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New England Root Beer Distributors (NERD4)
• Case Objective
NERD, a regional distributor of high quality root beer in the northeast
of the United States, is exploring network restructuring to include:
Sourcing from a new supplier
Eliminating some Distribution Centers (DCs)
• Supply Chain Details
Sources product (barrels) from single plant in Scranton PA (SCP) to five
DCs located in Massachusetts, Rhode Island, and New Hampshire.
Transportation from SCP to DCs is by a national truckload carrier.
Product is stored at these DCs and is distributed by a local courier to
12 total cities. Each city is supposed to be dedicated to a single DC.
The DCs vary in size with capacities of 1000 barrels/week (Boston,
Providence, and Worcester) and 500 barrels/week (Nashua and
Springfield).
BO
WO
SP
HA
P
R
Plant
Scranton
N
NH
L
dij BO BR CO HA MN NA NH NL PO PR SP WO
BO 8 93 69 98 55 37 128 95 62 42 82 34
NA 37 65 33 103 20 12 137 113 48 72 79 41
PR 42 106 105 73 92 72 94 57 104 17 68 38
SP 82 59 101 27 93 79 63 57 127 68 12 47
WO 34 68 72 66 60 41 98 71 85 38 47 18
$/shipment
Cost structure (by shipment, not unit!)
Fixed costs
Variable costs - $/mile
distance
Minimum charge
• Existing Lanes (SCP to all DCs)
Convert history ($/shipment) to usable form ($/unit)
Find cost per shipment and average volume shipped for each lane
Determine average cost per unit (barrel) for each lane
No exact approach – find a “good enough” approximation
Be careful with minimum charges and per mile charges
• New Lanes (BFP to all DCs)
No history exists!
Get rates from existing carriers (retail, list, or “rack” rates)
Regress existing rates to uncover $/unit/mile and estimate
Use benchmark rates from other sources
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 7
Transportation Data – Inbound
Inbound Transportation Costs
Things to note:
$/barrel BFP SCP
BO $3.40 $4.80 • Outbound transportation is much more
NA $3.00 $5.25 expensive than inbound
PR $4.40 $5.12 • Costs are based on existing historical
SP $3.04 $4.00 volumes
WO $3.36 $4.20
• These are not the lowest possible rates,
just best estimates
$/barrel BO BR CO HA MN NA NH NL PO PR SP WO
BO $4.40 $51.15 $37.95 $53.90 $30.25 $20.35 $70.40 $52.25 $34.10 $23.10 $45.10 $18.70
NA $20.35 $35.75 $18.15 $56.65 $11.00 $6.60 $75.35 $62.15 $26.40 $39.60 $43.45 $22.55
PR $23.10 $58.30 $57.75 $40.15 $50.60 $39.60 $51.70 $31.35 $57.20 $9.35 $37.40 $20.90
SP $45.10 $32.45 $55.55 $14.85 $51.15 $43.45 $34.65 $31.35 $69.85 $37.40 $6.60 $25.85
WO $18.70 $37.40 $39.60 $36.30 $33.00 $22.55 $53.90 $39.05 $46.75 $20.90 $25.85 $9.90
DC Costs
• Fixed vs Variable Costs
One can argue that . . . barrels/week
All costs are variable – “over time I can change anything”
All costs are fixed – “once a facility is in place, everything is set”
Think of the impact to the design
Fixed costs – will minimize the number of facilities opened
Variable costs – will use all facilities with lowest unit cost
• Third Party Facilities
Terms of contract - Monthly/weekly fixed fee plus handling or variable charges
• Owned Facilities
Plants Var Cost
Fixed Costs BF Plant $2.00
Operating versus Capital Costs SC Plant $0.75
Capacity can be used as a tool
Distribution Center Var Cost Fixed Cost
Variable costs Boston - BO $1.50 $11,000
Activity Based Costing (ABC) Nashua - NA $0.95 $5,000
Providence - PR $1.05 $9,000
Labor, Utility, Material, Handling etc. costs Springfield - SP $1.10 $8,000
Capture from historical data Worcester - WO $1.12 $7,000
Current
Flows
BO BR CO HA MN NA NH NL PO PR SP WO Qty
BO 400 0 25 0 15 30 0 0 20 50 0 40 580
NA 0 15 50 0 90 100 0 0 85 0 0 0 340
PR 5 0 0 25 0 0 60 60 0 40 60 60 310
SP 15 0 0 85 0 10 80 10 15 60 60 20 355
WO 30 45 5 20 5 0 0 0 0 160 80 70 415
Qty
Delivered 450 60 80 130 110 140 140 70 120 310 200 190
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
BL1: Actual BL2: Adhere BL3: Optimal
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
BL3: Optimal S1: 4DC S2: 3DC S3: 2DC S4: 1DC
$85,000
$75,000
$70,000
$65,000
BL1: BL2: BL3: S1: 4DC S2: 3DC S3: 2DC S4: 1DC
Actual Adhere Optimal
BFP
PO
MN
BR
NA
BO
WO
S
P
HA
P
R
SCP N
L
NH
• Action:
B
P
O
M
N
B
R
F
P N
A
W
O
S
P
H
A
P
R
S N
N
L
C
H
# DCs to Open 5 3 3 3 4 4 3 5
LOS - Avg Distance 23.51 33.0 33.0 33.0 29.1 29.1 37.8 23.505
LOS - PctIn50Miles 87% 87% 87% 87% 81% 81% 65% 0.865
Demand 2000 2000 2000 2000 2000 2000 2000 2000
$/bl $39.54 $34.38 $34.26 $34.13 $50.35 $50.67 $41.05 $39.41
$110,000
$100,000
$90,000
$80,000
$70,000 DC Handling
$60,000 Mfg Costs
$50,000
IB Transport
$40,000
OB Transport
$30,000
DC fixed cost
$20,000
$10,000
$-
BL3: Optimal S5: BFP@250 S6: BFP Infinite S7: Demand 50% S8: Demand 50% S9: 3 Big DCs S10: LOS Mins
BFP no BFP
CTL.SC2x - Supply Chain Design Lesson: Network Design Models 38
Key Take Aways
caplice@mit.edu