In-Transit carrying cost and the cost of transportation.

Dong Hai

Cousins Ag

Unit Price

80.11

85

Cost to Transportation (Transport Cost/EOQ)

7.929038

4.55665

In-Transit Carrying Cost

1.98

0.37

Value per unit

90.01904

89.92665

Dong Hai

Cousins Ag

Average Inventory

Value per Unit

90.02

89.93

Carrying Cost

32.20%

32.20%

Annual Inventory carrying Cost

20478.92

10482.6

Therefore, the average inventory cost for Dong Hai is $20,478.92 whereas that for Cousins Ag is $10,482.60.

9. Inventory carrying costs are based on the value of the product at the time it is held in inventory. When the product is sitting at IDC's Alliance Fort Worth Distribution Center, its value is a combination of purchase price plus any transportation costs to get it from the supplier to the DC plus in-transit carrying costs. 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? From CousinsAg?

Question 8 above calculates the total annual inventory cost for both supply chains. In this question, we consider the total carrying cost of inventory for every unit. As is known, the total number of units for every year is 21, 500 units. Therefore, this is calculated as follows:

Dong Hai

Cousins Ag

Annual Inventory carrying Cost

20478.92

10482.6

Annual Units

21500

21500

Carrying Cost per Unit

0.952508

0.487563

Therefore, on the basis of every unit, the total inventory carrying cost for the safety stock and cycle stock inventory held at Alliance Fort Worth if everything is bought from Dong Hai Supply is $0.95 whereas if bought from Cousins Ag is from $0.49.

10. Let's put it all together to determine the total cost of ownership. We have determined the unit price, the in-transit carrying cost, the transportation costs, and the IDC Alliance Fort Worth Distribution Center's inventory carrying cost. If we also consider the annual ordering cost, what is the total cost of ownership per unit (in dollars) if we purchase everything from Dong Hai Supply? From CousinsAg?

The total cost of ownership is obtained by summing up the unit price, the in-transit carrying cost, the transportation costs, and the inventory carrying cost.

Dong Hai

Cousins Ag

Annual Orders placed

39.01996

52.95567

Cost per order

Annual ordering Cost

0.330309

0.258621

Dong Hai

Cousins Ag

Unit Price

80.11

85

Cost to Transport

7.929038

4.55665

In-Transit Cost

1.978827

0.374932

Holding Cost

0.952508

0.487563

Yearly Ordering Cost

0.330309

0.258621

Total Ownership Cost

91.30068

90.67777

Therefore, the total cost of ownership per unit if everything is bought from Dong Hai is $91.30 whereas if everything is brought from Cousins Ag the cost of ownership per unit is $90.68.

11. After you incorporate all the risk costs, which supplier is the least total cost provider of Schachtel Schmuggel Bannware?

As calculated above, it can be perceived that the least total cost provider of Schachtel Schmuggel Bannware is Cousins Ag, which has a total cost of $90.68.

12. There are additional risks that must be considered to better evaluate IDC's decision for the two supply chain choices -- CousinsAg and Dong Hai Supply. Identify two additional risks that should be considered, and provide at least two realistic quantitative measures for each risk that you would use to evaluate that risk

There are additional risks that ought to be taken into consideration in order to have a better assessment of IDC's decision for choosing between Cousins Ag and Dong Hai Supply. One of the risks encompasses the prospective for damage during transit. Measures that can be used to quantitate this particular risk includes the proportion of containers that are lost or damaged during transit. Another measure can be the cost of insurance that is incurred for property while being transported. Another risk that ought to be taken into consideration is the capacity level. One of the measures for quantifying this risk can be the variations in demand in comparison to the forecasted demand level. Another measure can be the risk of experiencing stock outs due to failure to supply enough quantities (Wieland, 2013).

13. Recommend improvements to the supply chain process to reduce total landed cost.

There are suggestions that can be made to enhance and augment the supply chain procedure so as to decrease the total landed cost. One of the suggestions could be the provision of altering the International Commercial Terms, which stipulates the accountabilities of the buyer and the seller in a global transaction. Another suggestion is to utilize the TEU containers that have a holding capacity of 600 units (Frankel, 2013).

References

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

Shim, J. K., & Siegel, J. G. (1999). Operations management. Barron's Educational Series.

Wieland, A. (2013). Selecting the right supply chain based on risks. Journal of Manufacturing Technology Management, 24(5), 652-668.