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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