New Zealand All Natural Ice Cream (NAN)

Introduction:

During the 1990s , the low cost of transportation services relative to inventory holding

costs encouraged organizations that implement lean principles to emphasize fast,

small, frequent delivery to customers i.e just-in-time delivery. However in the last

decade, things have changed dramatically, due to oil prices’ escalating and imbalance

between supply and demand for transportation services. These factors caused

increase in transportation costs to a level that forced companies to re-think and shift

their supply chain strategies.

As a result shifts in supply chain strategies designed to overcome the new

transportation challenges and to improve organization's broader supply chain and its

financial performance. As oil prices increased, the importance of transportation

economies of scale attained by making larger and less-frequent shipments, increased

too, and the trade-offs between transportation and inventory costs become more

important. For that companies have shifted to inventory/transport hybrid strategies that

not only focus on cycle and safety stock policies but also taking into account lowering

transportation costs.

Techniques such as shipment consolidation have more attention today. Shippers are

trying to find prospects to consolidate their own shipments, and are considering shared

routes by using a third-party logistics provider (3PL). They also focus on capacity

utilization by building consolidated, multi-product containers and pallets. And they are

trying to evaluate alternative transportation modes to handle the high transportation

costs (Dawn Russell,Johnj.Coyle,Kusmel Rand Evelyn A, 2014).

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Literature Review

In a traditional supply chain , which operates functionally rather than process driven.

Activities are not integrated ,causing buildup inventory due to conflicting

performance measures between its departments. Supply chain integration is the

solution to eliminate waste and reduce inventory costs. Since procurement as one of

supply chain segments , is responsible for about 30% of total supply chain inventory

investment and has a significant impact on the supply chain beside being the link

between suppliers , marketing and distribution, then procurement requires to include

new approaches in its strategy such as anticipation of customer demand patterns

,continuous replenishment logistics, considering new production techniques and

strategic positioning of suppliers . On the other hand distribution is the key factor to

achieve customer service level set by the organization. Terms such as Cross-docking,

consolidation and Post Manufacturing , distribution Resource Planning and Logistics

Operations Planning are crucial for improving operations and reducing inventory (Kilty,

May 2000).

There is no doubt that Inventory is considered as a safety factor and a buffer that fills

the gap between supply and demand which ensures business continuity. There are

different types of inventory items that entities could hold such as raw materials, work-

in-progress and finished goods. Companies keep inventories for many reasons. It holds

inventory for example : to reduce the overall cost which includes the administrative

cost, delivery cost, bulk discount, and handling cost and also to minimize the cost of

stock-out which will result in business loss due to loss of sales . Although keeping

inventory is very costly, but the major risk of keeping inventory can be obsolescence of

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item, where the company will bear the cost of keeping inventory that is no longer

saleable(Anon., 1988).

Within Supply Chain circle, the relationship between customers and Suppliers should

contain benefits for all parties and make them all winners. In order to make this level of

success, collaboration is needed from all parties, having long term contracting

relationships lead to easy cooperation between them (Campean, E., Morar, L., Blaga,

L., Pap, S. & Gelmereanu, , 2013). One of the new concepts illustrating such

relationship is called consignment inventory CI strategy between the vendor

( manufacturer) and the customer ( retailer). Under consignment, goods are owned by

the vendor until they are used by the customer, the customer pays physical storage

costs but does not own the inventory, and hence incurs no capital costs for holding that

stock .Those carrying costs accrue to the vendor. CI allows the customer to hedge

against uncertainties in production and sales, influencing his total inventory carrying

cost. While for the vendor, CI helps him create new sales channels when the customer

hesitates to buy his new or expensive items(Anon., 13 February 2008).

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Company Background:

New Zealand All Natural Ice Cream (NAN) is a global franchise brand based out of

Auckland, New Zealand. It has different products beside ice cream including: Frozen

Yogurt, smoothie and juice parlours and mini parlours. NAN ice cream is natural

without any artificial coloring or flavoring. The milk which is used in NAN is brought

from cows that are grass-fed. Their product is high quality and hygiene standards.

This is what distinguished NAN from other competitors.

The company has variety of products that could target different customers; the natural

ingredients are the common factors between all it is products. For example, it

produces premium ice cream for all the customers, whereas it produces low fat

products to target the people who are dieting or have cholesterol issues, or seeking

healthy food. The company is introducing two or three new flavors and drinks recipes

every year. This is an indication that the company is targeting new customers; at the

same time this strategy could be proactive strategy to face any changes in the current

customer preferences.

All Natural Ice Cream (NAN) is a company that is located in New Zealand. They

moved from local to global through franchise the concept at 1990. Locally, NAN

decided to set its production facilities in Auckland in the North of New Zealand. The

purpose is to keep production close to supplier since the cow farms are located in

Waikato. NAN has three plants and distribution center. The company strategy is

based on postponement where the base product is produced in the plants and the

distribution center produces the end product to target the customer preferences

(Anon., n.d.).

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In the south, NAN provides consignment with the inventory. Customer will sell the

products and NAN will maintain adequate inventory by replenishment. NAN would get

paid once ice cream is sold to the end customer. To ensure the continuous

replenishment process, NAN has outsourced this function to Super Truck, Third party

logistics provider (3PL) company. Super-truck has to replenish any customer once

NAN's requested within 24 hours otherwise Super-truck will incur any lost that NAN

faces.

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The Case Study:

Current situation:

 Nan Sends full truck loads to each customer for replenishment.

 Capacity of truck is 40,000 Liters.

 Super-Truck charges $400 for each truckload from the Wellington DC to

each customer.

 The transport rate is Uniform rate, where NAN pays $350 to Super-

Truck per truck plus $50 for each drop- off location is added.

 Each liter of ice-cream product in consignment costs NAN $1.

 Holding costs is maintained at 25%

 NAN gets paid from consignee after the product is sold.

Data Given:

Customer profile in Wellington one of the distribution centers.

Consumption/Demand/ liters
Customer type Number of customer
Monthly Annual

Small 12 1000 12000

Medium 6 6000 72000

Large 2 12000 144000

Total 20 19000 228000

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First: Optimum Economic Order Quantity (EOQ.):

First we will calculate the Optimal Economic Order Quantity and related costs,

when delivering for each customer separately.

Input data

Full truck load shipment –Reorder cost Rc $400

Unit cost Uc $1

Holding cost I 25%

Truck capacity 40,000 liters

For Small Customer

2×𝑅×𝐷
EOQ = √( ) = √(2 × 400 × 12000)/(1 × 0.25) = 6,196.77 ≅ 6,197 liters
𝐻

Vco = Hc x Q0 = 1x0.25x 6,197 = $1,549

Cycle length T0 = Q0 / D = 6197/12000 = 0.52 year ≅ 6.24 months

Number of orders per year N = D/ Q0 = 12000/ 6,197= 1.936

Annual trucking/ordering cost = $ 400 x 1.936 = $ 774.4 for each order

Annual holding cost = H.Q0 /2 = 0.25 x 6,197/2 = $774.6 for each customer

Total Annual variable Cost Tco = order cost + holding cost

Total Annual variable Cost Tco = $774.4+ $774.4 = $ 1,549 Each customer

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For Medium Customer

2×𝑅×𝐷
EOQ = √( ) = √(2 × 400 × 72000)/(1 × 0.25) = 15,178.9 ≅ 15,179 liters
𝐻

Vco = Hc x Q0 = 1x0.25x15,179 = $ 3,794.75

Cycle length T0 = Q0 / D = 15,179/72000 = 0.21 ≅ 2.5 months

Number of orders per year N = D/ Q0 = 72000/ 15,179= 4.74

Annual trucking/order cost = $ 400 x 4.74= $ 1,896 for each customer

Annual holding cost = H.Q0/2 = 0.25 x 15,179/2= $1,897 for each customer

Total Annual variable Cost Tco = $ 3,793.4 Each customer

For Large Customer

2×𝑅×𝐷
EOQ = √( ) = √(2 × 400 × 144,000)/(1 × 0.25) = 21,466.25 liters
𝐻

Vco = Hc x Q0 = 1x0.25x 21,466.25 = $ 5,366.56

Cycle length T0 = Q0 / D = 21,466.25 /144,000 = 0.149 ≅ 1.8 months

Number of orders per year N = D/ Q0 = 144,000/ 21,466.25= 6.7

Annual trucking/ordering cost = $ 400 x 6.7 = $ 2,680 for each customer

Annual holding cost = H.Q0/ 2 = 0.25 x 21,466.25/2 = $ 2,683 each customer

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 Total Annual variable Cost Tco = $ 5,366.56 Each customer

Total Annual ordering and holding costs for all the customers is $ 52,092 as

shown in the below calculation:

Cost
Number of
Customer type All
customer Per customer
Customer

Small 12 $1,549.19 18,590.28

Medium 6 $ 3,794.73 22,768.38

Large 2 $ 5,366.90 $10,733.12

Total 20 $52,092

Thus, the total annual holding and ordering costs when delivering optimal quantity for

each customer separately is $ 52,092.

Second: Cost of sending Full Truck for each customer: “current operations”

If NAN's replenish consignment inventory to each customer in Wellington, the

annual cost of NAN’s strategy of sending only full truckload is calculated as

follows:

Using the formula Tc = (D/ Q) x S+ (Q/2) x H to calculate total variable cost

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Input Data

Full Truck load capacity 40,000 liters

Full truck load cost $400/truck
Holding cost 25%
For small customers /Full TL
Order Quantity Q 40,000
Number of orders N =D/Q 12000/40,000 = 0.3
Annual ordering Cost = N. S 0.3 x $400 = $ 120
Annual Holding Cost = H.Q/2 0.25x (40,000/2) = $5000
Total annual variable cost for each small customer $ 5120
Total annual variable cost for all small customers 12x 5,120= $ 61,440 … 1
For Medium Customer/Full TL
Order Quantity Q 40,000
Number of orders N =D/Q 72000/40,000 =1.8
Annual ordering Cost = N. S 1.8x $ 400 = $ 720
Annual Holding Cost = H.Q/2 0.25x(20,000) = $ 5000
Total annual variable cost for each medium customer $ 5720
Total annual variable cost for all medium customers 6x 5,720 = $ 34,320 … 2
For Large Customer/Full TL
Order Quantity Q 40,000
Number of orders N =D/Q 144,000/40,000=3.6
Annual ordering Cost = N. S 3.6x $400 = $ 1,440
Annual Holding Cost = H.Q/2 0.25x(20,000) = $ 5,000
Total annual variable cost for each large customer $ 6,440
Total annual variable cost for all large customers 2x 6,440= $12,880 …3
Adding steps 1, 2 and 3 give us the Annual variable cost for all customers:
Total Annual variable cost for all customers $108,640

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Analysis:

There are big differences between the current situation, annual cost and the optimum

one, 108,640 and 52,092 respectively.

Third: full Truck Load of multiple shipments for different customers:

Katy Leung the recently employed supply chain manager at NAN decided to

review the current operations for possible cost savings .She is studying the

possibility to include multiple shipments for different customers on a single

truckload.

Input data:

Fixed truck cost $ 350

Drop off location cost $ 50

Holding cost = 0.25 x $ 1 $ 0.25

Total annual demand for all customers D 864,000

Total number of customers 20

Total Truck cost= Fixed Truck cost + (number of customers*Drop off cost)

Truck cost S* = 350 + (20x 50) = $ 1350

Total annual demand =12x12,000 + 6x72,000 + 2x144,000=864,000

Actual number of orders N = D/ Q = 864,000/40,000 = 21.6

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Thus if each delivery (truck) include mixed orders for the 20 customers, Katy Leung

should place 21.6 orders each year. Since each order costs a total of $1350 then:

Annual order cost = 21.6 x $1350 = $ 29,160 for all customers

Each truck will hold:

- Small customers: Q=D/N = (12x 12000)/ 21.6 = 6,666.66 liters

- Medium customers: Q = (6x72000)/ 21.6 = 20,000 liters

- Large customers: Q= (2x144000)/ 21.6 = 13,333.33 liters

Lot sizes and costs for joint distribution at NAN

Small Medium Large

customers customers Customers

Demand D 144,000 432,000 288,000

Number of orders N 21.6/year 21.6/year 21.6/year

order quantity D/N 6,666.66 20,000 13,333.33

Cycle inventory Q/2 3,333.33 10,000 6,666.67

Annual holding cost H.Q/2 833.33 2,500 1,666.67

Total Annual holding cost $ 5,000 (833.3+2,500+1,666.67)

Total Annual ordering cost $29,160

Total Annual cost for joint distribution:5000+29,160 = $ 34,160

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Analysis:

1. We observe that with this scenario the annual cost is reduced from $ 108,640 in

the current operations to $34,160. Thus the cost is decrease about 68.6 %.

2. The reengineering of the whole process of replenishment by transferring from

sending full truck load to each customer as needed, to consolidating, add value

to NaN’s products, since one of the disadvantages in the consignments deals is

that the seller has no control over his product with the consignee.

A. In case the shipment is delivered in full truck to each customer :

The consignee could organize the ice cream shipment in fridges, so that the

new stock on top while the old ones kept down (LIFO). If the consignee keeps

doing that the products could be obsolete and this is considered as wastage

for NAN, Since NAN gets paid only after the product is consumed.

B. In case of delivering one shipment to different customers “consolidated “:

 The product will be delivered in smaller quantity; this will prevent the

obsolescence of inventory.

 The product will be delivered more frequently ; this will give the following
advantages:

a) It will provide NAN with clear visibility about their product consumption which will

help them to be proactive by analyzing trends and segmenting customers

according to their preferences.

b) Inventory holding cost decreases since the inventory in consignee decreases.

c) The product will be more tasty as it is more fresh, adding more value to

customers.

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Conclusion:

The cost advantage of a Consolidation strategy is measured as the difference between

total logistics cost when independent reorder strategy is used versus a consolidation

strategy. Consolidation strategy which takes into account both transportation and

inventory costs definitely can reduce the total logistics cost, yet this cost reduction must

be compared to those administrative costs of establishing and monitoring the

Consolidation strategy(Buffa, 1988).

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References:

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4. Campean, E., Morar, L., Blaga, L., Pap, S. & Gelmereanu, C. 2013, "Raw Material
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[4] Campean, E., Morar, L., Blaga, L., Pap, S. & Gelmereanu, , "Raw Material Stock Analysis in a Supply Chain,"
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[5] "Impact of consignment inventory and vendor-managed," Int. J. Production Economics 113 (2008) 502–517, 13
February 2008.

[6] "newzealandnatural," [Online]. Available: http://www.newzealandnatural.com.

[7] F. P. Buffa, "INBOUND CONSOLIDATION STRATEGY: THE EFFECT OF INVENTORY COST RATE CHANGE,"
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