Advanced Supply Chain Management

Logistics Cost Optimization

Ankit Modi 1502029

Harshit Garg 1502072
Harshvardhan Arya 150207
Jai Kumar Soni 1502076
Vivek Khonde - 1502235

Executive Summary
Methodology

Objectives
Warehouse selection

Intermodal transportation

How to decrease rising freight

cost while maintaining at max 5
day service level
Identification of root cause of
product returns

2ndary research on intermodal

transportation method ,identified pros and
cons and suggested train and trucks as
most cost efficient intermodal option

Suggesting milk run strategy for all the

demand states by identifying potential
clusters
In-depth analysis of the problem and 2nd
research on the potential causes of
product return

Total yearly cost calculation of each

warehouse and their combination as
well and finally suggested combination
of warehouses which will incur least
cost

Evaluation of Intermodal
transportation
Identifying pros and cons

France Case scenario

Identifying most cost effective

location among given 5 locations
Evaluating 1 warehouse is more
cost effective or combination of 2

Result

Option 1 : If the company wants

to operate with one warehouse,
De Lisle, MS is most suitably
placed
Option 2 : The company can
minimize its cost by keeping 2
warehouses at DeLisle, MS
and Cedartown, GA
around 14% of transport cost
can be saved through inter
modal transport

Around 17% saving can be

achieved by applying milk
run strategy in distribution

Executive
Summary

Case
Understanding

Secondary Transport
Strategies

As is Scenario

Cost Components

2 plants

Warehouse
Cities
173

Inbound Logistics

Customer

Warehouse operating
cost
Inventory holding cost
Inbound logistics cost
Outbound logistics cost

Total Cost : $32.47 M

Additional information

Outbound Logistics

Inventory Holding cost $1M

Warehouse operating cost
$13 M
Carrier 7 is being used the
most for inbound and
outbound shipment
covering around 50 % of
shipments.
Rise in product returns
High traffic of inbound and
outbound freights at the
plant
3-day delivery

Primary Transport
Strategies
Options

Inbound

Recommendatio
ns
Outbou
nd

Remarks

Total FTL

6012

5209

FTL is the sum of

trucks from plant
to warehouse and
Warehouse to
cities

Total
Distance
travelled

664,40
1

423,25
0

Total distance
travelled

422

Average distance
travelled to sell
the SKU to
customers

8.85

Cost of
transportation is
the freight cost of
transporting goods

1.79

Avg. time to transit

the goods, directly
impact the service
level

Avg. SKU
transit
Distance(mile
s)
Transportatio
n Cost ($M)
Wt. Average
Transportatio
n days

395

9.61

1.69

Total Cost
WH
22.89
($M)
Locations
DE LISLE, MS
CEDARTOWN,
GA
WHARTON, TX
PARK CITY, KS
STRYKER, OH

Change in Annual
Operating
Sum of Facility
and
9.61
Cost by relocating
to new
Transportation
cost
warehouse
0%
-10%
10%
-5%
5%

Executive
Summary

Case
Understanding

Outbound Transport
Strategies

Primary Transport
Strategies

Recommendatio
ns

Route Optimization & Warehouse selection

To optimize the routes we will serve the Customers from the nearest warehouse. This is done using the distance matrix approach.
Methodology
Assumptions

Citie
s

WH1 WH2 WH3

C1

25

C2
C3

30
455

345
890
555

98
230
220

From this distance matrix of around

200 cities and 5 warehouses,
warehouse at min distances for
individual city is selected

City allocation based on the minimum

freight cost per FTL

FTL load for calculating the cost and the number of

trucks in case of Inbound and outbound is
considered to be 43675 (lbs) which is highest used
by any carrier
Operating cost will depend on the volume handled
by the warehouse.

Operating cost per lbs=

Inventory holding cost is considered as $1M if one

warehouse is used and $1.1M if 2 warehouse is
used
Outbound transportation city allocation is based on
the minimum freight cost per FLT for particular city
Distance between warehouse and city*freight rate

Freight Rate
Distance
(miles)

Freight
rate($)

0-100

10

100-300

300-750

750-1500

>1500

2.4

Distance
(miles)

Freight
rate($)

Transit days

400
1
Inbound allocation is based on allocating the min
800
2
distance plant to warehouse and restricting the load
to 4000FTL.
1200
3
Shipment cost = Distance*Freight rate*FTL no.
1800
4
Excel model works for maximum 2 warehouses and
the simulation will show the cost variation
>1800
5
This
data
has
been
calculated
CO2 released is calculated based on the data from US
protection Agency releasing 600gm of CO 2 per mile. from American Trucking
CO Released = (0.6*distance*FTL) kg Association considering speed of
2

Executive
Summary

Case
Understanding

Secondary Transport
Strategies

Primary Transport
Strategies

Decision Matrix For Evaluation

Cases

Ware
Option house
s
Plant
Warehouses
Number

Recommendations

Case1

Case2

Case3

Case4

Case5

Remarks

Cedartow
n&
Stryker

Cedarto
wn

De Lisle
&
Wharto
n

Cedarto
wn &
Parkcity

De Lisle
&
Cedarto
wn

Depots/CFA taken
from earlier cases

A&L

A&L

A&L

A&L

A&L

A-Atlanta, GA, L- Lufkin

Plant locations in US

The number of warehouses we

use to store products from
plants

Wt. Avg.
Outbound
Transportation
Distance

34%

45%

25%

24%

16%

Average distance travelled by

the vehicle to reach city is
422miles

Outbound
Transport Cost

21%

29%

14%

15%

9%

Cost of transportation from

ware hoouse to Customers,
which is round $8.85M

Outbound transit
days

19%

25%

14%

10%

10%

Avrg time to transit the goods,

directly impact the service
level currently it is 1.69 days

20%

Cost of transportation from

plant to warehouse is $9.6M
which reduces to $7.7 M

12%

Currently a material travels

around 395 miles to reach a
warehouse

Inbound
Transportation
Cost
Wt. Avg.
Inbound
Transportation
Distance

28%

27%

33%

45%

14%

13%

29%

38%

Recommendatio
ns

Case 5 is the best option

for warehouse relocation, in
this case we can have a
10% overall saving in
transportation
and
warehouse cost which will
require to setup one new
warehouse
at Cedartown.
We can always
start with a
road map to ultimately
achieve Case 5 which will
start with opening of
Cedartown warehouse
Then move with removing
cities near to Cedartown
from the outbound table
and allocating them in
phase wise manner.
Reducing the space of De
Lisle in the mean time
with smooth transition to
not impact service level.
Transition may take over
6-8 months to completely
transform
to2Case
5 and
207
Ton
reduction
in
start
cost saving
Outbound
Logistics

CO

Source: United States Environmental

Intermodal Transportation
Pros
3
Calculatio
1
3
ns
Increased security save from damage
As can be observed from
Improved efficiency
the figure, most of the
Saving time and labor
Flexibility about type of transportation destination states are
connected by trains.
Various type of specialized containers
TTC = RC+HC+TC
Lower Cost
Handling during shipping is eliminatedRC= Total cost of train
operation
No theft or pilferage
HC = Total cost of road
operation
TC = Terminal handling
2
Cons
(consisting of shunting cost,
2
transloading cost, fixed
investment
Not suitable for small
shipments
Heavy load can damage
road
Delay while delivering
goods
4
Recommendation
Costs at harbor
4 may
s
increase
As can be observed from the calculations, around 14% of
transport cost can be saved through inter modal transport
Because of high terminal handling cost, the inter modal is only
feasible for long distance transport
1

(i) And (j) intermodal terminals and s

is the point of study

Assumptions :
As inter modal transport is not suitable for
low distance, it is applied only for distance
which is greater than 800 miles
*Per unit train freight is considered $ 0.66
*Per unit terminal handling cost is $268

*Reference : Intermodal Transport Cost Model and Intermodal Distribution in Urban Freight,
Behzad Kordnejada

Cost optimization in France shipment

Methodology
For each pin-code, total demand is calculated as the product of
total no. of pallets shipped
Daily demand is calculated through averaging total monthly
demand
Daily demand is plotted on the map of France
Clusters are formed of the nearby states considering each
clusters average daily demand doesnt exceed FTL i.e. 38 pallets
Milk run is suggested for each cluster

*Daily demand is mapped on the map of France

*Cluster wise classification of cities

Cost optimization in France shipment

Calculation
Assumptions

Total sum of pallets is calculated for each cluster,

then it is divided by 38 i.e.FTL (assuming all the
trucks would go as FTL)
In the milk run the proportion of each state would
be as per their daily demand. (e.g. in cluster 1,
area 51 has demand of 15 which is around 50%
of the total daily demand of that cluster, so 50%
of the shipments would terminate at area 51.
TheCalculation
freight rate is taken for 38 pallet unit.

Results
Total cost through this method =
$333607
Total cost beforehand
=
$390249
Saving
~
17%
Recommendatio
*Milk run is designed for each cluster such that total daily
demand is not exceed FTL 38 pallets

ns

Around 17% cost can be saved by applying milk run

strategy
It will better utilize the resources of the company by
achieving maximum efficiency

Potential causes of product return in France

Cause1
Moisture content of the product
Moisture affects the taste , texture and shelf life
of the product
More the moisture in the product the earlier it will
deteriorate
Moisture content increases during storage

Cause2
Longer storage of the product at warehouse
On purchase product reaches expiry date
very early
Shelf life decreases

Recommendations
Additional inventory holding locations (e.g.
Recommendations
alternative sources) can be expected to
Moisture content of the product needs to be
diminish the number of days of life
checked and optimized because it can make and
remaining for the retailer D.C. and the
break the product
store.
Below formula gives moisture content of the

Inventory purchased on promotion may

product
also diminish the number of days of life
% Moisture =Initial Sample Weight - Final Sample
remaining in the retailer D.C. and store,
WeightX 100Initial Sample
Weight
depending on factors such as when it was
Cause3
purchased (e.g. at the end of the
Inefficient cold supply chain
promotion).
These product deteriorate very easily so supply
chain of
such product should be very efficient
Recommendations
Regulatory Gap Analysis
Review and Writing of SOPs (related to Cold Chain, Storage
& Shipping) and Documentation
Temperature Mapping of Warehouse and Storage areas
Qualification of Storage Equipment (Refrigerators/Freezers)
Temperature Profile Studies in Transport (for uncontrolled
transports)
Test, Design and Qualification of Cold Chain Packaging

Ocean Freight Cost

Prime reasons for rise in cost
1. Destination Demurrage
cost
2. Ocean freight cost
1

1 How to decrease demurrage

cost

Pre-clear your cargo and issue

delivery instructions to your inland
carrier in advance
Have a trucker back-up plan.
Full payment in advance before ship
reaches to the port
Knowledge of proper documentation
to avoid costly delays(expert broker)
Advance planning, keep paper work
as early as possible

2 How to decrease freight cost

Choosing best shipment

agency to partner with,
who can optimize our costs
Note :- Maersk line came
to be the best shipping line
apart from it MSC and CMA
CGM group also can be
considered for shipping

Shippin
g lines

Freight
rates

Specializati
on

Service
compre
hensive
ness

Reputatio
n

Trackin
g
service
s

Delivery
time

Insuran
ce

Score

A.P. Moller
Maersk
Group

High

High

High

High

High

Mediu
m

High

33

MSC

High

High

High

High

High

Low

High

31

CMA CGM
Group

High

High

Mediu
m

High

High

Mediu
m

High

31

COSCO

Mediu
m

High

Mediu
m

High

High

Mediu
m

Evergreen
Marine

Mediu
m

Medium

Mediu
m

High

High

HapagLloyd

Mediu
m

Medium

Mediu
m

High

High

low

Medium

low

High

High

low

Mediu
m

High

Mediu
m

High

low

Mediu
m

High

Mediu
m

High

Hamburg
Sd Group
Hanjin
Shipping

low

low

OOCL

UASC

Medium

low

Weightage is 5

low

low

low

Weightage is 3

Mediu

High

Low
Low
Mediu
m

Mediu

High
High
High
High

29
25
25
23
21

19

Weightage
is 1
High
19