DB8327

Response to classmate (Ding Hardin)

Introduction

It is essential to form a baseline model when calculating different scenarios within the context of supply chains. These scenarios can help a company be proactive when it comes to lower cost and increase revenue if the results come within 1-10% of the baseline. This post will focus on the baseline scenario and answer questions from this week’s case study.

Answers to Question A, B, and C

1. Even though we applied a rate of $2/mile, the table (total cost / total miles) shows a rate higher than $2/mile for all warehouses. Why is that? (Hint: Think about the fact that the true transportation rates include minimum charges.)

The $2/ per mile is the actual baseline, which is a representation of the supply chain as it had been run in the past. However, all warehouses show a rate that is higher than the baseline because the current model will assign customers to a warehouse that provides the lowest cost per unit, which is a factor of both distance and $/mile. The lower cost per unit doesn’t necessarily factor in the situation that the distance might be longer to get to certain customers. All transportation costs have a minimum charge rate that is charged no matter what. That needs to be factored in as well.

B.The solution with the best two warehouses shows an average distance to the customers that is 144 miles higher than the optimized baseline with optimal customer assignments. However, the freight costs for the two scenarios are very close (~$74 million). How can you explain this?

The freight scenarios are close because the warehouses will have realigned their

territories optimally. The Riverside and Bridgewater warehouses should be handling more volume. Riverside should be focusing on states further east than them and their warehouse should handle 21% more volume and Bridgewater should handle 10% more volume as well. The fact that Riverside and Bridgewater are adding more volume to their warehouses is the reason that their freight costs are very similar for all warehouses.

C. When we look at the results of the scenarios shown in Figure 8.10, it looks as though some customers are not assigned to their closest warehouse. Why is that? Does that make sense?

The most likely reason for customers being assigned to other warehouses not within their territory is due to inventory availability. The item they were trying to purchase was out of stock in their assigned warehouse, thus requiring shipment from another warehouse. In this situation, it is cheaper and faster to ship to the customer form another warehouse than to wait for the product to be replenished in the warehouse they were originally assigned, and then ship to the customer. This makes sense because the customer doesn’t have to wait longer for the shipment, and it saves money in the long run because that particular warehouse doesn’t have to rush new inventory.

Conclusions

The baseline is a great starting point that uses data from the previous year. However, there are some factors that the baseline does not take into effect. Coming close within 1-10% of the baseline is great because you are staying close to the original costs. However, this can be inevitable for various reasons.

References

Watson, M., Lewis, S., Cacioppi, & Jayaraman, J. (2013). Supply chain network design: Applying optimization and analytics to the global supply chain. Upper Saddle River, NJ: Pearson.

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