The uncertainty in demand is reflected in the reorder point and safety stock. The more the variability in demand the higher will be the reorder point and the safety stock. A higher deviation in demand would directly affect the safety stock levels required at the warehouses and hence increase the inventory carrying costs. This increase would then affect the overall costs. Using our excel model, If we increase the standard deviation of annual demand from 10,000 to 32,000, the overall costs for Rotterdam become higher than those of Zaragoza. Similarly, varying the service life has an impact on the total cost as it controls the safety stock which in turn controls the inventory holding cost. Hence, as the service life increases to a higher value the cost of option 2 (Zaragoza) will be lesser than option 1. Cost of the product
As the cost of the product increases the inventory holding cost increases increasing the total cost. So Zaragoza as has a better cost advantage over Rotterdam option. In our excel model, plugging a product cost of 295 Euros (E 47 and F 47 cells), keeping all other parameters unchanged makes Zaragoza a better cost option. So it is a factor to be considered.
Based on our above analysis, we recommend the following to the CEO of Zaragoza Logistics Park (Who should they try to sell their idea/option) Zaragoza should target customers with high number of units/TEU They should target customers with high product costs
They should target customers whose demand uncertainty is high They should target customers with high annual demand rates
They should target customers who have preference for high service rates Plaza is also an educational center for logistics while Rotterdam is a just a logistics park. Zaragoza should try to educate the customer about the supply chain benefits of associating with a world class logistics research center Plaza is a government backed firm – they should use this factor to instill more confidence in the customer over a private firm like Rotterdam option