This document analyzes two supply chain options - Option 1 routing through the port of Rotterdam and Option 2 routing through the port of Zaragoza. It finds that for a truckload of 175 units, Option 1 (Rotterdam) has a lower total annual cost. However, the number of units per truckload is a key factor - if increased to 443 units, Option 2 (Zaragoza) becomes cheaper. Additional factors like demand uncertainty, product cost, and service requirements can also impact which option has a lower total cost. The recommendations suggest Zaragoza target customers where these factors favor Option 2.
This document analyzes two supply chain options - Option 1 routing through the port of Rotterdam and Option 2 routing through the port of Zaragoza. It finds that for a truckload of 175 units, Option 1 (Rotterdam) has a lower total annual cost. However, the number of units per truckload is a key factor - if increased to 443 units, Option 2 (Zaragoza) becomes cheaper. Additional factors like demand uncertainty, product cost, and service requirements can also impact which option has a lower total cost. The recommendations suggest Zaragoza target customers where these factors favor Option 2.
This document analyzes two supply chain options - Option 1 routing through the port of Rotterdam and Option 2 routing through the port of Zaragoza. It finds that for a truckload of 175 units, Option 1 (Rotterdam) has a lower total annual cost. However, the number of units per truckload is a key factor - if increased to 443 units, Option 2 (Zaragoza) becomes cheaper. Additional factors like demand uncertainty, product cost, and service requirements can also impact which option has a lower total cost. The recommendations suggest Zaragoza target customers where these factors favor Option 2.
This document analyzes two supply chain options - Option 1 routing through the port of Rotterdam and Option 2 routing through the port of Zaragoza. It finds that for a truckload of 175 units, Option 1 (Rotterdam) has a lower total annual cost. However, the number of units per truckload is a key factor - if increased to 443 units, Option 2 (Zaragoza) becomes cheaper. Additional factors like demand uncertainty, product cost, and service requirements can also impact which option has a lower total cost. The recommendations suggest Zaragoza target customers where these factors favor Option 2.
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Plaza, the Logistics park of Zaragoza Case Analysis
Supply Chain Network Diagram
The supply chain flow and the respective lead times
| Option 1
| Option 2
Average Cycle Time(Days)
| | Rotterdam | Zaragoza
Average Time to reach the port | 29
| 24
Time spent at port| 1.5 | 1.5 |
Time from warehouse to customer
| 0.5 | 1.5 |
Total average lead time(days) | 31
| 27
The average time to reach the port was averaged for each option 1 from the data given Demand, Inventory and Safety Stock | Option 1
| Option 2
| Rotterdam | Zaragoza Annual Demand (D) (units)
| 100000
Inventory Review Period( T) (days)
Inventory per review period (Q) = D(units/Year) * T (in years) |
| 30
| 100000
| 30
| 8219.178082
Standard Deviation ( d) (units/year) | 10000
S.D during Lead Time( T+L) (Sqrt(T+L) /365 o year) * d
| 4088.071522 |
| 8219.17808
| 10000
| 3951.76396
| Q
| | T+L =
d es 10000. Safety Stock(SS) (units/review period) | SS = 1.64* T+L |
| 6704.437296
| 6480.89289
T+L es lo que calcuas arriba (S.D. during Lead Time) y 1,64 que es la distribucin normal estandarizada para un sercicio de 95%. Average Inventory per review period(Q*) | Q* = (Q/2) + SS | Average Inventory (Q**)(in units) of review periods/year |
| 10814.02634
| 10814
| 10590
Annual Average Inventory transported (Q** tl)(in truckloads)
(Q**tl) = (Q/No. of units per truck)*12 |
| 10590.4819 | Q**= Q* * No. | 282 | 282 |
8219 (Q) / (175 unidades * 2 TEU por camion) *12 que son los pedidos por ao
The number of truckloads transported per order = 8219.17/No: of units in truck
load =23 per order So Total No: of truckloads/year = 23*12 = 282
Transportation Costs Transportation Costs
| Option 1
| Rotterdam | Zaragoza
| Option 2
Shipping Cost from China to Port/TEU*
| 145 | 0
Shipping Cost from China to Port/Truckload* | 72.5 | 0
Port handling charges/Truckload
| 335 | 305 |
Transportation Cost from Port to Warehouse/TL
|0
| 495 |
Average Distance from W.house to customer (km) | 516.1
|
| 1220.7
Transportation Cost from W.house to customer/TL | 619.32
|
| 1245.114
Total Transportation Cost /TL(Tr.C/TL) | 1026.82
Average Cost per km
| 1.2 | 1.02 |
Total Annual Transportation Cost(T.Tr.C)*
| T.Tr.C =( Tr.C/TL) X Q**tl |
| 2045.114
| 289358.2779
| 576313.926
* All costs indicated in the report are euros
Here we only are calculating the differences because we did not identify the shipping cost from China/Manufacturer to the first port (port in Spain).Since it is difference of cost calculation we assumed it to be zero. The transportation cost per truckload = Average distance between warehouse and customer * Average cost per KM for each option
Inventory Holding Costs
Inventory Holding Cost
| Option 1
| Rotterdam | Zaragoza Unit Price ( C )
| Option 2
| 100 | 100 |
Holding Cost per unit (Hc)
cost/100 |
| 26
| 18
| Hc = Unit cost* Percent Holding
Annual Average Inventory Holding Cost ( T.Hc)
190628.675 | (T.Hc) = Hc X Q** |
| 281164.6848
Pipeline Inventory Costs
Pipeline Inventory Cost
| Option 1
| option 2
Financial Cost or Interest rate
| 8% | 8% |
Lead time in pipeline(days)
| 31
No: of units in Transit
Unit Cost
| 27
| 8219.178082
| 100 | 100 |
| 8219.17808
Pipeline Inventory Cost (P.C)
| 5584.537437 Demand*Unit Cost*Interest *Lead Time |
| 4863.95196
| P.C =
0.08 / 365 *100 * 8219 * 31 = 5584
Pipeline Inventory is the inventory held up in the flow process. Since the customer pays only after handing over the inventory. The entire flow lead time till the inventory reaches customer was considered. In the flow process we assumed there would be no labor costs and rents of the building were considered. So we calculated the interest rate as the sum of financial cost + Insurance Cost = 7% +1% =8%
Total Costs Total costs = Inventory Holding Cost + Cost of the Inventory + Transportation Cost + Pipeline Inventory Cost
Total Cost
| Option 1
| Option 2
| Rotterdam | Zaragoza
Annual Average Inventory Holding Cost ( T.Hc)
|
| 281164.7
| 190628.675
Total Annual Transportation Cost(T.Tr.C)*
| 289358.3
| 576313.9
Pipeline Inventory Cost (P.C)
| 4864.0
| 5584.5
Annual Cost of Products | 1081402.634
Total Final Cost
| 1059048.19
| 1657510.1 | 1830854.7 |
Here we need to remember that the transportation cost considered was starting from the respective ports but not from the initial point manufacturer Cost Difference Final Cost Difference
| -173344.6 |
In this case (with 1 TEU = 175 units) the cost of option 2 (Zaragoza) is more than cost of option 1 (Rotterdam) So, for the given TEU, I would recommend the Rotterdam Port.
Cost Analysis and sensitivity controlling factors
Number of units/TEU In this specific case, the cost of Zaragoza might be higher than the Rotterdam option, however, varying the number of units/TEU has an impact on this analysis. If the number of units/TEU increases, the lesser holding cost of Zaragoza mitigates the higher transportation cost of Zaragoza. Also, the transportation cost of Zaragoza comes down if the number of units/TEU or number of units/Truckload increases. Hence, the number of units/ TEU plays a pivotal role in considering which option to go with (with the assumption rest all parameters remain same). In our excel model we tried to determine the no: of units/TEU at which the cost of the Option 2 (Zaragoza) is lower than cost of option 1 (Rotterdam) by varying the number of units/TEU (J 13 cell in excel model) and finding the influx point at which the cost difference becomes positive (E 69 cell in excel model). We found out that at the point of 1TEU = 443 units, the difference becomes positive .i.e Zaragoza option becomes cheaper from this point onwards. No: of units/TEU
| Cost difference
250 | -87257.9
300 | -53779.8
350 | -29866.8
400 | -11932.1
440 | -519.1
442 | -2.6 | 443 | 253.8
445 | 763.3
500 | 13176.6
550 | 22307
600 | 29915
X Axis No: of Units
Y Axis Cost difference
X Axis No: of Units
Y Axis Cost difference
The cost difference becomes positive at 443 units/TEU
Uncertainty in demand and service life
The uncertainty in demand is reflected in the reorder point and safety stock. The more the variability in demand the higher will be the reorder point and the safety stock. A higher deviation in demand would directly affect the safety stock levels required at the warehouses and hence increase the inventory carrying costs. This increase would then affect the overall costs. Using our excel model, If we increase the standard deviation of annual demand from 10,000 to 32,000, the overall costs for Rotterdam become higher than those of Zaragoza. Similarly, varying the service life has an impact on the total cost as it controls the safety stock which in turn controls the inventory holding cost. Hence, as the service life increases to a higher value the cost of option 2 (Zaragoza) will be lesser than option 1. Cost of the product As the cost of the product increases the inventory holding cost increases increasing the total cost. So Zaragoza as has a better cost advantage over Rotterdam option. In our excel model, plugging a product cost of 295 Euros (E 47 and F 47 cells), keeping all other parameters unchanged makes Zaragoza a better cost option. So it is a factor to be considered.
Recommendations Based on our above analysis, we recommend the following to the CEO of Zaragoza Logistics Park (Who should they try to sell their idea/option) * Zaragoza should target customers with high number of units/TEU * They should target customers with high product costs * They should target customers whose demand uncertainty is high * They should target customers with high annual demand rates * They should target customers who have preference for high service rates
* Plaza is also an educational center for logistics while Rotterdam is a just a
logistics park. Zaragoza should try to educate the customer about the supply chain benefits of associating with a world class logistics research center * Plaza is a government backed firm they should use this factor to instill more confidence in the customer over a private firm like Rotterdam option
