1. Situation analysis
Chris Summers, vice president of the management company to provide oilfield services Elevalt chain, is devoted to an analysis of their distribution centers worldwide (PED). Should evaluate network Elevalt developing countries across Europe, Africa and the Middle East to see if it would be beneficial to strengthen the existing network of six developing countries in one centralized DC in Europe or Africa. Before this decision can be taken, you should first optimize the current operation, which seems to suffer from inefficient management stocks. Inefficient inventory management also appears to be the engine of the additional transport costs. Summers should consider the benefits and risks associated with the consolidation of PED Elevalt maintaining its focus on the needs of customers Elevalt.
Operation process: Oil and gas extraction process
EVT’s customer received permission from relevant government agency to drill for oil or gas. EVT then offer exploration to conduct geological surveys and assessments (use seismic waves). If customers decide to extract oil or gas in specific region, EVT will perform drilling phase to drill into a specific ground using data gathered in exploration phase. After drilling, EVT start to build out the infrastructure to bring oil and gas safely out of the ground and distribution system. This phase is called completion. The last phase – production is to extract the oil or gas from the ground and transport to refinery. EVT’s customers (Petroleum companies) then refine the 2. Assumptions and missing information relating to operations
Summers’s team surmised that the EAME region was the dominant contributor to the disparity between inventory, total supply chain costs, and customer service levels. The diamond drill could reasonably be assumed to present 2.6% of the EAME region’s costs andv would serve as a baseline for comparing the inventory, transportation, and labor cost savings of each of the subsequent options.
For Scenario 1:
Putting a systematic ordering process in place would ensure that DC had sufficient inventory on hand and eliminate the need for transshipments. One diamond drill could be shipped per pallet. A full truckload carrier would be used for every 32 pallets ordered. If the order contained fewer than 32 pallets, diamond drills would be carried by a less-than-a-truckload carrier. The need for transshipments would be eliminated.
For Scenario 2:
Centralizing all items in a single location would allow for a greater proportion of truckload. The increased average distance the carrier would travel would be offset by the increased utilization of truckload carrier. Using diamond drill to evaluate the whole supply chain process is unsufficient because diamond drill is only one small part and it couldn’t be representative of the company’s overall inventory. Thus the information of all other parts in stock is the missing information. Other missing information is the information about the rest regions that EVT is operating in because the EAME region was supposed to be the main contributor to the problem but in fact that EVT is also operating in North America, South and Central America, Russia, and Asia Pacific.
3. Definition of the operational problem(s)
Problems: there are two main problems in this case:
At EAME regions, one DC had too much of one item and other DC had not enough that item. The DC with too little item requests to transport such item from the one with too much. This situation led to increasing transportation costs and decreasing customer service levels. At EAME regions, there was no set system in place, the quantity that any one DC ordered more dependent on who called the supplier than on how much inventory was on hand. 4. Development of alternative solutions for improving operations
Scenario 1: optimized current state
Inventory: Putting a systematic ordering process to ensure each DC had sufficient inventory on hand and to eliminate the transshipment. Inbound transportation: Determine the transportation costs, the different costs of various types of carriers (full truckload – TL, and less-than-a-truckload – LTL). Summers had used diamond drill as an example of how to save the transportation cost. Outbound transportation: with inventory system, and the need for transshipment is eliminated, Summers and his team had presented transportation cost base on demand in 2011. Labor: The elimination of transshipments, along with the implementation of systematic inventory ordering, the substantial overtime and temporary labor costs could be eliminated. Scenario 2: Consolidate distribution to a centralized DC (in Germany or Sudan)
Inventory: Summers and his team still put a systematic ordering process, but they would also consolidate the inventory into a single DC located in Germany or Sudan. Inbound transportation: Summers and his team would like to centralize all items in a single location to achieve greater of TL and LTL. Team hoped the increased distance would be offset by the increased utilization of TL carriers. Outbound transportation: The consolidation faced issue of consolidate a customer shipment within EAME region (a single truck from Azerbaijan and Edinburgh might be more costly). Labor: with consolidation operations, Summers and his team expected to reduce the labor cost.
5. Evaluation of alternatives and recommendations to management for improving operations Scenario 1: optimized current state
The advantage of this solution is eliminating transshipments and reducing labor costs. With the elimination of transshipment costs, the cost of outbound shipping could be calculated based on 2011 demand and shipping by removing all transportation costs. The labor cost saving from the reduction of overtime and temporary labor required to handle the transshipments was about 3%, equaling to $900,000. Scenario 2: Consolidate distribution to a centralized DC (in Germany or Sudan) The advantage of this solution is the consolidation of the inbound transportation that would allow for a greater proportion of truckload carriers on inbound shipments. Calculation showed that with a full truckload, the inbound per-pallet cost increased by $0.2 with centralization in Germany, and by $0.6 with centralization in Sudan to compare with the current network of DCs.
With a less-than-a-truckload, the inbound per-pallet cost increased by $0.7if centralizing in Germany, and even by $1.9if centralizing in Sudan to compare with the current network of DCs. The outbound transportation costs were also increased because despite of the consolidation of DCs, the shipments to customers would still have to travel to their distinct location. Calculation showed that the outbound transportation costs would increase by 0.75% to 4.5% if originating DC is Germany and increase by 3% to 9% if originating DC is Sudan. The labor cost saving from the reduction of overtime and temporary labor required to handle the transshipments was $3,000,000 if a centralized DC in Germany and $7,500,000 if a centralized DC in Sudan.
In my opinion, putting a systematic ordering process in both scenarios was a good decision. However, the scenario 1 has its own issue.
In Scenario 1, Summers and his team had concentrated on diamond drill transportation only, and ignored the possibility of combine all inventory parts into one shipment. The combination of all inventory parts ordering in one truckload would increase the utilization of TL carriers that would save the transportation costs. Summers should investigate in detail the monthly demand of all inventory parts within EAME region.