Cincinnati Seasonings Case Study Guide Ver2-7-8 E-51-68
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Apr 3, 2024
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Supply Chains for Lowest Total Cost Seasonings Factory Seasonings DC Louisville Store Indianapolis Store Ft. Wayne Store Chicago Store Columbus Store Console Data 48
Supply Chains for Lowest Total Cost There are opportunities to reduce storage at all the facilities except the Chicago Store. We could reduce storage capacity at all facilities, including Chicago, and still get the supply chain to run in this simulation. But there is usually a need for most facilities to maintain an appropriate amount of extra storage capacity to accommodate business growth and the occasional need to take in larger than usual amounts of inventory for whatever reason. Different facility storage costs make it advisable to shrink storage capacity in some facilities and expand it in others. Stores have the highest storage costs followed by the factory. The DC has the lowest storage costs so it makes sense to concentrate storage at the DC and use vehicles to transport product to stores as needed to meet demand and maintain safety stocks. You decide to make the changes shown in the table below. Facility Current Storage Reduced Storage Comment Factory 3,000 1,000 Move to less expensive storage at the DC Seasonings DC 15,000 10,000 Meet present needs of 5,000 and allow for doubling of business Louisville Store 1,500 500 Storage at stores is expensive Indianapolis Store 1,000 500 Large store format Ft. Wayne Store 800 800 * Unique store format Chicago Store 500 500 Large store format Columbus Store 300 100 Small store format In the edit screen you click on the Facilities menu tab and for each of the facilities in the supply chain you reduce storage as noted in the table above. * NOTE:
Too much inventory at Ft. Wayne prevents savings from storage reduction 49
Supply Chains for Lowest Total Cost You run the simulation again after you make these reductions to the storage space at each of the facilities. And you stop the simulation after 30 days and export the results to excel. Then you open this spreadsheet and the spreadsheet you saved before you changed the storage capacity at the stores. You add some rows into the spreadsheets and add some useful equations to quickly give you a sense of the cost savings that resulted from reducing unneeded storage space. Here is a screen shot of the spreadsheet where you have inserted equations to use the simulation data to calculate cumulative 30 day facility cost and average daily facilities cost before storage reduction. (This is just a portion of the simulation data available in the spreadsheet that you download from SCM Globe. Add any equations you want to analyze the data.) 50
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Supply Chains for Lowest Total Cost 51 And here is a screen shot of the spreadsheet where you have inserted equations to use the simulation data to calculate cumulative 30 day facility cost and average daily facilities cost after storage reduction
. (This is just a portion of the simulation data available in the spreadsheet that you download from SCM Globe. Add any equations you want to analyze the data.) Over this 30 day period you reduced cumulative facility costs from $3,264,000 to $2,454,000 – that’s $810,000. And you reduced average facilities cost from $108,800 per day to $81,800 per day – that’s $27,000. You achieved a 24.8 percent decrease in facility costs by doing the simulations and finding opportunities to reduce storage capacity. Now look at your costs of transportation and the cost of the on-hand inventory across the supply chain. How much have you reduced these costs since the end of week 3? Go back and look at the spreadsheet of simulation data you downloaded at the end of week 3. Here’s what you see: Facility Costs Vehicle Costs Avg Prod On-Hand Week 3 $3,264,000
$55,967
6,989
Week 8 $2,454,000
$54,482
4,360
Savings Amt $810,000
$1,485
2,629
Savings Pct 24.8 %
2.7 %
37.6 %
You are doing a great job. You have earned your paycheck this week. Go to the edit screen and create a save state of this design.
Expanding Supply Chains to Support Business Growth Week 9
– Expanding Supply Chains to Support Business Growth Objective
– find the best way to support the growth of Cincinnati Seasonings by designing an expanded supply chain that runs for 30 days. Consider the impact of different types of transportation and different combinations of facilities and locations to support business growth into further cities such as St. Louis, Kansas City and points west. You load up the save state you created at the end of week 8 and take a look at the supply chain map. Here is what you see. The icons and blue lines show your present supply chain network. Circled in red are the three new store locations opening now. Circled in blue are other locations where the company has plans to open stores in the future if all goes well (the circles are added here for illustration purposes, they are not part of the SCM Globe simulation). Some of these stores will be the large format stores like Indianapolis and Chicago. They will have daily demand in the 70 – 100 unit range. Other stores will be small format stores like the ones in Ft. Wayne and Columbus; their demand will be between 20 – 50 units per day. The list below shows the stores and their expected daily demand levels:
Denver – 100
Des Moines – 30
Kansas City – 100
Little Rock – 40
Memphis – 45
Minneapolis – 85
Omaha – 35
Sioux Falls – 30
Wichita – 35 52
Expanding Supply Chains to Support Business Growth 53 There is a lot to think about here. One way to structure your approach is to focus your investigation around two big questions: 1.
Will you open a new DC to support the new stores or will you support them out of your existing DC? 2.
Will you use a truck-based supply chain or will you use a mix of trucks and railroads? Once you decide on answers to these two questions, then you can further refine your design as we have done already with this supply chain in earlier weeks. First just get the basic idea in place and make it work. Then look at ways to reduce inventory and vehicle costs and facility costs. You start your investigation by adding the new stores in St. Louis, Kansas City and Des Moines. You can use the default values for most of the store definitions. Set store demand at: St. Louis – 80; Kansas City – 100; and Des Moines – 30. Leave the default storage capacity of 500 cubic meters for the St. Louis and Kansas City stores because they are large format stores. Set the storage capacity for Des Moines at 100 cubic meters because it is a small format store. Exact addresses for the stores are still being negotiated, so the chief operating officer (COO) tells you the general neighborhood of the stores in each city and says give it your best guess. You can always drag and drop those stores later if you need to fine tune their locations. Even without an exact address you can place the stores, and the simulation results will still be quite accurate. Accurate enough to show which design options are the most cost effective. In addition to placing the three new stores, you’ll need to estimate the increased production at the factory to handle the new demand from the new stores. Their combined daily demand is 210. At present the factory is producing 190 units of the Spicy Cube per day. This calls for more than doubling factory production rate so you should adjust the daily operating cost at the factory. The rent cost fluctuates with storage space used, but you need to estimate how increased production will affect operating cost. Operating cost includes labor, utilities, insurance, and other cost items that the company’s chief financial officer (CFO) tells you to include. At present the daily operating cost is $35,000. That seems high, yet the factory is producing 190 units of the Spicy Cube each day and they are valued at $1000 each. The factory is well equipped, and can quickly add extra capacity to increase production as demand rises. The CFO tells you to adjust the daily operating cost up to $55,000 to account for hiring more people and greater usage of power and utilities and other supplies. Then you need to find ways to move the extra product to the existing DC faster so as not to let factory on-hand inventory go beyond factory storage capability. You want to concentrate on-hand inventory at the DC because that is where storage costs are lowest.
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Expanding Supply Chains to Support Business Growth You will need to add a new large truck to handle this load and schedule it to run with the same frequency as the existing truck. Also set the speed of both trucks to 45 km/hr. Once the new stores are in place and the changes made to the factory, let’s quickly model a couple of supply chain designs and see which one looks most promising. We’ll start by designing a supply chain where we serve the three new stores with trucks originating at the existing DC in Cincinnati. Then we’ll design a supply chain that uses a new DC and serves the new stores with a mix of trucks and railroads. The screenshot below is a map of the supply chain design where we expand using the existing DC. Look at the costs of longer delivery routes from the original warehouse in Cincinnati. Define these routes as truck-based routes. You need to devote a single large truck to support the Kansas City store to meet its daily demand. To lower costs you could explore sending a small truck from Kansas City to Des Moines and back, and a large truck to St. Louis and back. Or you could use a single large truck to deliver to both stores. Do you open a new warehouse distribution center to support the new stores or do you keep and/or enlarge the existing distribution center? You can see in the map above that the delivery routes are getting very long. So vehicle costs and potential for missed deliveries goes up as a consequence. Experiment with adding a new DC to support store deliveries. Look for a central location for a DC to support the new stores. There is a crossing of routes at Indianapolis, but Indianapolis is still relatively close to Cincinnati and the original DC. A more efficient staging location for concentrating a lot of inventory to delivery to stores would have a more central geographical location so as to reduce distances traveled by delivery trucks 54
Expanding Supply Chains to Support Business Growth that transported product from the DC to the stores. In a truck based supply chain, good central locations for a DC are in places like Bloomington or Peoria. Zoom in on the map and switch to satellite view. You will quickly find large warehouse and trucking operations that have facilities in the outskirts of these two cities near the intersections of the big interstate highways. What is the effect on operating costs, transportation costs and inventory if you add a new DC in a central location such as Peoria compared to operating all trucks and stocking the inventory in the original DC? Now consider what is the effect on supply chain operations and costs if you were able to use trains to transport products instead of trucks? Trains cost less to operate but they are not as flexible in scheduling and they don’t go everywhere trucks do so facilities need to be located along rail lines. The Cincinnati factory is located on rail lines; what would happen if you located the warehouses so that they were also located near rail lines? Could you lower transport costs? What if you set up a new DC in Indianapolis and delivered large quantities of product to it via railroad? And then delivered by rail to two of the three new stores, and also by rail to the existing Chicago Store? Indianapolis is not geographically in the center of the new sales territory, but a little Internet research on freight rail lines in the United States shows that Indianapolis is a transfer point between major rail carriers. It sits on busy freight rail corridors that connect it with St. Louis and Kansas City on one line, with Cincinnati on another line, and with Chicago on a third. Does that shift the center of gravity in this supply chain? If you set up a DC in Indianapolis, you could ship product to it from the Cincinnati factory by rail and you could deliver to the stores in Chicago, St. Louis and Kansas City also by rail. Then you could have a small or medium size truck deliver to Ft. Wayne and Columbus and a large truck deliver to Louisville. And you could create a hybrid store and 55
Expanding Supply Chains to Support Business Growth warehouse facility in Kansas City and have a small truck from that facility deliver products to the store in Des Moines. We’ll use a rate of $3/cubic meter for daily rent cost of storage at this hybrid Kansas City facility. This design uses rail for all the long-haul routes. And if train transport costs about 20 percent of what truck transport costs, there should be some significant cost reductions produced by this design as compared to the costs of the first truck-based supply chain design. When shipping by rail think of cargo containers moving by rail. Each container has a volume of 110 cubic meters. That is the size of a standard freight container used on railroads, ships and trucks. The moving of containers from trains to trucks and ships without having to load and unload those containers as they move from one mode of transportation to another is what inter-modal freight shipping is all about. So when you define your vehicle as a train, its carry volume and weight will depend on how many container loads of product you are shipping. If you are shipping two container loads then your carry volume will be 220 (2 x 110) cubic meters and carry weight will be twice the value of one container or 40,000 kilograms. Freight containers on ships work the same way. On airplanes, a standard container is 6 cubic meters so you use multiples of that. Here is a map of what this rail-based supply chain design would look like. The rail segments of the supply chain are highlighted in orange. Assume railroad deliveries are less frequent – once every 3 days. This requires more storage space to hold larger deliveries plus appropriate safety stock. If deliveries happen every 3 days (72 hours) and daily demand is 100, then delivery size needs to be 300 plus the extra amount to build up safety stocks. It is a tradeoff between cost of extra storage 56
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Expanding Supply Chains to Support Business Growth 57 space and the price of truck fuel. Savings generated by much lower railroad transportation costs are offset by increasing need for storage space. Since the rent for space at a store is $4.00/cubic meter and rent at a warehouse is $2.00/cubic meter, it might be worth having a small warehouse that can store the large deliveries of products. But that then requires a small truck to make daily store deliveries from the warehouse and that expense could offset the savings on rent. So you can see how the right answer changes over time depending on the costs of things such as rents at stores and warehouses and the difference between cost of shipping by truck and rail. As a general rule, higher value products with smaller size and weight can be shipped by truck or even by air and still be a good business decision. And lower value products that have larger size and weight can be shipped by rail or ship. In this case the spicy cube product has a relatively high value ($1,000) and also relatively high size (one cubic meter or about 9 cubic feet). Many products are like this, so you need to explore different transportation options to see what works best. Model and simulate the characteristics of a rail and a road based design. Create two different scenarios – Truck only and a Rail-Truck mix as shown above. Which is more cost efficient? The table below shows results from analyzing the data downloaded after running a simulation for each of the two scenarios: Total Facility Cost Total Vehicle Cost 30 Day Avg Invtry Truck Only $3,342,000
$147,290
6,223
Rail-Truck Mix $3,771,000
$47,667
7,628
What we see is that facility costs in the truck only supply chain were lower than they were in the rail-truck mix. Vehicle cost in the rail-truck mix was about $100,000 dollars less, but facility cost was about $400,000 higher. We also see that 30 day average inventory amounts were higher in the rail-truck mix. We are seeing the effects of less frequent deliveries. More frequent deliveries enable inventory levels at all facilities to be lower because products are being used and replenished often on the same day (just-in-time delivery). If a facility only has to store one or two days of inventory in order to meet demand, it uses less storage space. When deliveries happen every three days or more, facilities need to keep more on-hand inventory to meet demand in between deliveries. That means their storage costs go up. Below are screenshots of inventory levels at three facilities: Indianapolis DC; Chicago Store; and Kansas City Store. The first row of screenshots shows inventory levels in the truck only supply chain with daily deliveries. The second row shows inventory levels in the rail-truck mix where many deliveries happen only every three days.
Expanding Supply Chains to Support Business Growth TRUCK ONLY
: Seasonings DC Chicago Store Kansas City Store RAIL-TRUCK MIX
: New Indy DC Chicago Store Kansas City Store We can see that in the rail-truck mix inventory levels fluctuate more frequently, and they fluctuate within a wider range so average on-hand inventories are higher. And more storage is needed to accommodate inventory when on-hand amounts spike up after deliveries are made. In many cases, railroad deliveries can only be made once a week and the average overall speed of the train is low because of tracks that cannot handle higher speeds and because of time a train or a rail car spends sitting in rail yards or on rail sidings during the trip. If rail deliveries could be done more frequently, rail transport would be hard to beat. It is the less frequent deliveries and the longer delivery times that drive the higher rent costs required for the extra storage. If rail deliveries could happen as frequently as truck deliveries, there would be no question about which mode of transportation to use. But as we can see from comparison of these two supply chain designs, you cannot think about one factor in isolation from the other factors that influence supply chain operations (products, facilities, vehicles, routes). Actions in one area always produce ripple effects in other areas. 58
Expanding Supply Chains to Support Business Growth 59 There are other ways to mix rail and truck transport than just the design shown here. Experiment with different ideas. What would happen if you only used rail to deliver to Kansas City and to move products from the factory to the Indianapolis DC? Then you could base large trucks at the DC to deliver to Chicago and St. Louis as well as to Louisville. As the price of fuel for trucks rises, it makes rail transport more attractive. Experiment with what would happen if you raised truck operating costs by 20 percent. How does that increase affect the comparison between the truck only and the rail-truck mix scenarios? One framework for thinking about the problem and its possible solutions is this:
rail shipments reduce vehicle costs, and truck shipments reduce inventory and storage costs
concentrate larger product inventories at lower rent facilities such as warehouses and DCs
concentrating large product inventories at low rent facilities enables you to use more space at those facilities to accommodate less frequent and larger shipments via rail
use frequent distribution from low rent facilities to deliver to higher rent locations to meet demand and also keep storage requirements low at those higher rent facilities
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Exploring other Options and Plans Week 10
– Exploring other Options and Plans Objective
– explore other supply chain options and make some plans for the future What would happen if you began using even larger trucks that had higher operating costs per kilometer but could also carry twice as much cargo? In some places it is possible to use trucks that haul two trailers instead of just one. What changes to the supply chain would be needed to make greater use of rail on some of the other routes? Would it make sense to use air transportation to move products to some locations in this supply chain? Would it make sense to use air transport if a unit of Spicy Cube was four times smaller and lighter and was worth four times more (as in pharmaceuticals or electronics)? What would happen if instead of one big factory in Cincinnati, you created another factory closer to the new stores to support your growth? What if you created a new facility that was both a factory and a DC? Would you be able to reduce operating costs and transportation costs? As the business grows and delivers to more and more stores, it looks like Kansas City is the place where you would locate a new factory and DC because it has good access to both rail lines and road networks. It is an effective central place location for the market that Cincinnati Seasonings would be serving at that time. This is illustrated on the map below. What would your distribution network of vehicles and routes look like if you delivered to these stores by truck from the Kansas City DC? 60
Looking at the Big Supply Chain Picture 61 Week 11
– Looking at the Big Supply Chain Picture Objective
– describe a general strategy for effective supply chain operations at Cincinnati Seasonings. Discuss how to best manage products, facilities, vehicles and routes to support company growth while minimizing the costs of operating your supply chain. Here are some questions to consider as you formulate your supply chain strategy:
Is it better to expand the existing factory to support demand from the new stores or better to keep existing factory as is and build a new factory closer to the new stores?
When do you need to open new distribution centers? Hint: think of opening new a new DC when you need to establish an inventory staging location to support deliveries to new stores as company sales territory expands.
When is it best to use single-drop routes and what kind of truck is most cost efficient?
When is it best to use multi-drop routes and what kind of truck works best?
What if you could use rail transportation, when would that work best?
What is your approach to managing on-hand inventory at different locations (factory, DC, stores)?
Where do you want to concentrate inventory and where do you want to keep inventory levels low?
Where do you want to locate facilities such as factories and warehouses and distribution centers?
When is it advantageous to be located near rail lines? Pull your answers to these questions, and other insights you have developed over the last several weeks into an overall strategy describing how you would design and operate supply chains for Cincinnati Seasonings.
Final Report and Recommendations 62 Week 12
– Final Report and Recommendations Present a final report that describes your strategy for designing and operating supply chains. Discuss how to expand supply chain operations to support company growth. Start by describing the biggest challenges you faced. Then describe how you used simulations and applied your supply chain knowledge from other sources such as readings, lectures and your work experience to address these challenges. Describe your overall strategy for designing and operating supply chains and list the 3 or 4 main guiding principles that your strategy focuses on. These are the guiding principles you formulated over the last several weeks as you dealt with the challenges of those weeks. These are the principles you articulated in the previous week as you answered the questions posed to you as you looked at the big picture of the Cincinnati Seasonings supply chain situation. Use supply chain designs you created in this course to illustrate how your main principles work. Show screenshots from your simulations to illustrate your strategy ideas. Back up your ideas by presenting data from simulations that shows how effective your strategy is. Show data, either on-screen data displays or numbers from downloaded data to support your three or four main principles What you present here is the foundation for how you will handle expansion of the Cincinnati Seasonings supply chain to support business growth. This is what management wants to know about. NOTE: Students can send their simulation data to instructors by downloading their data to a spreadsheet. They can do this by pressing the button on the simulation screen labeled “Export Results to Excel”. A spreadsheet will download to their PC and they can attach it to an email and send it. Students can also send their entire supply chain design to instructors by going to their “My Account” screen and clicking on the button labeled “Download” next to the supply chain they want to send. A file will be downloaded to their PC that will end in “.JSON”. Students can attach that JSON file to an email and send it to their instructor. The instructor can copy student files to their PC and click on the button labeled “Upload Save File” in the My Account screen. Students should submit both their report and the JSON file with the simulation that their report is based on. They can also submit the excel spreadsheet with their simulation data. The downloading and sharing of a JSON file is illustrated with screenshots on the following pages.
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3 Steps to Download and Share a Simulation 3 Steps to Download and Share a Simulation When you have a simulation you like, you can share it with others by downloading it as a JSON file and sending to others as an email attachment. This is a three-step process illustrated in the three screen shots below. Step 1: Save the simulation to a “Save State” 1.
From the edit screen, click on the “Options” button 2.
Click on the “Save” button in the Options menu 63
3 Steps to Download and Share a Simulation Step 2: Download the JSON file to your computer 1.
Go to your “My Account” screen and see the simulation you just saved in your “Save States” list 2.
Click on the “Download” button next to the simulation you want to download and the simulation will download as a file with the ending of JSON 3.
Attach this JSON file to an email and send to people you want to share it with. 64
3 Steps to Download and Share a Simulation 65 Step 3: Uploading a Shared Simulation 1.
On “My Account” screen, click “Upload Save File” 2.
A file directory window opens, locate the JSON file and double click it to upload 3.
Click “OK” button in dialog box showing successful file upload 4.
Find the uploaded similation at the bottom of your Save States files and click on the “Restore” button. The simulation will show up at the bottom of your list of supply chains at the top of the My Account screen. Click the “Edit” button next to the simulation to open it up. These three steps are also explained in the SCM Globe Online Guide in a section titled “Download and Share Supply Chain Models” (
http://blog.scmglobe.com/?page_id=924
) so students have access to instructions on how to share simulations. ***** Copyright © 2018 by SCM Globe Corp.
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