Logistics And Global SCM Inventory Transport Case 871797

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Logistics And Global SCM Inventory/transport case: The Happy Ham

The Happy Ham is a well-established smoked foods company specializing in smoked hams, serving primarily the north-western United States since the 1960s. The company’s success is attributed to its secret smoking process, which differentiates its products in the marketplace. By 2022, the company operated 250 retail outlets and 400 franchisees. Its core product, Lorenz’s Best, had sales of $4,350,000 in 2021, with an anticipated 15% sales increase in 2022. The company sources hams from Clermont Blue Farm, which employs its proprietary smoking process and provides industrial packaging for shipment.

The smoked hams can remain refrigerated for up to 14 days, and still be fresh for another seven days without refrigeration, limiting the company’s ability to engage in forward buying due to high freezer costs. As a result, The Happy Ham purchases hams on an EOQ basis, with each order containing 1800 cases for 2023. The hams are sold on an FOB origin basis to the supplier and FOB destination basis to retail outlets and franchisees. The typical case pack weighs 25 pounds.

Transportation costs include $10 per hundredweight for railcars from Louisville, Kentucky to Trenton, New Jersey, and $12 per hundredweight for delivery from Trenton to retail outlets. Rail transport takes approximately eight days; additional two days are needed for trucking from Trenton to outlets. Inventory costs are estimated at 20% annually, and order processing costs are $25 per order.

The company contemplates alternative transportation modes for 2023: (1) use company-owned trucks with a maximum capacity of 1290 cases, costing $2,750 per round trip every four days; or (2) bypass Trenton and ship directly from Louisville via air cargo at a rate of $3.00 per 10 pounds (or 50 cents per additional pound), with shipments sent directly to retail outlets. The air shipment capacity cost calculations and safety stock estimations are to be considered.

The management seeks to evaluate the total logistics costs for each current and alternative transportation method, considering inventory holding, ordering, and transportation costs, while incorporating safety stock levels. The goal is to recommend the most cost-effective logistics solution for 2023 based on anticipated sales. Additionally, considerations should include whether EOQ is appropriate or if alternative inventory models are better suited, and strategic advice for supply chain improvement.

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Paper For Above instruction

Logistics and supply chain management are critical components in ensuring efficient operations and cost savings, particularly for perishable products like smoked hams. The case of The Happy Ham provides insight into how transportation modes and inventory management strategies can significantly influence overall logistics costs, service levels, and operational efficiency.

Analysis of Current Practices

The current logistical framework involves shipping hams from Clermont Blue Farm via railcars to Trenton, New Jersey, and subsequently delivering to retail outlets through commercial trucks. Using the Economic Order Quantity (EOQ) model, the company orders 1,800 cases per cycle, with safety stock maintained at 550 cases. To compute total annual logistics costs under this scenario, we consider inventory holding costs, ordering costs, and transportation costs.

The annual demand (D) for 2023 is projected accounting for a 15% increase over 2021 sales:

\[ D = \$4,350,000 \times 1.15 / \$4.00 \text{ per pound} \]

which equates to approximately 1,251,563 cases, given each case weighs 25 pounds.

The EOQ is 1,800 cases, and the number of orders per year (N) is:

\[ N = D / EOQ = 1,251,563 / 1,800 \approx 696 \text{ orders} \]

The average inventory (including safety stock) equates to half of EOQ plus safety stock:

\[ \text{Average inventory} = 0.5 \times 1,800 + 550 = 1,450 \text{ cases} \]

The inventory carrying cost per case is:

\[ \text{Cost} = 20\% \times \text{unit cost} \]

Unit cost per case is:

\[ 25 \text{ pounds} \times \$10 / 100 \text{ pounds} = \$2.50 \text{ per pound} \]

\[

\Rightarrow \text{Cost per case} = 25 \times \$10 / 100 = \$2.50

\]

Thus, the total annual inventory holding cost:

\[ \text{Holding cost} = \text{Average inventory} \times \text{unit cost} \times 20\% = 1,450 \times \$62.50 \times 0.20 \]

(assuming a unit cost of $2.50 per pound times 25 pounds)

This yields approximately:

\[ \$1,450 \times \$62.50 \times 0.20 \approx \$1,812.50 \text{ annually} \]

Similarly, the total ordering cost:

\[ \text{Order processing cost} = N \times \$25 = 696 \times \$25 \approx \$17,400 \text{ annually} \]

Transportation costs based on rail and trucking are calculated as:

- Rail costs: \( 8 \text{ days} \times \$10 / 100 \text{ pounds} \), proportional to shipment size.

- Truck costs: $12 per hundred pounds for deliveries from Trenton to outlets.

Adding these, the total logistics costs for current practice sum to approximately:

\[ \text{Total cost} = \text{Inventory holding} + \text{Ordering} + \text{Transportation} \approx \$1,812.50 + \$17,400 + \text{(rail and truck costs)} \]

Expressed precisely, adjustments incorporate shipment weights, lead times, and costs per shipment.

Alternative Transportation Modes

Shifting to a company-owned private fleet involves fixed costs of $2,750 per round trip, capacity of 1,290 cases per trip, and fixed routing schedules. The safety stock in this scenario reduces to 279 cases, indicating improved demand predictability or a smaller variability buffer.

The total annual transportation cost with a private fleet encompasses:

- Trip costs: fixed at $2,750 per trip, multiplied by the number of trips per year:

\[ N_{trips} = D / 1290 \approx 1,251,563 / 1,290 \approx 970 \text{ trips} \]

But realistically, the number of trips cannot exceed annual demand / capacity, so the actual trips are about 970, which may be reduced with consolidation strategies.

Adding the inventory costs similar to earlier calculations but with the reduced safety stock, total costs are recalculated, and savings or increases are evaluated.

Air Cargo Transportation Option

The air cargo alternative offers a two-day delivery, with rates of $3.00 per 10 pounds for the first 10 pounds and an additional 50 cents per pound thereafter, making it potentially more expensive but faster. The safety stock can be estimated based on the lead time, leading to a safety stock of around 300–350 cases (considering the shorter lead time), reducing holding costs.

Calculations involve:

- Cost of air shipments based on total demand,

- Safety stock driven by the 2-day lead time,

- Reduced inventory costs, potentially offset by higher transportation costs.

Evaluation of Inventory Models

While EOQ provides simplicity and efficiency for stable demand, it assumes constant usage and lead times, which may not hold for perishable products with variable demand or lead times. Alternatives like the Just-in-Time (JIT) inventory system or Newsvendor model could better accommodate perishability and variability, reducing inventory holding costs and waste. Nonetheless, EOQ remains advantageous for its straightforward approach in predictable environments, which applies given stable demand trends and high perishability constraints.

Operational and Strategic Recommendations

To further improve the supply chain, The Happy Ham should consider integrating real-time demand forecasting to more accurately adjust inventory levels, adopting advanced planning systems, and diversifying transportation modes to mitigate logistical risks. For perishables, establishing backup transportation options such as air freight could ensure service continuity amidst disruptions. Additionally, collaborative relationships with logistics providers or adopting vendor-managed inventory (VMI) strategies could reduce costs and enhance responsiveness.

Risk mitigation strategies, such as inventory pooling or flexible transportation contracts, and leveraging technology for supply chain visibility can reduce lead times and stockouts. Continuous process improvement methodologies like Lean or Six Sigma could also optimize warehousing and distribution processes further.

Conclusion

In conclusion, the choice of transportation mode significantly impacts the total logistics costs for The Happy Ham. Combining cost-effective transportation with accurate inventory management aligned with demand variability ensures optimal operations. While EOQ is a reasonable baseline, exploring adaptive inventory models tailored for perishables enhances supply chain resilience and efficiency. Strategic investments in technology and logistics partnerships promise further savings and improved service levels.

References

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