Based on the transactions provided by allsupply chain members, the product flow for LTO-] 1 was reconstructed. The oroduct flow for the LTO was ouilt from the amount of product that was shipped from and received by each location each day belween the first and the last transaction of the LTO. In this way, if was possible to estimate daily inventory levels for each stocking location in the supply chain.
Having daily inventory levels by location enabled the estimation of inventory holding costs and the amount of product ief over at each location. Daily inventory levels at each stocking location were calculated as the sum of the inbound shioments minus the outbound shioments for each day. if some product was lost, rather than shipped to a customer, then this was not accounted for. However, none of the pariicipanis in the study identified spoilage and pilerage as a major concern.
As product moves forward in the supply chain, # increases in value. For example, if the direct variable manufacturing cost of a case of product is $10, the product is held in inventory at the plant’s warehouse at this cost. If moving the product to regional distribution center #1 costs $1 then the same case of product is held at the regional distripution center at $11. Similarly, if the transportation cast to regional distribution center #2 is $2, the same case of product is held in inventory at
$12. If a case of product is transshioped to regional distribution center #1 from regional distribution center #2 and the cost of transhioment is $0.50, then that case
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of product should be held in inventory at $13.50. This implies that product atregional distrioution center #1 should be hela at different costs. As cumbersome as this is to explain, H is necessary fo develop an accounting system to keep track of how much of each product is held at what cost.
To simplify this, # wes assumed that all product at each location was held at the same cost, and the cost of the transshioments were considered avoidable costs.
Therefore, rather than taking info account the time effect of holding transshipped inventory at a higher cost and the negative effect that incurring these extra costs has on profit margin, transshioment costs were acided as a lump-sum to calculate the business opportunity in terms of potential savings. In short, the business opportunity was the sum of ail costs that could be reduced.
For the majority of the transsnioments, there were no data availabie fo determine the exact cost of the fransshioments other than the number of transshioments through the supply chain. Therefore, transshioment costs were estimated. For the manufacturers and distributors, the distance between the origin and the destination of the transshipment was used to estimate the truckload cost oer unit of product. The truckload cost was used because ihe producis included in this research are only two of many other producis. Furthermore, the volumes of LTO products represented a small perceniage of the total. Supply chain members who reported transshioments said that in the majority of the transshioments, there was no extra cost incurred. in less than jen percent of the cases, the cost incurred was due to the additional stop charged by the trucking company because the stop
“was on the way of the truck”. No manager reported the managerial time required ta deal with the transshipment as a cost.
However, handling the transshioment does take managerial time. Data of the time, or cost, related to the management of a transshioment were not available.
Fatiure to estimate a cast for these efforts, encourages transshioments. It is a common practice in modeling to estimate a “penalty” cost, to discourage an undesired
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type of event. That was the case with transshioments in this setting. A $10 management time cost was added per iransaction to all transshioments except for those between restaurants. For example, if 10 cases were transshipped at a transportation cost of $0.50 per case, the total cost of this transshioment was estimated at $15; that is, 10 cases at $0.50 per case, plus $10 for management's time. For restaurants, $30 per transaction was used to represent the coportunity cost of not being at the restaurant. The appropriateness of the size of these penalty costs incorporated in the moceling process were validated with faculty and executives experienced in modeling in addition fo the franchisor’s management.
These penalty costs seemed reasonable and perhaps conservative.
The cost of obsolescence was calculated by determining the final inventory levels at each location and the direct variable cost at which the product was held at each location. The final inventory levels were determined by considering allinputs and outputs fo each location provided in the data,
Table 4.6 oresents the business opportunity; thai is, the dollar amount that can be reduced with the implementation of dynamic time-based postponement.
The cost estimates based on data available needed jo be scaled to the portion of the supply chain that was modeled with the optimization software, which was 3.1%
of the supply chain. For example, Table 4.5 shows that the amount of ingredient A left over atthe plant was $ 2,744. Since the manufacturers provided transactions for all product manufaciured, scaled to the portion of the supply chain modeled the cost of product left over resulted in $86 ($2,764 / 100% * 3.1%}. in the case of Ingredient B left over at the distrioution centers, the dollar amount was $ 69,361.
Since, there were data available for 48.3% of all products manufactured, this dollar amount was scaled and resulted in $4,449 ($69,361 /100% * 3.1%).
Adding all estimates, shown in the botiom section of Table 4.6 (Business Opportunity - Totals), the total business opportunity for the portion of the supply chain modeled was $32,034. This amount scaled to the number of restaurants in the
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Member of the Supply Chain Product Cost Component Cost for LTO scaling ( before Scaling Factor Supply Chain in the i the Portion of the .
calling () Model (2
Manufacturer 1- Ingredient A Inventory Holding Cost | $ 1,135 100% |$ 35
Plant Left Over Product $ 2,764 100% | $ 86
Manufacturer 2- | dient . B Inventory Holding Cost | $ 80 100% | $ 2
Plant ngrecien"” Left Over Product 0 100% | $ -
- Inventory Holding Cost | $ 9,567 100% | $ 297 Manufacturer 2 RDC Ingredient B |Left Over Product . $ 22,465 100% $ 696
Transshipments $ 200 100% | $ 6
Inventory Holding Cost | $ 755 45.3% 1 $ 52 Ingredient A |Left Over Product $ 1,447 45.3% | $ 99
ơ Transshipments $ 50 45.3% |$ 3
Distributor-DC _ Inventory Holding Gost] $ 5,319 48.3% | $ 341
Ingredient B |Left Over Product $ 69,361 48.3% | $ 4,449 Transshipments $ 6,914 48.3% | $ 443 Inventory Holding Cost | $ 811 3.1% | $ 811 Ingredient A |Left Over Product $ 4,142 3.1% |$ 4,142
Franchor-R Transshipments $ 4,230 3.1% |§ 4,230
Inventory Holding Cost | $ 1,985 3.1% | $ 1,985 Ingredient B |Left Over Product $ 7,155 3.1% 1 $ 7,155
Transshipments $ 7,200 31% |$ 7,200
Business Opportunity - Totals Cost for LTO for
the Portion of the] System-wide Cost Cost Component Supply Chain in . for LTO () A
the Model (`
Inventory Holding Cost|_ $ 3,523 | $ 113,650 Left Over Product] $ 16,627 | $ 536,365 Transshipments| $ 11,883 | $ 383,325
1)
System-wide Cost per year (8 LTOs/Year)| $ 8,266,718
This cost includes inventory holding costs, the cost of left-over product (obsolescence), and the cost of transshipments for both manufacturers, the distributor and 177 restaurants.
2) 177 restaurants.
3)
This column shows the cost for the LTO scaled to the portion of the supply chain represented by This cost includes inventory holding cost excluding obsolescence, the cost of left-over product (obsolescence), and transshipments scaled to the portion of the supply chain represented by 177 restaurants.
4) (obsolescence), and transshipments scaled to all restaurants in the system. This cost includes inventory holding costs excluding obsolescence, the cost of left-over product
Table 4.6
Size of the Business Opportunity
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system resulted in $1,033,340 ($32,034 / 3.1%}. This cost estimate was based on one LTO, bui there were eight LTOs a year. Thus, the total business opportunity was of
$8.26 million, shown at the bottom of Table 4.6.