LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 1(8)

UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

LLSMS2033
EXAMEN 21.08.2013

Professors: Per AGRELL UCL/LSM/POMS

Fouad RIANE UCL/LSM/POMS

Result :
Question 1 2 Total
Score
Total 50 50 100

INSTRUCTIONS
1. Write your name on each submitted page.
2. Do not unstaple the exam paper.
3. Only answer one question per page.
4. Read all questions carefully.
5. Explain any introduced assumptions.
6. All responses have to be motivated.
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 2(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

QUESTION 1 50 p

Philip Morris International (PMI) is one of the world’s leading tobacco companies. It holds about
15% of the international cigarette market share and employs about 40,000 people worldwide.
Cigarettes are produced in more than 50 factories around the world and sold in over 160
countries. The PMI Baltic (PMB), is responsible for the distribution of final products in the Baltic
states (ES, LT, LV). PMB disposes of one production facility in Klaipeda, Lithuania (LT), tax
exempt warehouses in ES, LT, LV and sales offices and distribution centers in all countries.
Today Klaipeda factory employs about 600 people and operates 7 days a week, 24 hours a day
in a 4 shifts mode, providing an annual capacity of 24,000 million (M) cigarettes. The production
serves both the regional demand (see Fig 1) of 4,800 M cigarettes and sources 75% of the
products for PMI world wide duty-free business (19,000 M cigarettes, 350 SKUs).

All finished products for export are sold to Philip Morris World Trade (PMWT) organization and
shipped from Klaipeda factory to the central warehouse, dedicated only for WWDF products
and located in Hamburg, Germany. The warehouse is operated by an external logistics provider.
From the Hamburg warehouse PMWT distributes the cigarettes to its customers, located all
over the world. There are more than 300 customers worldwide, located in 140 different
markets. The majority of brands are produced every month. Export cigarettes from PMB are
shipped immediately by sea (ferry) and the shipping time is one week due to customs
preparations and irregular ferry schedules. The delivery lead time is quite variable due to the
sensitivity to weather conditions.

Finished products for regional demand are transported to the factory warehouse where the
products are shipped by truck, according to the Sales order, to the respective distribution
center. Within the transportation lead time, the goods arrive at the market distribution center
and are ready for being commissioned for the dispatch to the customer. Due to high volume and
limited factory warehouse capabilities no cycle stock can be held. Due to tax rules, the
cigarettes must be delivered and declared to the tax exempt warehouse in each market prior to
distribution to clients. The delivery lead time is one day.
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 3(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

(SOM, %) (SOM, %)
80 PM 45
76.5
(left axis) 40

35
60
52.3 30

25

40 18.4 20
JTI 14.5
15
9.5
ST 7.4 10
20
7.6
6.7 5
4.1 BAT
0
0.4 Gallaher
0 -5
3

5
04

04

05

05
3

5
3

5
-0

-0

-0
-0

-0

-0
-0

-0
-0

-0

-0
b-

n-

b-

n-
ug

ug

ug
ct

ct

ct
pr

pr
ec

ec

ec
Fe

Ju

Fe

Ju
O

O
A

A
A

D
Source: AC Nielsen

Figure 1 Market share cigarettes in the Baltic States, Philip Morris (PM)

The challenge for PMI is to address parallel import of counterfeit and untaxed cigarettes. The
current decline in local market share is mainly due to this effect, as well as a decline of the
demand for early local products.
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 4(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

a) Classify the Philip Morris supply chain in terms of current strategic positioning
(market, products, processes, supply chain)
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 5(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

b) What are the challenges in the current supply chain structure in terms of
profitability, time and safety stock?
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 6(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

c) Currently, the road and rail system in Poland is characterized by long travel times
(poor rail infrastructure, few motorways, distances necessitate changeover of
drivers and train engines), damages, theft and pilferage in transit. However, a TPL
has suggested to transport the cigarettes for export per car ferry to Sweden and
then by road to Hamburg. Evaluate the consequences of this proposal from a
supply-chain viewpoint.
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 7(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog:

QUESTION 2 50 p

A supply chain consists of factories i = 1,…,I serving clients k = 1,…,K through a network of
warehouses j = 1,…,J. The transport from the factories to the warehouses is made by railway,
whereas the outbound distribution is made by trucks. The transportation cost between factory i and
warehouse j is known as cij [EUR/ton] and hjk [EUR/ton] between warehouse j and client k,
respectively. The fixed annual cost for warehouse j is denoted by fj [EUR]. There exists a reliable
demand forecast Dk [ton] for each client k.

A consultant proposes the following mathematical model for the strategic supply chain planning:

a) A consultant proposes the use of a P-median model for the optimization. What exactly
is this, how does it work and is it applicable to the problem above ?

b) Develop a mixed-integer linear programming model for the problem above, explaining
each each part and constraint.

c) Amend the mathematical model above for the case where the factories and warehouses
have limited capacities [ton/year]. Introduce necessary variables and modifications of
constraints and/or the objective function.

d) Extend the model above (without any change in subquestion b) for the case where
clients are situated in different countries (or customs unions, e.g. the EU). Assume that
you have P countries and that each client k belongs to one and only one country p. The
tax to pay when importing to country p from any other country is ap [EUR/ton].
Introduce necessary variables and modifications of constraints and/or the objective
function.
LLSMS2033 INTERNATIONAL SUPPLY CHAIN MANAGEMENT 8(8)
UCL/LSM/POMS/AGRELL-RIANE 21.08.2013
Name: Prog: