Freight Transport – Assignment

Please carefully read the instructions outlined in the assignment.This case was written by Melvyn Peters School of Management, Cranfield University, Cranfield,Bedford MK43 0AL,England.© Copyright Cranfield School of Management, Sept 2020All rights reserved.Introduction NB: This case study has been based on true trading data but made anonymous to protect the identity of the company.  For the purposes of this case study the focus is restricted on the outbound logistics of specialist silicas from the main UK site (North West – Manchester Area)UK Sands is a global chemical business producing speciality inorganic chemicals and operates over 60 manufacturing sites in 21 countries. Annual sales revenues are in excess of $1 billion. Silica and related products are produced in two manufacturing plants at the main UK site located in the North West.  There is a wide range of Stock Keeping Units (SKUs) created through multiple production routes. The customer end use of silica is extensive, as a; flow aid in food, mild abrasives in toothpaste, filter aids in beer manufacture, catalyst support in ethylene polymerisation, to name a few. The sales value and contribution margin of these more speciality chemical products are significantly higher than the other bulk commodity chemicals produced at the site. Whilst Silica only accounts for 25% of sales tonnage, it contributes 70% of the site’s total sales by value and accounts for 74% of the site’s outbound freight costs (see Appendix A).The marketplace for silica is global. Silica product is provided in a variety of pack formats but mainly in valve sacks, drums, and bulk bags all of which are palletised. However, pack configuration and dispensing technology lead to poor vehicle fill as the product cannot be stacked. Bulk tanker supply is limited to a few major customer accounts in Europe. Transportation of silica products to customers is predominantly by road haulage or sea containers. Road haulage dominates the UK and European markets whilst more distant regions of Asia Pacific and the  Middle East are serviced by sea freight.UK Sands’ Supply Chain For UK Sands there are a number of fixed factors that constrain the supply chain and transport options for servicing the market. Chemical manufacturing sites are capital intensive and aim to operate on a 24 hr/7day basis in order to generate a satisfactory return on investment. Operational focus is on lean manufacture through Economic Order Quantities (EOQ) and supply of full pallets/loads. This gives rise to a mismatch in supplier/ customer goals. With historical investment at locations close to key raw materials.  The UK site has found itself increasingly remote from the more global silica markets it now competes in.  For the silica business, some products are only produced at the UK site due to a combination of processing technology and local raw material quality. These products cannot be supplied to global customers from closer regional sites. Freight costs, therefore, have to be kept low in order to service distant markets and maintain profitability against the more locally based competition. Sea freight in the format of full container loads is therefore predominantly used. However, the supply lead time is obviously extended (6 – 8 weeks) and there is a higher level of inventory throughout these supply chains. Silica to Oman A significant proportion of silica catalysts and related products are supplied to the petrochemical industries in Oman in the Middle East.  This is the UK site’s highest margin business relative to tonnage and the most specialised area of the silica product range. Local customer lead times are relatively short at 1-2 weeks and 100% On Time In Full (OTIF) has to be maintained for these ‘A’ list customers. Product is routinely shipped from the UK to a third-party regional distribution warehouse near to the port of Sohar, Muscat from where the product is transferred into a third-party warehouse and into the ownership of Silica’s local operating company who provide onward delivery and customer service.  The average inventory holding (Oman) to support catalyst sales was 150 tonnes in 2019. Historically there have been occasions when customer demand has overtaken plant capacity, stocks have dropped, and continuity of supply has been threatened. On these occasions, the site has used airfreight to reduce the transport lead time. Airfreight has also been used in the event of plant quality problems or sudden high un-forecast demand. It is believed by many in the company that the higher value silica’s being shipped to the Middle East can be switch to air freight which would remove approximately 100 tonnes from the average inventory holding with obvious cost savings for the company (weighted cost of capital in UK Sands is set at 15%). A former college had developed an evaluation framework but never completed the cost comparison.  The comparative costs for the sea and air transport options are shown in Appendix B.  AssessmentYou have recently taken the position of Supply Chain Director at UK Silica Sands and you have been tasked to evaluating the options for outbound transport for silica catalyst products to Oman. You have been asked to write a concise management report detailing:Which of the two transport modes would you recommend on total cost grounds to serve Oman? You should use the framework provided in Appendix B to calculate the two modal options (30% of Marks)How sensitive is the model to changing costs?  Identify the cost drivers and test the model sensitivity (30% of marks) What are the relative strengths and weaknesses of the two modal options and the wider issues that need to be considered? (30% of marks)An additional 10% of marks will be awarded for the structure, presentation and referencing (if relevant).The report should be divided into appropriate section:  Executive SummaryTable of ContentsIntroduction (including problem statement) Body of the report Conclusion (Recommendations) ReferencesAppendixAssumptions, logic and justifications should be carefully stated.  Whilst this is a report, based on the case study material provided, you may still use references where they support the arguments and recommendations you put forward.   Maximum words: 1,500 (see assessment format as attached)Appendix A:  Annual Sales and Trading Data Annual sales tonnes, value and costs for the UK by product groups (2019).Product GroupSalesSalesFreight CostFreight Cost (tonnes)(Million £)(Million £)% of Sales     XXXXXXXXX,XXXXX.XXXX.XXXX.X%YYYYYYYYY,YYYYY,YYYY.YYYY.Y%Silicas27,67157.1683.3705.9% Total109,39081.5604.5505.56% Annual Sales for the UK by product groups (2019) SILICAS Product GroupSales RegionsSalesSalesFreight CostFreight Cost(tonnes)(Million £)(Million £)% of SalesUK6,6878.8700.4114.6%Europe (excl. UK)13,14029.9901.6455.5%Asia Pacific1,0315.7000.80314.09%Middle East1,1606.3300.85013.43%Africa3,5784.1030.60114.65%Latin America2,0752.1750.38217.56%xTotal27,67157.1683.3705.9%Appendix B: Silica supply to Oman: Total Landed Cost Model (draft 2019)Sea AirAnnual sales kgCost price per kg Cost price p.a.Shipping Cost per kgShipping Cost p.a.Insurance Duty p.a.  Average Inventory (tonnes) Inventory Value per tonneTotal Inventory ValueInventory holding cost p.a. Warehousing costs p.a. (storage & handling)Total Costs p.a.Data (for 2019)Forecast annual sales (2019) to Oman – 780 tonnesAverage cost price per Kg £5.77Sea freight FCL costs (transit time 31 to 33 days, last quoted rates 2019)20ft   £1,520 – per TEU – 10t payload 40 ft   £1,820 – per FEU – 20t payload Air freight costs £0.96 per kg (transit time 5 -7 days, last quoted rate 2019 to Muscat Int. and adjusted for volumetric weight)Average in-transit and local inventory held – 250 tonnes (sea) Allocated local warehousing/storage/dispatch costs (variable) at £65,500 pa (Oman) Assumptions:Cost of capital 15%Import duty 5% (this is the weighted average based on the different HST codes relating to the product ranges being exported by UK Sands into Oman). Oman calculates import duty using the CIF method.International freight insurance – 1.07% Sea and 0.92% Air  

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