CASE STUDY

Delivery Strategy at MoonChem

John Kresge, vice president of supply chain, was very, concemed as he left the meeting at MoonChem; a manufacturer of specialty, chemicals. The year-end meeting evaluated financial performance and discussed the fact that the Iron was achieving only two inventory turns a year. A more careful look revealed that more than half the inventory MoonChem owned was in consignment with its customers. This was very surprising, given that only 20 percent of its customers carried consignment inventory, John was responsible for inventory as well as transportation cons. He decided to take a careful look at the management of consignment inventor), and come tip with an appropriate plan.

MoonChern Operations

MoonChem, a manufacturer of specialty chemicals, had eight manufacturing plants and 40 distribution centers. The plants manufactured the base chemicals, and the distribution centers mixed them to produce hundreds of end products that fit customer specifications. In the specialty chemicals market. MoonChem decided to differentiate itself in the Midwest region by providing consignment inventory to its customers. The company wanted to -take this strategy national if it proved effective. MoonChem kept the chemicals required by each customer in the Midwest region on consignment at 12 small customers. The annual consumption at each type of customer was as shown in Table 1. Golden charged $400 for each shipment from Chicago to foods, and MoonChem's policy was to send a full truckload to each customer as needed.

John checked with Golden to find out what it would she to include shipments for multiple customers on a single load. Golden informed hint that it would the customers' sites, Customers used the chemicals as needed, and MoonChem managed replenishment .to ensure availability. In most instances, consumption of chemicals by customers was stable. MoonChem owned the consignment inventories and was paid for the chemicals as they were used.

Distribution at MoonChem

MoonChem used Golden trucking, n full-truckload carrier, for all its shipments. Each truck had a capacity of 40,000 pounds, and Golden charged a fixed rate given the origin and destination, regardless of the quantity shipped on the truck. MoonChem sent full truckloads to each customer to replenish its consignment inventory.

The Illinois Pilot Study

John decided to take a careful look at his distribution operations. Ile focused on the State of Illinois, which was supplied from the Chicago distribution center. Ile broke up Illinois into a collection of zip codes that were contiguous, as shown in Figure 11-9. He restricted attention to the Peoria region, which Wes classified as zip code 6)5. A careful study of the Peoria region revealed 2 large customers, 6 medium-sized customers, and Charge $350 per truck and add $50 for each drop-off that Golden was responsible for. Thus, if Golden carried a truck that had to make one delivery, the total charge would be $400. However, if a truck had to make four deliveries, the total charge would be $550.
Each pound of chemical in consignment cost MoonChem $1, and MoonChem had a holding cost of 25 percent. John wonted to analyze different options for distribution available in the Peoria region to decide on the optimal distribution policy. The detailed study of the Peoria region would provide the blueprint for the distribution strategy that MoonChem planned to roll out nationally.

QUESTIONS

1. What is the annual cost of MoonChem's strategy of sending full truckloads to each customer in the Peoria region to replenish consignment inventory?

2. Consider different delivery options and evaluate the cost of each. What delivery option do you recommend for MoonChem?

3. How does your recommendation impact consignment inventory for MoonChem?