Case Study Project Team 6: Mirjam Milsch Gaurav Majumdar Karthigeyan Machendran Henry Mensah

Overview
1) Introduction of Moonchem 2) Problem Overview 3) Questions 4) Solution Strategy & Illinois Pilot Study 5) Operational Data 5.1) Moonchems Existing Distribution Strategy 5.2) Alternative 1: No Aggregation Model 5.3) Alternative 2: Complete Aggregation Model 5.4) Alternative 3: Tailored Aggregation Model 6) Inference & Recommendation
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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
Moonchems 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 Moonchems 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 Moonchems 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 cant 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 Customers 12 Total Consumption (lb/month) 1000

Small

Medium Large
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5000 12000
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5) Operational Data
Logistics Contractor: Golden Trucking
Truck Capacity: 40,000 lbs
Full Truckload, Single Customer Drop-off Transportation Cost $ 400/truck Full Truckload, Multiple Customers Drop-off $350/truck + $50/ drop-off

Holding Cost (h) = 25% = 0.25 Unit Cost (CS=CM=CL)= $ 1 / lb

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5.1) Moonchems 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) Moonchems 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-inTime 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 $20,000 $10,000 $0 Existing No Complete Tailored Distribution Aggregation Aggregation Aggregation Strategy Model Model Model Total Costs Total Cycle Inventory

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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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