2836.doc - Innovative Distribution Company A Total Cost...

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Innovative Distribution Company A Total Cost Approach to Understanding Supply Chain Risk CASE OVERVIEW: This case illustrates the use of the total cost of ownership concept to analyze two supply chains, one international and one domestic. Students must calculate economic order quantity and safety stock quantities, then combine purchase price, shipping costs, and inventory carrying costs to quantify the differences between the two supply chains. The domestic vs. international aspects of the case allow the instructor latitude in discussing: 1) Differences in labor rates driving outsourcing 2) Use of exchange rates 3) Contrast INCO terms versus FOB terms 4) Understand the economic development of inland China and their developing infrastructure 5) In-transit carrying costs and on-site inventory carrying cost 6) Economic order quantity 7) Safety stock 8) Total cost of ownership Learning Objective and Appropriate Audience The case addresses many activities in supply chain management that may be quantified to help assist a lowest total cost of ownership decision. It has been effectively used with the intermediate to advanced student in a senior-level capstone course to synthesize the many trade-offs which should be considered in supply chain management. It may also be effectively utilized within a junior-level international logistics course. "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. Did you know piracy has been dramatically increasing? In 2005 there were 276 piracy incidents and in 2009 there were 406 incidents worldwide 72 "Wow! That has got to cost someone a bundle. Who pays for that?" asked Heskett. "I read a segment on MSN about that," 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 adds 2,700 miles to each trip and increases fuel costs by $3.5 million annually—and, since the ships 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

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