Logistics And Global SCM Inventory Transport Case

Logistics And Global SCM Inventorytransport Casethe Happy Hamthe Hap

Logistics And Global SCM Inventorytransport Casethe Happy Hamthe Hap

LOGISTICS AND GLOBAL SCM INVENTORY/TRANSPORT CASE: THE HAPPY HAM The Happy Ham is a well-established smoked foods company specializing in smoked hams and has been selling its products throughout the north-western part of the continental United States since the 1960s. Initially owned and operated by Lorenz Bauer, a German immigrant and his family, the key to the company’s success lays in a secret smoking process. By 2022 the firm had 250 retail outlets and 400 franchisees. Although the company sells a variety of pork products, its competitive strength lay in one main product line, “Lorenz’s Best,” which had sales in 2021 of $4,350,000. Sales estimates for 2022 indicate a 15 percent increase over the 2021 level.

Hams are supplied by Clermont Blue Farm, who clean and smoke the hams using the patented process and provides the necessary industrial packaging for safe shipment to the retail outlets. Lorenz’s Best is sold to retail outlets for $4.00 per pound, and due to some planned promotions and better positioning in advertising, a 30 percent sales increase in 2023 is expected for the Lorenz’s Best line. The smoking process employed by The Happy Ham has some unique characteristics that clearly differentiate the company's products from those of its competitors. The smoked hams can be refrigerated for up to 14 days without spoiling and remain fresh and edible for another seven days even without refrigeration.

These features, however, do not permit the company to engage in forward buying since freezer costs are relatively high. Consequently, the company purchases hams from the Clermont, Kentucky supplier in simple economic order quantities (EOQ), which represent 1800 cases per order for 2023. The Happy Ham coordinates the remaining distribution functions. The cured and packaged hams are purchased from the supplier on an FOB origin basis and sold to the retail outlets and franchisees on an FOB destination basis. Approximately 40 percent of sales revenue in 2021 can be attributed to direct variable costs and 60 percent of these direct variable costs are estimated to be actual ham costs.

It takes an estimated eight days for railroad freezer cars to bring the smoked hams from the supplier’s factory near Louisville, Kentucky, to Trenton, New Jersey (The Happy Ham’s East Coast distribution point), and another two days on average for commercial trucks to deliver them to the various retail outlets on the East Coast. Lorenz’s Best is shipped in a case pack size of 25 pounds, and inventory carrying costs expressed as a proportion of the cost of the hams is 20 percent per annum. Order processing costs are estimated to be $25 per order. Heartland Farms pays $10 per hundred pounds shipped for the refrigerated railcars and another $12 per hundred pounds for the commercial truck shipments to stores on a daily basis.

From a logistical standpoint, management wanted to examine and evaluate alternative modes of transportation with respect to Lorenz’s Best for the planning year of 2023. Two alternatives are available: (1) the company could discontinue the use of railroad freezer cars for delivery up to Trenton and use company-owned private trucks and trailers; or (2) the company could bypass all transportation and use an air carrier service that would pick up the cases in Louisville and deliver them directly to the retail outlets served by the Trenton distribution center. This re-evaluation of transport modes was triggered by an offer from a new small aircraft company providing cargo shipping at very attractive rates: $3.00 for the first 10 pounds per case for a guaranteed two-day delivery service anywhere in the continental United States; each extra pound over 10 pounds per case was to be billed at the rate of 50 cents per pound.

The company-owned truck was expected to cost $2,750 per round-trip and had a maximum capacity of 1,290 cases of Lorenz’s Best. Each trip leg was expected to take four days. Since the shipments from the distribution center to the individual retail outlets were relatively small, it was recognized that even if the firm chose the company-owned truck option, the delivery to retailers would still involve the use of commercial trucks. Do any analysis necessary for the questions below and consider how The Happy Ham might improve its inventory management and transportation system. What do you recommend based on expected 2023 sales?

Assumptions include that total costs comprise average inventory carrying costs, inventory order processing costs, and transportation costs; that average cycle stock equals half of EOQ plus safety stock; and that the number of order cycles equals annual demand in cases divided by the EOQ.

Paper For Above instruction

Question 1: What is the total annual logistics cost of inventory and transportation associated with the current practice of shipping product by railroad freezer cars to Trenton, NJ and then by commercial trucks to retail outlets? Show your calculations. (6 points)

To determine the total logistics cost under the current practice, we need to calculate several components: inventory carrying costs, order processing costs, and transportation costs.

Step 1: Forecasted demand for 2023

• 2021 sales: $4,350,000
• Expected increase: 15%
• 2022 sales estimate: $4,350,000 * 1.15 = $5,002,500
• 2023 sales estimate: $5,002,500 * 1.30 = $6,503,250
• Demand in cases: Since Lorenz’s Best is sold at $4.00 per pound and each case is 25 pounds, then:
• 2023 demand (in pounds): $6,503,250 / $4.00 ≈ 1,625,813 pounds
• Demand in cases: 1,625,813 / 25 ≈ 65,032.52 cases (~65,033 cases)

Step 2: EOQ and safety stock

• EOQ = 1800 cases (given)
• Safety stock = 550 cases (given)

Step 3: Average inventory level

• Average inventory = (EOQ / 2) + safety stock = (1800 / 2) + 550 = 900 + 550 = 1,450 cases

Step 4: Inventory carrying costs

• Cost per case: 25 pounds * ($4 / 25 pounds) = $4
• Annual inventory cost = average inventory cost per case carrying rate
• Cost per case: $4
• Annual carrying cost = 1,450 cases $4 20% = $1,160

Step 5: Total demand in cases

• Demand: ~65,033 cases

Step 6: Number of orders per year

• Number of orders = demand / EOQ = 65,033 / 1800 ≈ 36.13 orders (~36 orders)

Step 7: Order processing costs

• Total order processing costs = number of orders processing cost = 36 $25 = $900

Step 8: Transportation costs

• Railcar transportation cost per case:
• Cost per hundred pounds = $10
• Cost per case: (25 lbs / 100 lbs) $10 = 0.25 $10 = $2.50
• Total rail transportation cost = demand cost per case = 65,033 $2.50 = $162,583

Step 9: Total logistics cost

• Total = inventory carrying costs + order processing costs + transportation costs
• = $1,160 + $900 + $162,583 = approximately $164,643

Thus, the total annual logistics cost under the current rail and trucking transportation method is approximately $164,643.

Question 2: What would the total annual logistics cost be if the company uses the private fleet option? Safety stocks under this scenario are reduced to 279 cases. Show your calculations. (6 points)

Following similar steps:

• Safety stock: 279 cases (given)
• Average inventory = (EOQ / 2) + safety stock = 900 + 279 = 1,179 cases
• Carrying cost = 1,179 cases $4 20% = $943.20
• Number of orders = 65,033 / 1800 ≈ 36 orders
• Order processing costs = 36 * $25 = $900
• Transportation costs for private fleet:
• Cost per round trip = $2,750
• Number of trips per year = total demand / truck capacity = 65,033 / 1,290 ≈ 50.45 trips (~50 trips)
• Total transportation cost = 50 trips * $2,750 = $137,500

Adding all components:

• Total logistics cost = inventory costs + order costs + transportation costs
• = $943.20 + $900 + $137,500 ≈ $139,343

Therefore, the total annual logistics cost using the private fleet option is approximately $139,343.

Question 3: What would the total annual logistics cost be if the company uses the option of shipping product by air to the retail outlets? Estimate safety stocks based on lead time, since standard deviation figures are not provided. Show your calculations. (6 points)

Given the air shipping rates:

• $3.00 per 10 pounds first weight per case
• Each over 10 pounds billed at 50 cents per pound
• Lead time: 2 days (air), plus 8 days (rail + trucking), so air is faster ($2 days) because we bypass the rail step for this calculation.

First, calculate cost per case:

• Base rate for 10 pounds: $3.00
• Additional weight: (25 - 10) pounds = 15 pounds
• Extra cost = 15 * 0.50 = $7.50
• Total air shipping cost per case = $3.00 + $7.50 = $10.50

Next, estimate safety stock based on lead time. Without standard deviation, assume safety stock as proportional to lead time. Previously, safety stocks of 550 and 279 cases were used for longer lead times; for a shorter lead time (2 days), safety stock would proportionally be lower. Using the previous safety stock of 279 cases for 10-day lead time as a basis:

• Safety stock for 2 days = (2 / 10) * 279 ≈ 56 cases

Calculations:

• Average inventory = (EOQ / 2) + safety stock = 900 + 56 = 956 cases
• Carrying cost = 956 $4 20% = $765
• Number of orders = 65,033 / 1800 ≈ 36 orders
• Order processing costs = 36 * $25 = $900
• Transportation cost = demand cost per case = 65,033 $10.50 ≈ $682,397

Summing component costs:

• Total logistics cost = inventory + order processing + transportation
• ≈ $765 + $900 + $682,397 ≈ $684,062

Thus, the total annual logistics cost if shipping by air is approximately $684,062.

Question 4: Would you consider the EOQ model most appropriate here? If not, what alternative would you suggest, and why? If yes, explain why.

The EOQ model assumes constant demand, lead times, and ordering costs, which may not fully capture the variability in actual supply chain operations, especially with perishable products like smoked hams with limited shelf life. Because the product's perishability restricts forward buying and inventory holding, and demand variability could be significant based on promotions and seasonal factors, a more flexible model such as a perishability-adjusted or dynamic inventory model could better accommodate these factors. For instance, a Newsvendor model considers perishability and demand uncertainty more explicitly, optimizing order quantities based on service levels and stockout costs, which may suit the company's needs better.

However, if demand and lead times are relatively stable, the EOQ model remains a reasonable approximation due to its simplicity and effectiveness in minimizing total costs associated with ordering and holding inventory. Its assumptions about economic order quantities are useful in defining optimal inventory levels, especially when combined with safety stocks to buffer against variability.

In sum, the choice depends on the variability in demand and perishability concerns. Given the product's limited shelf life and potential demand fluctuations, an alternative approach like the Newsvendor model could provide a more precise inventory policy, whereas EOQ is suitable if demand predictability is high.

Question 5: What other advice would you provide to The Happy Ham executives for further improving their supply chain?

To enhance the company’s supply chain, several strategies could be employed. Firstly, integrating real-time demand forecasting tools and advanced analytics can help better predict sales fluctuations, reducing excess inventory or stockouts. Implementing a just-in-time (JIT) inventory system could be especially beneficial given the product's perishability, minimizing holding costs and spoilage risks.

Second, diversification of transportation modes, including more flexible options like air freight during peak periods, can improve responsiveness and service levels. Developing strategic partnerships with multiple carriers can mitigate risks associated with transportation disruptions.

Third, optimizing inventory levels through the adoption of perishability-sensitive models like the Newsvendor model can tailor stock levels to actual demand and reduce waste. Additionally, investing in cold chain technology and monitoring systems ensures product quality during transit, reducing losses.

Furthermore, expanding the use of regional distribution centers could decrease transportation times and costs, especially for growth markets. This decentralization can improve delivery speed and inventory responsiveness.

Lastly, incorporating sustainability practices such as energy-efficient transportation and packaging innovations can reduce costs and meet consumer demand for environmentally friendly products. Overall, combining technology, flexible logistics, and demand-driven planning can significantly improve supply chain efficiency, reduce costs, and enhance customer satisfaction.

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