CASE STUDY CONCEPT: Managing Transportation and Operating Costs in a Growing Business.
Congratulations, you’ve just joined the S&J Trading Company. They have big plans, and you’ll be the one to carry them out. This video gives you a quick introduction to the challenges ahead. And it shows how you can use supply chain simulations to help you meet those challenges.
[ S&J Trading Company introduces a global and local supply chain supporting a growing company. The instructor study guide for S&J Trading Company is structured as a sequence of five scenarios to explore different aspects of this supply chain. The study guide is illustrated with screenshots and commentary. Instructors using this case can request the study guide by contacting: info@scmglobe.com ]
Transportation infrastructure has a big effect on business activities. In the country of Angola, the rebuilding of their railway system opens up new business growth opportunities. The railway system was once one of the finest in Africa, but during the Angolan Civil War (1975 – 2002) it was mostly destroyed. Over the last 10 years this transportation infrastructure has been rebuilt and expanded (http://www.bbc.com/news/world-africa-11295533).
As the railway network becomes operational again, and expands to link up with previously isolated cities, it is possible to transport people and products quickly and inexpensively (http://www.railwaygazette.com/search.html?q=angola). This intermodal transportation network (ship, truck and rail) enables commerce to increase and businesses to grow.
Powerful business interests (Angolan, Chinese and Swiss) are at the center of these infrastructure rebuilding projects. They are positioning themselves to profit from the petroleum and mining commodity trade in Angola and Central Africa that will be affected by this new infrastructure (“Angola’s Chinese-built rail link and the scramble to access the region’s resources” http://china-africa-reporting.co.za/2014/02/angolas-chinese-built-rail-link-and-the-scramble-to-access-the-regions-resources/ ). Yet regardless of the motives for building transportation infrastructure such as this, once it is built, it also enables the expansion of many other types of businesses, not only those related to the building of railroads or the mining of minerals. This case study explores expansion opportunities from the perspective of one such company looking to grow their business and manage their operating and transportation costs.
S&J Trading Company – Growing the Business
You joined the family business and this is your opportunity to prove yourself. Your family has been in the import/export business for a long time. They have a way of seeing opportunities early and getting in before everybody else. Angola’s economy has a lot of potential, and up until recently it was one of the fastest growing economies in the world. Then, with the drop in oil prices, it fell on hard times. But it will come back (oil prices are rising again). Your father and uncle spent some time in Angola and opened up a distribution center and three stores. They are looking for you to grow the business and open new facilities. It calls for long hours and lots of perseverance, but the potential rewards are well worth the effort.
The company imports products from the United States and Europe and sells the merchandise through its three stores. There are three categories of products imported in quantities large enough to fill a growing number of shipping containers (the categories are: Product A; Product B; and Product C). You track inventory demand and product inventory at the shipping container level. Load the S&J Trading Company supply chain from the online library. In the Edit screen click on the tabs for the four entities and see more about the products, facilities, vehicles and routes that make up this supply chain.
[ To access this Online User Manual — click “Help” button in upper right corner of any SCM Globe application screen ]
(click on screenshot for larger image)
FIRST CHALLENGE — Make changes to the existing supply chain and get it to run for 30 days. Then expand the supply chain to support four new stores.
There are problems with the existing supply chain, as you quickly find out when you run the first simulation. You need to make changes and improvements in your store delivery schedules routes and in other areas. As soon as you get your existing supply chain stabilized and able to run for 30 days, then you need to expand the business and open up four more stores. Pick locations for the four new stores, and figure out how to best deliver products to those new stores.
S&J Trading is going to open new stores in Lubango, Namibe, Haumbo, and Kuito. Here is the product demand information you need to start planning for these new stores. For each of these cities, zoom in and use the satellite view to explore the city layout. Find a suitable location for a store in each of these cities and plan to open each store with on-hand product inventory equal to 10 days demand:
| Daily Demand | Product A | Product B | Product C |
| Lubango | 4 | 3 | 3 |
| Namibe | 3 | 2 | 2 |
| Huambo | 2 | 4 | 2 |
| Kuito | 4 | 3 | 1 |
| Total Demand | 13 | 12 | 8 |
When you add the new facilities, zoom in and look at the four cities named above. Switch to the satellite view and look around. Select a location for each store that looks like a good retail location. Look for places on a main road, in the middle of a large concentration of population. Look for facilities that allow a large truck to drive up and park and unload products at the stores (as shown below).
Notice how the transportation and operating costs of this expanded supply chain change after you add the new stores and delivery routes to serve those stores. What costs rise by the largest amount?
Outline your findings and the main challenges you faced to this point in the case study in a short executive report. Use screenshots and simulation data to illustrate your findings and back up your decisions.
TIP: SAVE BACKUP COPIES of your supply chain model from time to time as you make changes. Click “Save” button next to your model in Account Management screen. There is no “undo”, but if a change doesn’t work out, you can restore from a saved copy. And sometimes supply chain model files (json files) become damaged and they no longer work, so you want backup copies of your supply chain to restore from when that happens.
Your existing supply chain uses trucks. As you start considering ways to extend your supply chain to supply these new stores you see how quickly transportation costs go up with trucks. Angola’s road system is not in good repair, and even if the roads were better, keeping stores supplied entirely by truck is expensive. As you think about what to do you notice there is another way to make deliveries to the stores. Your stores and facilities are all located in cities that have railroad service. You have a DC in Luanda, and you could also open a DC in one of the other cities. There are now, or soon will, be stores in the other cities highlighted with orange circles in the map below.
SECOND CHALLENGE — The railway system is a viable alternative to using trucks. Do some experimentation to find the best way to build a rail-based supply chain.
Explore answers to these questions:
- Can you service all stores out of a single DC or do you need another DC, and if so then where should it be?
- What kind of delivery schedule would be best? What if you could deliver by rail every day?
- What if you could only deliver every second or third day?
- How does the delivery schedule affect inventory needed on-hand at stores?
- And how does amount of on-hand inventory affect store operating and rent costs?
- How much will the move to rail transportation reduce costs?
- Do reductions in transportation costs offset some increased costs elsewhere?
The answers to these and related questions will emerge as you model different supply chain options, and simulate their performance to see what works best.
Things to Think About Regarding Your Distribution Center
As you change from truck to rail for your main mode of transportation, look at the map of the Angolan Railway System above and locate nodes in the network where different rail lines (planned and existing) come together. Then use your SCM Globe account and zoom in and look at those places. Switch to satellite view and look for freight handling facilities that would indicate a good location for a new DC.
The screenshot below shows the Huambo railway station. Huambo is one of those nodes where different rail lines come together. Notice the size of the warehouse facilities and the presence of a rail yard that can handle several large trains simultaneously (red arrows). Notice also there is a potential facility for the Huambo store located right near the train station (yellow circle).
(Rail freight handling facility in Huambo, Angola — click screenshot for larger image)
Note some other cities on the rail lines that might make good locations for a new distribution center. Then zoom in to view those other locations and switch to the satellite view. Find the railway stations in those cities. Look at the size of the stations and the size of warehouses and other freight handling facilities next to them. What do you see? How do those other stations compare to the one in Huambo regarding their freight storage and handling capabilities?
Also note how these freight handling facilities compare to those at the port in Luanda where your present DC is located (yellow circle on right side of screenshot below). Your present DC is located in a large warehouse near the container storage yards where the freight containers are stored after they are unloaded from cargo ships at the port. You can also see your DC is located on the rail line that runs along the south side of that facility. Follow the rail line to the left and see the railroad station (yellow circle in lower left of screen).
(Port facility in Luanda, Angola — click screenshot for larger image)
You have three options for the location of your DC:
- Maintain your Luanda DC and continue to serve the whole supply chain out of that DC
- Keep the Luanda DC and open another DC in another city
- Close the Luanda DC and serve the whole supply chain from products stored at a new DC.
What are the pros and cons for each of these options based on what you see by looking at the facilities involved? How do these different options affect transportation costs and why?
See useful ideas for expanding this supply chain and for modeling railroad vehicles and routes in the online guide section“Tips for Building Supply Chain Models”. Scroll down to the headings for Vehicles and Routes. There are also ideas for reducing inventory and calculating optimum product delivery amounts and schedules in “Cutting Inventory and Operating Costs“.
Along with your new supply chain model create a short presentation explaining how you built your rail-based supply chain and why you choose the locations you chose for your facilities. Show how the costs and inventory levels compare to a truck-based supply chain.
To be even more realistic, do research on the Internet to find out what current commercial real-estate rental rates are in the cities in Angola where you have facilities. Rents have come down since this case study was originally written (2014). Do some web searches on key phrases and see what you can find. Here is the website of a commercial real-estate broker, Knight Frank, where you can see lease rates and purchase prices for property in Angola – https://www.knightfrank.com/africa/luanda
REMEMBER — There is a spreadsheet reporting template you can use to analyze downloaded simulation data. Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators. See more about this in the online guide section “Analyzing Simulation Data” – scroll down to the heading titled “Download Simulation Data to Spreadsheet Reporting Templates“. The sample template is set up for the Cincinnati Seasonings company, but look at how the reports read the simulation data and you will see how to change the spreadsheet as needed to accomodate the S&J Trading Company.
To share your changes and improvements to this model (json file) with other SCM Globe users see “Download and Share Supply Chain Models”
Register on SCM Globe to gain access to this and all other case studies. Click the blue “Register” button on the home page (app.scmglobe.com) and buy a subscription (if you haven’t already) using a credit card or PayPal account. Then go to the SCM Globe library and click the “Import” button next to this case study. Scan the “Getting Started” section (if you haven’t already), and you are ready to go.