Delivery Strategy at

Supply Chain Management ( IE 659)

Professor – Dr. Sanchoy K. Das

Case Study Project Team 6: Mirjam Milsch

Gaurav Majumdar
Karthigeyan Machendran
Henry Mensah
Overview p.
1) Introduction of Moonchem 3
2) Problem Overview 4
3) Questions 5
4) Solution Strategy & Illinois Pilot Study 6
5) Operational Data 8
5.1) Moonchem’s Existing Distribution Strategy 9
5.2) Alternative 1: “No Aggregation” Model 11
5.3) Alternative 2: “Complete Aggregation” Model 13
5.4) Alternative 3: “Tailored Aggregation” Model 15
6) Inference & Recommendation 17
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1) Introduction of Moonchem
 Moon Chemical Co. Ltd. (Moonchem) established in 1996 in Yangzhou, China

 Leading manufacturer of :

 a) Industrial Chemicals,

 b) Specialty Chemicals (e.g. Cosmetic Chemicals),

 c) Food Additives,

 d) Pharmaceutical Chemicals etc.

 8 Manufacturing Plants & 40 Distribution Centers worldwide.

 In the Specialty Chemicals market, Moonchem has differentiated the US Midwest

Region for trying out a new concept of “Consignment Inventory”

 If found to be profitable, Moonchem plans to launch it on a national level.

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2) Problem Overview
 Moonchem’s Year-end Business Review reveals the new inventory strategy of
“Consignment Inventory” has achieved a low Inventory Turnover Ratio (ITR) of 2,
in spite of having a stable Product Demand from the Customers.
 Over 50% of Moonchem’s Inventory has been classified as “Consignment
Inventory”.
 However, only 20% of their total number of customers use Consignment Inventory.

 Mr. John Kresge, VP of Supply Chain Department, decided to look how

Consignment Inventory is being managed and to come up with an appropriate plan
to increase the ITR value.

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3) Questions
1) What is the current Annual Cost of Moonchem’s
Strategy of sending full truckloads to each customer in
the Peoria region to replenish consignment inventory?

2) Consider different delivery options and evaluate the

costs of each. What delivery option do you recommend
for Moonchem?

3) How does your recommendation impact consignment

for Moonchem?

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4) Solution Strategy
 ITR = (Annual Sales Value of Goods Sold) / (Average Inventory Value)

 Moonchem can’t directly influence the demand from its customers

 But it can decrease the Average Inventory value by decreasing :

 Cycle Inventory

 subsequently the Total Annual Costs incurred.

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4) Illinois Pilot Study
 A pilot study is conducted by Moonchem in
Illinois State in the Peoria region (as marked in
the map) for the consignment inventory
distribution strategy analysis. The resulting
analysis is tabulated below.

Customer Type Number of Total

Customers Consumption
(lb/month)
Small 12 1000
Medium 6 5000
Large 2 12000

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5) Operational Data
 Logistics Contractor: Golden Trucking
 Truck Capacity: 40,000 lbs

Full Truckload, Single Full Truckload, Multiple

Customer Drop-off Customers Drop-off
Transportation Cost $ 400/truck $350/truck + $50/ drop-off

 Holding Cost (h) = 25% = 0.25

 Unit Cost (CS=CM=CL)= $ 1 / lb

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5.1) Moonchem’s Existing Distribution Strategy
 Moonchem sends FULL TRUCKLOADS to each customer, irrespective of the
customer type.

 QS = QM= QL= 40,000 lbs

 Order Frequency, n = D / Q
 Annual Holding Cost, AHC = (Cycle Inventory) *h*C = (Q/2)*h*C
 Annual Ordering Cost, AOC = (D / Q) * S
 Total Annual Cost, TC = AHC + AOC

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5.1) Moonchem’s Existing Distribution Strategy

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5.2) Alternative 1 – “No Aggregation” Model
 The products are delivered independently to each type of customer on a “Just-in-
Time” basis where the Optimal Order Quantity for each type of customer is
predicted using the basic EOQ Inventory Model.

 Q* = √[(2*D*S)/(h*C)]
 n = D / Q*
 Annual Holding Cost, AHC = (Cycle Inventory) *h*C = (Q*/2)*h*C
 Annual Ordering Cost, AOC = (D / Q*) * S
 Total Annual Cost, TC = AHC + AOC

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5.2) Alternative 1 – “No Aggregation” Model

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5.3) Alternative 2 – “Complete Aggregation” Model
 Products for each type of customer being delivered jointly in each truck.

 Product Specific Order Costs, sL=sM=sS=$50

 Combined Fixed Order Cost per Order (S*) =

S + sL + sM + sS = $ 350 + $50 + $50 + $50 = $ 500

 n* = √[(DLhCL+ DMhCM+ DShCS)/2S*]

 QL = DL/(n*) QM = DM/n* QS = DS/n*

 AHC = (QL /2)*h*CL+(QM /2)*h*CM+(QS/2)*h*CS

 AOC = (n*)*(S*)

 TC = AHC + AOC
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5.3) Alternative 2 – “Complete Aggregation” Model

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5.4) Alternative 3 – “Tailored Aggregation” Model
 Products are delivered jointly for a selected subset of type of customers.
 Step 1: The type of Customer with the highest Ordering Frequency is identified.
 Step 2: Ordering Frequency of other types of customers are identified as a multiple.
 Step 3: Ordering frequency of the type of customer placing the most frequent orders
are recalculated.
 Step 4: Ordering frequency of all types of customers are identified

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5.4) Alternative 3 – “Tailored Aggregation” Model

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6) Inference & Recommendation

$70,000

$60,000

$50,000

$40,000

$30,000 Total Costs

Total Cycle Inventory
$20,000

$10,000

$0
Existing No Complete Tailored
Distribution Aggregation Aggregation Aggregation
Strategy Model Model Model

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6) Inference & Recommendation

 “Complete Aggregation” Model is the most suitable Distribution Strategy which

Moonchem should implement.

 It would result in a 57.18% reduction in Total Costs and 75.5% reduction in the
Total Cycle Inventory, which would in turn result in a higher ITR for
Moonchem in the long run.

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 THANK YOU
FOR YOUR ATTENTION!
QUESTIONS ?

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