Q1: Calculate the total relevant costs of each option for a park customer.

All the relevant costs are calculated in the attached excel sheet, given in
Appendix 1.
Cost Summary Rotterdam Zaragoza
Total Shipping Costs 530.8 0
Total Costs of Transport from Port to
Warehouse 613.2 1613.3
Total Inventory Costs 4183.0 3001.2
Total Cost of Delivery from
Warehouse to Customer 1133.3 2509.5
OVERALL COSTS 6460.3 7124.0
As shown in the cost summary sheet, the overall costs for Zaragoza come out to
be slightly higher than those of Rotterdam. The major difference is caused due
to the transportation costs from port to PLAZA. For Rotterdam these costs are
almost negligible, hence the huge difference. Also the cost of delivery from
PLAZA to customers in central Europe comes out to be higher for Zaragoza.
Reason being the fact that distance from Zaragoza to central Europe is almost
double the distance from Rotterdam to central Europe. Yet, the overall cost
difference of 664E seems to be small. Taking into consideration some of the
factors discussed in question 2, Zaragoza might just be the better option.
Calculations:
All the calculations for Economic order quantity, Reorder Point and Safety
stock are given in appendix 2.
The EOQ is calculated using the standard EOQ formula. For the formula we
take the fixed costs to be the cost that is paid at the ports for order processing.
This cost is 335 for Rotterdam and 305 for Zaragoza.
For calculating the reorder point we first calculated the average performance
time. This includes time spent by the order on port, Time spent on sea and the
delivery times from the warehouse to the customers. The total days are then
converted into years for purpose of ROP calculations.
For safety stock calculations, we have used the service level formula given in
the book. The formula used is F(K) = (1-SL)*(Q/Sd). Here Q is the order
quantity and Sd is taken in annual terms since ROP and EOQ calculations were
also performed in terms of annual figures.
Q2. How would the customer's conclusions change if the following
assumptions changed:
(i) Demand was more/less uncertain
(ii) The number of units per container changed
(iii) The service level increased
(iv) The product cost increased/decreased

Demand was more/less certain

Increase in variability in demand reflects that reorder point and safety stock will
be higher. Deviation in demand is directly proportional to safety stock (affect)
level at warehouse. This would increase inventory holding cost and then overall
cost.
Cost summary Rotterdam Zaragoza
Total shipping costs 530.8 0
Total costs of transport 613.2 1613.3
from port to warehouse
Total inventory costs 8183 5851.2
Total cost of delivery 1133.3 2509.5
from warehouse to
customer
Overall cost 10460.3 9974

The number of units per container changed

Increasing in number of units increases the overall costs. When size is increased
from 500 to 1000 these effects happen.
Cost summary Rotterdam Zaragoza
Total shipping costs 265.4 0
Total costs of transport 306.6 806.6
from port to warehouse
Total inventory costs 4183.0 3001.2
Total cost of delivery 566.7 1254.7
from warehouse to
customer
Overall cost 5321.7 5062.6
Increase in container size is suitable from Zaragoza as there is reduction in
transport cost from port to warehouse and to customer. Decrease in size could
have negative effect as it would increase the transportation cost. So customer’s
conclusion would change with the value offering.

Service level increased

Increase in service level means increase in safety stock and this in turn means
increase in inventory holding costs. The costs are higher for Rotterdam than
Zaragoza , so if we increase the service level it would be good for Zaragoza,
which would lead to holding more inventory at approximately same cost as that
of Rotterdam.
The product cost increased/ decreased
This would be directly proportional to the overall costs.

Q3. What other issues (besides the one presented) should the customers
take into account?
Below issues/ advantages can be taken into consideration by the customers:
 Other than the cost the customers can put these factors into account. Plaza
has advantages over its competitors, the Plaza had hosted ZLC a research
and teaching institute in collaboration with government and other
companies. The customers would benefit from the research at the
laboratory, the research can help the customers identity and solve any
logistics problems they face in their operations.
 The Plaza is managed by government of Zaragoza, it has access to
Airfield and Cargo holding facilities, Sea ports and Dry ports. The
population of Zaragoza has less population than any other Spanish ports
and Rotterdam. The Plaza has a strategic advantage over other areas in
term of geographic position. Low Population will improve the ease of
transportation. Since the
 Plaza is run by government it will improve customer confidence over
other competitors.
  Inventory holding cost of Zaragoza is less than other port, areas and
Rotterdam.
 Plaza has access to area around it and has facilities for operating offices,
the customers can open offices or other logistics operations near Plaza for
easier access.
 Lead time of Plaza is greater than Rotterdam since it is located further
from Central Europe than Rotterdam.

Q4. What opinion would you have about setting up more than one DC to
cover Europe (i.e. one in PLAZA and one in Rotterdam)?

Zaragoza seems to be a much better option than Rotterdam. The inventory

holding costs and all the added facilities and services that Plaza offers makes it
a better option than Rotterdam. However, Rotterdam has the advantage of being
closer to central Europe. In case of any transport-related problem, Rotterdam
would be in a better position to timely deliver products to central Europe.
However, at the same time, it is more costly to operate from there. Hence the
operating strategy of the company would be a significant factor as to where the
warehouse should be located. If the company policy is that of keeping high
levels of inventory and safety stock, and it faces uncertain demand, Plaza would
be the better option, because it is much cheaper to keep large amounts of
inventory there. However, if the company operates in a JIT mode, then
Rotterdam would be better because then the company can operate a smaller
warehouse in Rotterdam. As for keeping two warehouses, the cost of the
company would increase a lot. However, the company can operate the two
different strategies mentioned above and keep a massive warehouse at Plaza,
and a small one in Rotterdam. However, instead of shipping directly to
Rotterdam, all the inventory should be unloaded at Plaza, and then transported
to Rotterdam. This would keep costs low, and the Rotterdam warehouse would
then be able to deliver goods to central Europe in case if there is a disruption in
logistics between Plaza and central Europe. This strategy would also help in
reducing the delivery time of the goods to retailers in central Europe.
Appendix 1

Option Option
1(Rotterdam) 2(Zaragoza)
Cost of Shipping (Sea) per TEU 145 0
Total Shipping Costs 530.8 0

Cost of Transportation from Port to

Warehouse
Fixed Cost at Port per Truckload 335 305
Transport Cost per Truckload 0 495
Total per Truckload 335 800
Total Costs of Transport from Port to 613.15 € 1,613.28 €
Warehouse

Cost of Inventory
Average Inventory 20915.2 20008.3
Inventory Carrying Costs 20% 15%
Total Inventory Costs 4,183.03 € 3,001.24 €

Cost of Delivery from Regional

Warehouse to Customer
Spain to Central Europe/KM - 1.02 €
Rotterdam to Central Europe/KM 1.20 € -
Distances to Central Europe 516 1220
Cost of Delivery to Customer per Truck 619.20 € 1,244.40 €
Number of Trucks 1.83 2.02
Total Cost 1,133.32 € 2,509.45 €

Overall Costs 6,460.29 € 7,123.98 €

 Appendix 2

Economic Order Quantity

Option Option 2 ( Zaragoza )
1(Rotterdam)
Cost Per order(a) 335 305
Annual Demand 100,000 100,000
Annual Inventory Carrying costs 20% 15%
Cost Per Unit 100 100
Economic Order Quantity 1830.30 2016.60
EOQ in terms of TEU's 3.66 4.03
EOQ in terms of Truckloads 1.83 2.02
EOQ Formula EOQ =
(2C0D/C1U)^0.5

(a) Cost per order will be the fixed cost that is paid at each port for processing every individual order.

Reorder Point & Safety Stock

Reorder Point Formula with Periodic Review ROP = D(T+P/2)+Safety
Stock
Option1(Rotterdam) Option 2 ( Zaragoza )
Annual Demand 100,000 100,000
Average Performance Cycle(a)(Years) 0.085 0.074
Review Period(Years) 0.082 0.082
Safety Stock(b) 20000.0 19000.0
ROP 32602.7 30506.8
Average Inventory (EOQ/2 + SS) 20915.2 20008.3

(a) Average Performance cycle Breakup Option Option 2 ( Zaragoza )

1(Rotterdam)
Time spent on Port 1.5 days 1.5 days
Average Time on Sea 29 days 24 days
Delivery Time from warehouse to Customer 0.5 days 1.5 days
Total Time 31 27
 (b) Safety Stock Formula wrt Service Levels
Option Option 2 ( Zaragoza )
1(Rotterdam)
Service Level 95% 95%
Annual SD 10,000 10,000
Q is Replenishment Order Quantity 1830.30 2016.60
F(K)=(1-SL)*(Q/SD) 0.0092 0.01008
K from Table given in Book 2 1.9
Safety Stock(a) 20000.0 19000.0