1. Case: Optimizing Supply Chain Costs – TCT Company (35 points)
1. Case: Optimizing Supply Chain Costs – TCT Company (35 points)
After announcing disappointing financials for the 2017 Fiscal year, TCT Company decided that it would be taking a hard look at several business areas to reduce costs and improve customer satisfaction. After some preliminary analysis, one of the key areas that were identified was supply chain costs.
John Lee was tasked with evaluating the 2017 supply chain cost performance and developing methodologies that would improve 2018 performance. His evaluation will include a few important items such as the optimal distribution plan, correct number of distribution centers, individual distribution center (DC) performance, etc.
Company Background
TCT was founded in the early 1990s as a small newspaper covering stories around Shanghai. After years of being in the newspaper business, TCT decided to leverage its strong business acumen and move into the paper
production business. TCT soon became a niche player to serve mass-market paperback book publishers in four markets: Northwest, Northeast, South, and East. TCT prided itself on being able to offer its customers low pricing and exceptional services. TCT’s success was also attributed to its ability to manage cash and inventory effectively. TCT currently operates four distribution centers (DCs) in the following cities: Shanghai; Xian, Shenzhen, and Shenyang. The annual capacity and operational cost of each distribution center is listed in Table 1. The demand for each market is in Table 2. Table 3 is the shipping cost (USD/ton) between DCs and markets.
Table 1: Distribution Center (DC) Annual Output (capacity of DC) and Operational Cost
DC Location
Annual Capacity (Tons)
Annual Operational Cost ($)
Shanghai
350
$100,000
Xian
230
$80,000
Shenzhen
335
$110,000
Shenyang
210
$90,000
Table 2: Annual demand for each market
Market
Annual demand (Tons)
Northwest
175
Northeast
280
South
300
Shanghai
120
Table 3: Shipping Cost between DCs and Markets (US$/Ton)
From/To
Northwest
Northeast
South
East
Shanghai
475
350
100
170
Xian
250
180
220
305
Shenzhen
215
245
300
420
Shenyang
205
160
320
280
Please response the following questions (you need to submit your model and spreadsheet as well):
1. (10 points) Formulate the case in linear programing (LP) model without closing any DC. You need to define the variables clearly and write the objective function and all constraints.
2. (10 points) If the annual total supply chain cost (Total cost from DCs to Markets and the operational cost for DCs) was $600,000 in 2017, did TCT minimize its total supply chain cost? If the total supply chain cost in 2017 was not minimized, what is the minimum total supply chain cost in 2017 and how much savings could have been achieved in 2017?
3. (5 points) What would be the optimal volume allocation from each distribution center to each market under the 2017 scenario?
(10 points) If TCT would like to consider an option of closing one of the DCs, how would you modify the LP model created in question 1? What is the optimal solution for this situation?
