Using the exchange rates cited in the case, what is the INITIAL PURCHASE COST ?PER UNIT (in US Dollars; do not include transportation costs) paid to: a. Dong Hai Supply in Chengdu, China?

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CSCMP ACADEMIC CASE STUDY SERIES

Case studies can supplement a course and be used to teach application of supply chain

management concepts to real-world situations. Others can use the case studies to learn

about supply chain challenges and to analyze the situation to develop solutions.

Innovative Distribution Company: A Total Cost Approach to Understanding Supply Chain Risk

An Academic Learning Case Study written for the Council of Supply Chain Management Professionals

Written by: Dr. Ted Farris, PhD, CTL Austrian-American Fulbright Scholar Charn Uswachoke International Scholar University of North Texas

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A Total Cost Approach to Understanding Supply Chain Risk

2

“Arrrgh!” exclaimed James L. Heskett, President of Innovative Distribution Company

(IDC), “pirates have struck again off the coast of Somalia. It seems like every time we turn

around there is another piracy on the High Seas.”

“Unfortunately, that is nothing new,” replied John L. Hazard, VP of Supply Chain

Excellence, “piracy has been going on for centuries and is still going on today. In 2005 there

were 276 piracy incidents1 and in 2010 there were 445 incidents worldwide?2 While efforts

have been made to eliminate piracy, there were still 245 incidents in 2014! Even with

increased emphasis in stemming piracy there were 132 incidents in 2021.3

“Wow! That has got to cost someone a bundle. Who pays for that?” asked Heskett.

“I read a segment on MSN about that,”4 responded Hazard, “the cost of insuring ships

has gone up. Insurance premiums increased by 10 times in 2009. Some companies are

spending more time training their crews, others are avoiding the area altogether — taking long

trips around Africa’s southern tip that can adds 2,700 miles to each trip and increases fuel

costs by $3.5 million annually. And, since the ships take can only make 5 round trips per year

instead of 6, delivery capacity has dropped by 26%. Who pays? The customer!”

“Gee, I never thought of those costs. The supply chain really takes a hit. It is a good

thing we do not ship anywhere around Somalia,” exclaimed Heskett.

“But there is risk everywhere,” challenged Hazard, “Piracy occurs around the world.

They have piracy problems in Malaysia and off the coast of Brazil as well. And there are lots of

other risks in the supply chain that need to be mitigated. We have embraced off-sourcing

because of lower unit prices but we need to consider the total cost of ownership of the supply

chain. Longer transit times, fluctuating exchange rates, uncertain delivery schedules, disruptive

weather patterns, multi-language requirements, political turmoil, unique tariffs and duties, all

add to the cost of doing business internationally. I’m not sure we understand the true cost

of our supply chain.”

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A Total Cost Approach to Understanding Supply Chain Risk

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“You have a great point. We ought to take a look at all the costs of sourcing IDC’s next

new product and consider the entire supply chain costs,” pondered Heskett, “see what

numbers you can gather and we’ll take an all-in look at the numbers.”

A few days later Hazard and Heskett met to review all of the information they had

gathered about the new product. “What did you find?” asked Heskett.

NEW PRODUCT SOURCING DETAILS

“There are only three possible sources of supply for IDC’s new product. Suppliers are

located in Wahoo, Nebraska, Freising, Germany, and Chengdu, China. We cannot buy or hold

fractional units of a product and we have a projected annual demand (based on a 365-day

year) of 21,500 units with a deviation in daily sales of 11 units. Our goal is to maintain an in-

stock probability of 97.7% for our customers” replied Hazard.

“All product (regardless of supplier) will be shipped by rail utilizing twenty-foot

equivalent units (TEUs) to IDC’s distribution center in AllianceTexas® where we will service all

of IDC’s customer’s needs. A single TEU container can hold up to 600 units of the new product.

Due to the nature of the product, no other product may be loaded into the same container.

IDC’s inventory carrying cost throughout the supply chain is 32.2%.”

Hazard and Heskett recognize it will cost $90 to place each order with the Nebraska

supplier and due to the complexity of international trade will cost $155 to place each order

with the German supplier and $185 to place each order with the Chinese supplier.

NEBRASKA SUPPLIER DETAILS

One of the possible sources of supply is CousinsAg, located in Wahoo, Nebraska. The

US Department of Labor reported that in 2021, 88,000 of Nebraska’s wage and salary workers

are members of unions. CousinsAg is a union shop with an average labor rate in their

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A Total Cost Approach to Understanding Supply Chain Risk

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Wahoo, Nebraska facility of $25.30 per hour. In responding to IDC’s Request for Quote (RFQ),

CousinsAg’s price is $8.25 per unit.

Figure One: Nebraska-AllianceTexas® Supply Chain

As shown in Figure One, when an order is placed with CousinsAg it will take 10 days

for them to process and manufacture the order, and an additional 5 days to ship it FOB Origin

Prepaid to IDC’s AllianceTexas® Distribution Center. Rail shipping cost from CousinsAg to

AllianceTexas® is $1,850 per TEU. Based on similar rail shipments from that part of the country,

Hazard assumes the standard deviation of the shipping time from Wahoo will be 1.14 days.

CHENGDU, CHINA SUPPLIER DETAILS

There are two other possible sources of supply. The first is Dong Hai Supply, in Chengdu,

Sichuan, China. Over the past decade, China aggressively developed their transportation and

logistics infrastructure inland from the coast. The Chinese government is now actively promoting

trade in areas such as Chengdu. Located 2,107 kilometers from the port of Shanghai, the Sichuan

Administration of Price Control, Sichuan Department of Finance, and the Sichuan Labor

Department have maintained strict wage controls to help develop manufacturing for export.

The average labor rate in Chengdu is 10.36 Yuan per hour. Assume the current exchange rate

for use in this case is 1 CNY China Yuan Renminbi (¥) = 0.1585 US Dollar. In responding to

IDC’s Request for Quote (RFQ), Dong Hai Supply’s price is 547 ¥ per unit.

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A Total Cost Approach to Understanding Supply Chain Risk

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Figure Two: China- AllianceTexas® Supply Chain

The China- AllianceTexas® global supply chain is shown in Figure Two. When an order

is placed with Dong Hai Supply (EXW Chengdu, China) it will take 15 days for them to process,

manufacture, and stuff the order into a TEU container. Dong Hai Supply will use the Interface

Exporting Company (IEC) to ship the container FCA Long Beach. As a part of China’s aggressive

development in infrastructure, the high-speed Shanghai-Chengdu Railroad has recently been

completed,6 and will take IEC 1 days to move the container by rail from Chengdu to Shanghai.

It will wait 4 days at the Port of Shanghai waiting to be loaded onto a ship, 16 days to cross the

Pacific Ocean to the Port of Long Beach, and 3 days waiting to clear customs and be unloaded

onto a dockside rail spur in Long Beach. IEC charges 12,414.5 ¥ for each TEU shipped. Import

tariffs and duties are $325 per TEU are incurred at Long Beach U.S. Customs and charged

separately to IDC on a monthly basis. Once the shipment clears customs and is offloaded to

railcar in Long Beach it will take an additional 4 days to ship it FOB Origin Prepaid to IDC’s

AllianceTexas® Distribution Center. Rail shipping cost from Long Beach to AllianceTexas® is

$2,250 per TEU. Based on similar mini-landbridge shipments from inland China, Hazard

assumes the standard deviation of the shipping time will be 3.45 days.

FREISING, GERMANY SUPPLIER DETAILS

The second international source of supply is Staberhofer Supply, located in Freising,

Germany, just outside of Munich. The German transportation and logistics infrastructure are

well developed and supports trade throughout the European Union. Located 649 kilometers

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A Total Cost Approach to Understanding Supply Chain Risk

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from the port of Rotterdam, wages in Freising have been strictly controlled by the German

Bundestag and Bundesrat to help stabilize the EU economy. The average labor rate in Freising

is 15.68 euros per hour. Assume the current exchange rate for use in this case is 1 EUR Euro (€)

= 1.1735 US Dollar. In responding to IDC’s Request for Quote (RFQ), Staberhofer Supply’s price

is 70.53 € per unit.

Figure Three: Freising- AllianceTexas® Supply Chain

The Freising- AllianceTexas® global supply chain is shown in Figure Three. When an

order is placed with Staberhofer Supply (EXW Freising, Germany) it will take 11 days for them

to process, manufacture, and stuff the order into a TEU container. Staberhofer Supply will use

the Engelhardt GmbH to ship the container FCA Jacksonville. It will take Engelhardt 1 day to

move the container by rail from Freising to Rotterdam. It will wait 5 days at the Port of

Rotterdam waiting to be loaded onto a ship, 10 days to cross the Atlantic Ocean to the Port

of Jacksonville, and 3 days waiting to clear customs and be unloaded onto a dockside rail spur

in Jacksonville. Engelhardt charges 1,840 € for each TEU shipped. Import tariffs and duties are

$377 per TEU are incurred at Jacksonville U.S. Customs and charged separately to IDC on a

monthly basis. Once the shipment clears customs and is offloaded to railcar in Jacksonville it

will take an additional 5 days to ship it FOB Origin Prepaid to IDC’s AllianceTexas® Distribution

Center. Rail shipping cost from Jacksonville to AllianceTexas® is $2,720 per TEU. Based on

similar mini-landbridge shipments from inland Europe, Hazard assumes the standard

deviation of the shipping time will be 2.9 days.

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A Total Cost Approach to Understanding Supply Chain Risk

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Faced with this information Heskett has asked Hazard the following questions.

QUESTIONS:

Q1: Using the exchange rates cited in the case, what is the INITIAL PURCHASE COST

PER UNIT (in US Dollars; do not include transportation costs) paid to:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q2: What is the AVERAGE TIME for an order filling a TEU container to come from:

a. Dong Hai Supply in Chengdu, China to IDC’s AllianceTexas® Distribution

Center?

b. CousinsAg in Wahoo, Nebraska to IDC’s AllianceTexas® Distribution Center?

c. Staberhofer Supply in Freising, Germany to IDC’s AllianceTexas®

Distribution Center?

Q3: Using the exchange rates cited in the case, what is the COST (in US Dollars

including tariffs and duties) to ship a TEU container from:

a. Dong Hai Supply in Chengdu, China to IDC’s AllianceTexas® Distribution

Center?

b. Staberhofer Supply in Freising, Germany to IDC’s AllianceTexas®

Distribution Center?

Q4: What is the ECONOMIC ORDER QUANTITY (use unit price only; do not include

transportation costs when you calculate economic order quantity) if we

purchase everything from:

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A Total Cost Approach to Understanding Supply Chain Risk

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a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q5: How many units of SAFETY STOCK will we need to hold if we purchase

everything from:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q6: Inventory Carrying Costs are based on the value of the product at the time

it is held in inventory. What is the IN-TRANSIT CARRYING COST PER UNIT

(in dollars and cents) if we purchase everything from:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q7: What AVERAGE INVENTORY LEVEL (in units; be sure to consider both safety

stock and cycle stock) will we hold at the IDC’s AllianceTexas® Distribution

Center if we purchase everything from:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q8: Inventory Carrying Costs are based on the value of the product at the time it

is held in inventory. When the product is sitting in the IDC AllianceTexas®

Distribution Center, its value is a combination of purchase price PLUS any

transportation costs to get it from the supplier to the DC PLUS in-transit carrying

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A Total Cost Approach to Understanding Supply Chain Risk

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costs. What is the TOTAL ANNUAL INVENTORY CARRYING COST (in dollars) for

the safety stock and cycle stock inventory held at the AllianceTexas® Distribution

Center if we purchase everything from:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q9: Inventory Carrying Costs are based on the value of the product at the time it is

held in inventory. When the product is sitting at IDC’s AllianceTexas® Distribution

Center, its value is a combination of purchase price PLUS any transportation costs

to get it from the supplier to the DC plus in-transit carrying costs. ON A PER-UNIT

BASIS (in dollars) what is the TOTAL ANNUAL INVENTORY CARRYING COST for

the safety stock and cycle stock inventory held at IDC’s AllianceTexas®

Distribution Center if we purchase everything from:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

Q10: Let’s put it all together to determine the total cost of ownership. We have

determined the unit price, the in-transit carrying cost, the transportation costs,

and the IDC AllianceTexas® Distribution Center’s inventory carrying cost. If we

also consider the Annual Ordering Cost, what is the TOTAL LANDED COST OF

OWNERSHIP PER UNIT (in dollars) if we purchase everything from:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

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A Total Cost Approach to Understanding Supply Chain Risk

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Q11: If we change our strategy to “near-sourcing,” ANNUALLY WHAT IS THE

ADDITIONAL COST OF NEAR-SOURCING?

Q12: After we make our initial sourcing decision based on the lowest total (landed)

cost, we get hit with unexpected supply chain disruption which clogs the port

of Long Beach and delays shipments adding 89 days to receive a shipment from

our Chengdu supplier as cargo ships “drift” in San Pedro Bay waiting to unload.

If we shift from ocean shipping to air, flying from Shanghai to DFW, we can

bypass the port congestion, but at a much higher cost. Doing so will speed the

shipment to 1 day loading in Shanghai, 2 days air shipping, and 1 day to clear

customers at AFW and deliver from the Alliance airfield to our warehouse; but

at a cost 17 times that of ocean shipping for the same volume of freight.

A. How does this change your sourcing decision in terms of:

a. Dong Hai Supply in Chengdu, China?

b. CousinsAg in Wahoo, Nebraska?

c. Staberhofer Supply in Freising, Germany?

B. AT WHAT ADDITIONAL COST?

Q13: After considering the new information contained in Q12, based on LOWEST

TOTAL LANDED COST should we “near-source” or should we shift to air for

shipments from Chengdu supplier? WHAT IS THE LOWEST TOTAL LANDED COST?

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A Total Cost Approach to Understanding Supply Chain Risk

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ENDNOTES

1 “Modern High Seas Piracy,” 20 November 2000 presentation by Michael S. McDaniel to the Propeller Club of the

United States at Port of Chicago with November 2005 update. www.cargolaw.com/presentations_pirates.html

accessed 8 February 2010.

2 International Chamber of Commerce International Maritime Bureau (IMB) Piracy and Armed Robbery Against Ships

Annual Report 1 January – 31 December 2014. p. 5.

3 http://www.icc-ccs.org/piracy-reporting-centre/piracynewsafigures and

https://www.icc-ccs.org/index.php/1314-caution-urged-despite-lowest-reported-maritime-piracy-incidents-since-

1994

4 “Pirate attacks drive up the cost of shipping: Companies face higher insurance rates or taking longer, expensive

routes,” April 12, 2009, www.msnbc.msn.com/id/30180080/ accessed 8 February 2010.