Major Alternative Configurations of Delivery Products - Case Study Example

Report: Agnew Cheese Company Ltd Table of Contents: Executive summary …………………………………………………………………………...2 Introduction …………………………………………………………………………………...3 Scenario 1: Shipment via Grangemouth to Zeebrugge warehourse (Belgium) ………………4 Scenario 2: Direct delivery from Harwich via Hoek of Holland (Euro Direct) ………………5 Scenario 3: Direct delivery from Stranraer via Hull ferry service (Ace Transport) ………….6 Scenario 4: Direct delivery from Stranaer via Rosyth ferry service (Ace Transport) ………..7 Scenario 5: Railfreight delivery from Grandemouth to Harwich (TDG)…............................. 8 Scenario 6: Direct inter-modal delivery via the Channel tunnel and via rail freight terminal close to Rotterdam (TDG) …………………………….………….…………………………...9 Conclusion and recommendations ………………………………….……………………….10 Appendix …………………………………………………………………………………….11 Executive Summary: There was carried out a comparative analysis of the major alternative configurations of delivery products manufactured by Agnew Cheese Company Ltd and exported to the Benelux market. Below is provided a summary table of findings related to the logistics costs and estimated time resources required for each scenario. The summary table is visually supported with graphic representation. Scenario Total cost (£)/26 pallet loads Total cost (£)/20 pallet loads Time reuirements (hours) 1 1293,6 1131 60-264 2 1195,8 956 25 3 1194,15 953,15 23 4 1139,15 910,15 21 5 1817,66 1398,2 27 6 1424,8 1296 27 Table 1. A summary table of logistics costs and estimated time resources required for each scenario Graph 1. Comparative graph of Logistics Costs for various scenarios Based on the interaction analysis between the different distribution costs and how they vary with respect to the different alternatives (vehicle type, time, number, size, location) and logistics cost estimates there was made a recommendation to choose scenario 4: Direct delivery from Stranaer via Rosyth ferry service (Ace Transport). This option provides the lowest logistics costs for both delivery sizes: 26 pallet loads and 20. In addition to this, Stranaer via Rosyth ferry service by Ace Transport allows Agnew Cheese Company Ltd to reduce lead times to 21 hours and gain competitive advantage on the Benelux market. Report: Agnew Cheese Company Ltd To: Senior Management Team at Agnew Cheese Company Ltd From: Consultant Subject: Review of the alternative arrangements for the delivery of Agnew Cheese products to the Benelux market Date: November 12, 2013 Introductory statement: The purpose of this report is to provide the senior management of Agnew Cheese Company Ltd with a comparative analysis of the major alternative configurations of delivery its products to the Benelux market. Based on the interaction analysis between the different distribution costs and how they vary with respect to the different alternatives (vehicle type, time, number, size, location) and logistics cost estimates (Rushton et al, 2004, 120) will be given the final recommendations. There are reviewed 6 different scenarios (the current one is included): Scenario 1: Shipment via Grangemouth to Zeebrugge warehourse (Belgium) Scenario 2: Direct delivery from Harwich via Hoek of Holland (Euro Direct) Scenario 3: Direct delivery from Stranraer via Hull ferry service (Ace Transport) Scenario 4: Direct delivery from Stranaer via Rosyth ferry service (Ace Transport) Scenario 5: Railfreight delivery from Grandemouth to Harwich (TDG) Scenario 6: Direct inter-modal delivery via the Channel tunnel and via rail freight terminal close to Rotterdam (TDG) Scenario 1: Shipment via Grangemouth to Zeebrugge warehourse (Belgium) This scheme is currently used by the company, but is considered to be not feasible anymore. Agnew Cheese Company Ltd uses selective distribution strategy focusing its distribution of their products in selected location – Benelux market (Browne 2013, 13). The data below provides a breakdown of total logistics costs and time resources, and serves as a benchmark for further analysis. If to consider reduction of order sizes to 20 pallet loads, “shipment will not fill a container and will require to be consolidated with other Less than Container Load (LCL) in order to economically fill a shipping container” (Rushton et al, 2004, 354). The concept of LCL was taken into consideration while calculating the container/trailer/wagon capacity.   Cost (£)/26 pallet loads Cost (£)/20 pallet loads Time Delivery from Stranraer factory to Grangemouth 0 (uplift included) 0 12-24 hours Shipment from Grangemouth to Zeebrugge 680 520 (26*20) 39 hours Warehousing cost per day (in Harwich) 236,6 (9,10*26) 182 (9,10*20) 4-8 days Delivery from Zeebrugge warehouse to final customers 377 ((14 + 5%)*26) 429 ((16 + 5%)*26) n/a Total 1293,6 1131 2,5 -11 days Pros: Distribution rate is much lower than the average market rate Taking into consideration that average distribution rate in Europe is approximately 6% of the cost of the product, for Agnew Cheese Company Ltd it would be £45/pallet (6% of £750), the distribution rates of current operator of the Zeeburge warehouse are very low even after 5% price increase. Cons: No lead time reduction opportunity is available Schedule of the ship from Grangemouth to Zeeburge with periodicity of every 2 days and 39 hours of transit time makes impossible to reduce lead times to 24 hours as it is practiced in other sectors of the market among manufacturers. Additional warehousing costs: Recent tendency of keeping products in storage for 4-8 days leads to additional costs (£36,4-£72,8/pallet). This might impose additional risks for the company. As for using sea vehicle for transportation, it is necessary to consider such supply chain risks as: risk of delay and risk of disruptions, especially if the company operates on DDP basis (Panayides & Song 2012). Scenario 2: Direct delivery from Harwich via Hoek of Holland (Euro Direct) Euro Direct, based at Harwich charges a very competitive backhaul rates, provides delivery service from European hauliers, returning empty on the Ro-Ro ferry service from Harwick to Hoek of Holland. Below is presented breakdown of the offer of a distribution contractor Euro Direct. Note on assumptions made: For calculating delivery costs from Stranraer factory to Harwick warehouse was used the basic rate of Ace Transport. For calculation cost of delivery/pallet it is assumed that a trailer payload is 26 pallets. Therefore, the cost per pallet is £22, 19 and the cost per 20 pallet loads is £440.   Cost (£)/26 pallet loads Cost (£)/20 pallet loads Time Delivery from Stranraer factory to Harwick warehouse (assumption based on Ace Transport rates) 577/trailer 440 13 hours Delivery from Harwick via Hoek (Holland) to final customers 442 (17*26) 380 (19*20) 12 hours Warehousing cost per day (in Stranraer) 176,8 (6,80*26) 136 (6,80*20) - Total 1195,8 956 25 hours Pros: Lead time reduction opportunity Four Ro-Ro ferry sailings per day between Harwick and Hoek at regular intervals throughout nights and days allows Agnew Cheese Company Ltd to decrease lead times and thus be competitive on the market. Easily adjustable costs to the number of pallet loads No storage costs due to direct delivery of the products to the final customers Decreased warehousing costs Direct delivery to the final customers Centralization of finished inventory on the Stranraer site leads to significantly decreased warehousing costs. Cons: The minimum time of delivery is 25 hours; this lead times does not provide senior management with lead times reduction opportunities Scenario 3: Direct delivery from Stranraer via Hull ferry service (Ace Transport) In case of establishing warehouse of finished inventory on the Stranraer site it is necessary to consider transportation costs for a driver accompanied by lorry. One of the options is to use the daily overnight Hull-Rotterdam fast ferry service provided by Ace Transport. Below is presented breakdown of their offer. Note on assumptions made: For calculation cost of delivery/pallet there is made an assumption that a trailer payload is 26 pallets. Therefore, the cost per pallet is £40, 15 and the cost per 20 pallet loads is £803.   Cost (£)/26 pallet loads Cost (£)/20 pallet loads Time Direct delivery from Stranraer factory to final via Hull Ro-Ro 1044/trailer 803 23 hours Warehousing cost per day (in Stranraer) (+10% of capital ccost) 150,15 (5,775*26) 150,15 (5,775*26) n/a Total 1194,15 953,15 23 hours Pros: Relatively low cost estimate for delivery of reduced sizes to 20 pallet loads Centralization of finished inventory on the Stranraer site leads to significantly decreased warehousing costs Time of delivery enables the company to meet 24 hours lead times Cost and time estimates perfectly fit to the senior management requirements Cons: While considering the option of refusing from warehouse outsourcing function and locating warehouse centre on the Stranraer site it is necessary to build necessary infrastructure, which may be both cost and time consuming (Donath 2002). Scenario 4: Direct delivery from Stranaer via Rosyth ferry service (Ace Transport) One of the other options is to use the daily high speed Rosyth Ro-Ro overnight ferry service also provided by Ace Transport. In case of establishing warehouse of finished inventory on the Stranraer site it is necessary to consider transportation costs for driver accompanied by lorry. These costs should be based on the following indicators: value to the customer; weight, value and size of the products; the distance moved; complexity of journey, etc. (Waters 2003, 309). Note on assumptions made: For calculation cost of delivery/pallet it was assumed that a trailer payload is 26 pallets. Therefore, the cost per pallet is £38,00 and the cost per 20 pallet loads is £760.   Cost (£)/26 pallet loads Cost (£)/20 pallet loads Time Direct delivery from Stranraer factory to final via Hull Ro-Ro 989/trailer 760 21 hours Warehousing cost per day (in Stranraer) (+10% of capital ccost) 150,15 (5,775*26) 150,15 (5,775*26) n/a Total 1139,15 910,15 21 hours Pros: Cost of delivery for 20 pallet loads is the lowest among all other scenarios. While, the difference might seem to be not significant, the saving will be impressive if to calculate yearly sales of the product. Centralization of finished inventory on the Stranraer site leads to significantly decreased warehousing costs (£ 70,000 per annum in sales and inventory administration costs on sales distributed to the Benelux market) Time of delivery enables the company to meet 24 hours lead times, having 3 additional hours in store Cons: There are no obvious cons for this scenario. However, there is always risk in a supply chain when unexpected events might disrupt the flow of materials on their journey from initial suppliers through to final customers (Waters et all 2011, 7). As Agnew Cheese Company Ltd operates on the Delivered duty paid basis (DDP) it means that it pays for all transportation costs and bears all risk until the goods have been delivered to their destination and all applicable duties have been paid (Turner 2011, 250). Scenario 5: Railfreight delivery from Grandemouth to Harwich (TDG) An offer of TDG, railfreight services provider, is based on a transportation of Angnew Cheese products in conventional 44 pallet capacity rail wagons from a rail freight terminal in Grandemouth to Harwick. If wagon payload is 44 pallets, the cost per pallet is £18,11; the cost per 26 pallet loads is 470,86 and the cost per 20 pallet loads is £362,2. Note on assumptions made: As there was not specified time of delivery from Stranraer factory to Grandemouth it was assumed that minimum it would take 12 hours for delivery (based on the background information on existing logistics model) Distribution costs from Harwick to final consumer is based on the assumption of the average distribution price in Europe – £45/pallet Cons: Minimum/maximum order size requirement Minimum delivery policy of 4 wagons/daily (or 176 pallets) and maximum of 8 wagons/daily (or 352 pallets) imposes certain limitations and risks for the Agnew Cheese Company Ltd. Referring to the background information, the average of 12 container loads of powder (312 pallets), but during the past year it varied from 5 container loads (130 pallets) to a 17 container loads per day (442). If the container loads are not fixed, there are high risks of not meeting minimum/maximum order size requirement. Train service from Grandemouth to Harwick is provided only from Monday to Friday. This automatically incurs warehouse cost in Harwick and makes company to keep more products in stock in order to ensure its delivery to the final customer within 24 hours. In order to ensure enough stock in Harwick it would be necessary to transport more products on Thursday (or spread additional stock from Monday to Thursday). This scheme increases a risk of exceeding maximum of 8wagons/daily. While transporting food products it is critical to ensure that temperature is controlled on each stage of the supply chain (Sparks & Fernie 2009). Scenario 6: Direct inter-modal delivery via the Channel tunnel and via rail freight terminal close to Rotterdam (TDG) Analysis of the offer of TDG, based on a direct transportation to Beneux customers via the Channel Tunnel railfreight services and then via a rail freight terminal near the Rotterdam is also presented below in the table. Note on assumptions made: For this scenario, time of delivery from Stranraer factory to Grandemouth also is an assumption based on the minimum of 12 hours for delivery (based on the background information on existing logistics model).   Cost (£)/26 pallet loads Cost (£)/20 pallet loads Time Delivery from Stranraer factory to Grandemouth 0 (included in 0 12 hours Delivery from Grandemouth to to the rail freight terminal near Rotterdam 1248 (48*26) 1160 (58*20) 15 hours Warehousing cost per day (in Harwick) 176,8 (6,80*26) 136 (6,80*20) n/a Total 1424,8 1296 27 hours Pros: Rail freight has a greater chance of being profitable if longer distances and full trainloads  are involved (Rushton et al 2000, 360). All rates include uplift from Stranraer factory and any transhipment charges Cons: Extremely high delivery costs Very high delivery costs, almost no difference in transporting 26 pallet loads vs 20. No delivery during the weekend the same as in Scenario 5 imposes a risk of availability of enough goods in stock in Harwick, and thus increases warehousing costs in Harwick. The Channel Tunnel Island Unknown reliability of the Channel Tunnel Island. It might have political and/or military importance (Wood 2002). Conclusion and recommendations: The logistics strategy supports the business strategy (Shamim 2009, 257). As the business strategy of Agnew Cheese Company Ltd is to deliver its products to the customers within 24 hours lead times and move to smaller order quantities, the logistics strategy should be chosen according to these criteria. Choosing the most suitable transportation vehicle and port or entry can make a big difference in landed costs (Cook and Amacom 2007, 41). After detailed review and cost estimate analysis of 6 alternative logistics arrangements there was made a recommendation to choose scenario 4: Direct delivery from Stranaer via Rosyth ferry service (Ace Transport). This option provides the lowest logistics costs for both delivery sizes: 26 pallet loads (per £1139, 15) and 20 pallet loads (per £ 910,15) among 5 other alternative options. In addition to this, Stranaer via Rosyth ferry service by Ace Transport allows Agnew Cheese Company Ltd to reduce lead times to 21 hours and gain competitive advantage on the Benelux market. There were not identified some notable factors or risks that might negatively impact on the logistics process. Appendix Scenario Total cost (£)/26 pallet loads Total cost (£)/20 pallet loads Time reuirements (hours) 1 1293,6 1131 60-264 2 1195,8 956 25 3 1194,15 953,15 23 4 1139,15 910,15 21 5 1817,66 1398,2 27 6 1424,8 1296 27 Table 1. A summary table of logistics costs and estimated time resources required for each scenario Graph 1. Comparative graph of Logistics Costs for various scenarios Map 2: Harwick – Hoek of Holland route References: Browne, T 2013, Everything You Need To Know About Distribution And Logistics Management, [S.l.]: BrainMass Inc, eBook Collection (EBSCOhost), EBSCOhost, viewed 12 November 2013. Cook, T, & Amacom 2007, Global Sourcing Logistics : How To Manage Risk And Gain Competitive Advantage In A Worldwide Marketplace, New York, N.Y.: AMACOM, eBook Collection (EBSCOhost), EBSCOhost, viewed 12 November 2013. Donath, B, & Institute of Management &, A 2002, The IOMA Handbook Of Logistics And Inventory Management, New York: J. Wiley and Sons, eBook Collection (EBSCOhost), EBSCOhost, viewed 12 November 2013. Panayides, P, & Song, D 2012, Maritime Logistics : Contemporary Issues, Bingley, U.K.: Emerald, eBook Collection (EBSCOhost), EBSCOhost, viewed 12 November 2013. 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