Applied Business Optimization and Modelling

 

Disclaimer

Please note all the information and any related data presented in this project are NOT accurate, and are not supported by any reference either. They are only provided for you for this project. You should not assume that this is real data.

Background

In this project, we will be working on a supply network design problem for a company— let’s call the company ‘SND Australia Limited’ and use ‘SND’ for short. SND operates across Australia in the following major cities: Adelaide, Brisbane, Melbourne, Perth and Sydney.

SND has an overseas supplier—let’s call it ‘OVS’—which has been steadily supplying SND’s demand over the years. OVS uses sea transport to supply SND and transports all the goods to the designated ports as specified by SND. As all the major cities have ports, we assume that once freight reaches a port, there will be no additional cost required to get into the corresponding city. There will be additional costs, however, if SND decides to re-direct freight from one city to another city within Australia. When such a decision is made, the re-direction of freight will be managed via road transport and the corresponding road freight charges apply.

Affected by recent uncertainty and volatility in business environment, the top management of SND has allocated a budget for setting up a subsidiary in Australia—let’s call it ‘DMS’— to complement any quick surge in demand. The subsidiary DMS, when requested, will be able to produce a maximum of 500 units per month for SND. At other times, DMS seeks opportunities from other business and therefore does not incur cost to SND. In this project, please assume that the set up cost of DMS will be the same for any city in Australia. In this sense, this set up (fixed) cost does not need to be considered.

SND adopts and operates on a monthly ordering cycle and therefore we will only focus on one month’s logistics activities to design the supply network. The objective is to design a supply network that minimises the total logistics cost. Table 1 lists the demand for each major city and the unit production cost if DMS chooses to operate at the particular city.

 

 

 

 

 

Demand atUnitsProduce atUnit cost
Adelaide420DMS Adelaide$450
Brisbane870DMS Brisbane$480
Melbourne1,250DMS Melbourne$505
Perth930DMS Perth$490
Sydney1,310DMS Sydney$515
  DMS OVS$440

Table 1: Demand and unit production cost for SND.

Transport Cost and Lead Time

Sea transport will be used for the shipments from the overseas supplier OVS; while road transport will be used for transport within Australia. For sea transport, we will be able to use either 20’ or 40’ containers. In addition, less-than-container load (LCL) could also be used, i.e., sea transport on a unit basis and charged by the number of units shipped. Each 40’ container can hold 200 units; and each 20’ container can hold half of that amount, i.e., 100 units. Due to loading and safety constraints, containers must be fully loaded at all times. If the number of units is not enough to fill a full container, then the LCL option—where special safety measures are taken—must be used.

 $/40’ container$/20’ container$/LCL unitLead times (Days)
Adelaide2,0001,2002530
Brisbane1,6001,0002021
Melbourne1,8001,1002328
Perth1,2007001518
Sydney1,6501,0502225

Table 2: Sea transport cost and lead time from overseas supplier to cities

SND needs to pay its supplier upfront, which means that SND needs to bear the inventory holding cost when the freight is being transported from OVS. Table 2 presents the unit transport prices for a 40’ container, a 20’ container, and a unit transported via LCL. The lead time of sea transport between OVS and each major city is also listed in the table. The accounting department mentions that an annual interest rate of 15% would be reasonable to calculate the inventory holding cost.

Within Australia, road transport will be used. The unit transport cost between each pair of cities is shown in Table 3.Becauseefficientroadtransportonlytakes1–3daysbetween any pair of cities, the holding cost can be safely ignored

 

 

 AdelaideBrisbaneMelbournePerthSydney
Adelaide$0$35$10$35$25
Brisbane$35$0$25$70$15
Melbourne$10$25$0$45$15
Perth$35$70$45$0$55
Sydney$25$15$15$55$0

Table 3: Road transport cost per unit between cities

Project Tasks

The tasks for the project are straightforward, as a group, you need to determine:

  1. What is the lowest cost for SND? (Remember to include all the related cost components in your model.) And where should SND set up its subsidiary DMS?
  2. How is the international sea transport and the domestic road transport managed?
  3. What can you conclude from you model
  4. How sensitive is your solution to some of the parameters, such as unit cost at different places, transport cost, lead time?
  5. How sensitive is your solution to the fluctuations of demand?
  6. What will happen if SND does not set up the subsidiary DMS? More specifically, how would the transport operations change?p(6)

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