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Received March 1998 Revised June 1998

Evaluation of alternative logistics operations for the national supply of an imported bulk commodity
The use of a spreadsheet model
Peter Gilmour
Graduate School of Management, Macquarie University, Sydney, Australia
Introduction One result of the continuing current competitive environment in Australia is cost pressure on the supply of manufacturing commodities such as anhydrous sodium sulphate. Commodity suppliers do not have much scope for providing value-added services. Anhydrous sodium sulphate, for example, is mostly brought to the customers attention when negative service characteristics occur stocks run low or run out; deliveries do not arrive when expected; physical product characteristics are not what are expected; unexpected price movements are imposed. For participants in commodity markets price is always important. A small price change for a large commodity user can have a large dollar impact. This paper describes the analysis of the logistics system for one supplier of anhydrous sodium sulphate to the Australian market, Akzo Nobel. This examination considered the total cost and customer service implications of the present supply of anhydrous sodium sulphate from North American Chemical Company and Saskatchewan Minerals from the US west coast, its unloading at three Australian ports the Kooragang Island wharf at the Port of Newcastle (about 150 kilometres north of Sydney), in Melbourne and Brisbane and subsequent distribution to customers in Sydney, Melbourne, Brisbane and the Gold Coast (about 70 kilometres south of Brisbane). From this initial basis a number of options for restructuring anhydrous sodium sulphate logistics were examined: the use of a single inbound port: at Kooragang Island in the Port of Newcastle; at Pt Kembla (about 70 kilometres south of Sydney); establishment of a single centralised distribution centre for the national distribution of anhydrous sodium sulphate: at Akzos current facilities at Camellia in Western Sydney; at Akzos current manufacturing site at Tomago (about 30 kilometres inland from the port at Kooragang Island); at TNTs site at Kooragang Island.

International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 5, 1998, pp. 382-395, MCB University Press, 0960-0035

In addition to these major structural options a number of possible improvements were examined which can be applied to any of them. These were the installation of a centralised national order processing operation for anhydrous sodium sulphate, the reduction of national inventory holdings of the product, changes in the terms of trade, modified relations with distributors and improved interrelationships with customers. Current logistics operation Akzo ordered all anhydrous sodium sulphate from either North American Chemical Company or Saskatchewan Minerals. Material from North American Chemical Company was loaded at Long Beach, California and Saskatchewan Minerals loaded its anhydrous sodium sulphate at Long View, Washington. Normally six vessels were received in a year with each carrying around 6,000 tonnes of product. All vessels were partially or completely unloaded at the K2 berth at Kooragang Island in the Port of Newcastle. In most instances the vessel was unloaded at two or three ports Newcastle and Melbourne, Newcastle and Brisbane or Newcastle and both Melbourne and Brisbane. From these ports, the anhydrous sodium sulphate was trucked to the Akzo warehouses in Sydney (Camellia), Melbourne (Spotswood) and Brisbane. These three centres supplied customers orders in their respective states. South Australian orders were supplied from Spotswood. Negligible sales were generated from the rest of Australia. Customers were categorised according to the manner in which they wanted the product supplied. Smaller customers were supplied in 25kg sacks which were branded Akzo for customers supplied direct by Akzo and were branded Brycodate for customers supplied by Robert Bryce & Co. Ltd, Akzos sole distributor. Larger customers were typically supplied in one tonne bulk bags. The largest customers were supplied in bulk using either a tip truck (of about 26 tonne capacity) or a pneumatic powder tanker. Akzo had five bulk customers in Sydney and one at Labrador on the Queensland Gold Coast. Bulk bags were supplied to three customers in Sydney, four in Melbourne and one in Adelaide. 25kg bags were supplied to the distributor Robert Bryce for onsale to their customers. In addition, Akzo supplied 25kg bags direct to 30 customers in New South Wales, 26 customers in Victoria, four in Queensland and 15 in South Australia. Akzo arranged and paid for contract cartage to make these customer deliveries with the exception of Robert Bryce and a small number of other customers who picked up their orders from the nearest Akzo warehouse. The Akzo logistics operation was examined for an annual period. This was done by developing a computer spread-sheet model (Microsoft Excel) of the operation from ships arrival to customer delivery receipt. The basic structure of the model is shown in Table I. Table I is presented in four columns. In the actual spreadsheet these were all row headings and the column headings were the four states New South Wales, Victoria, Queensland and South Australia and a total column. The first section shows the total demand in dollars and customer demand in tonnes for this period as well as the average price paid per tonne by product category. Following this section are six other sections which relate to

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the physical logistics activities which generate costs during the movement of product through the logistics channel. These sections are: inbound shipment; line haul; local delivery; stock holding; warehousing; and order processing.
Demand ($m) Price per tonne: Bulk Bulk bags 25kg bags Demand (tonnes): Bulk: Bulk bags: 25kg bags: Totals Bulk tonnes Bulk bag tonnes 25kg tonnes Total tonnes Discharge costs: Ave $/tonne No of truckloads No of tonnes Rate/truckload Rate/tonne Acutal line haul cost LOCAL DELIVERY Pickup % Ave tonnes/order Ave $/order Ave tonnes/delivery Bulk Bulk bags 25kg bags Outside carrier % Rate $/tonne bagged Rate $/tonne bulk1 Rate $/tonne bulkbag Outside carrier cost Akzo truck costs Drivers wages Fuel and oil Maintenance Depreciation Actual local deliv cost STOCK HOLDING Actual weeks inv Inventory held $ Cost of holding inv Inv hold costs actual WAREHOUSING No of WH staff No of sup staff No of work days Daily productivity rate WH labour cost pw Annual WH compensat WH equipment $ Annual WH equip $ WH rent/opp per mth WH size sq m Market rental/sq m WH opp cost $ Total actual WH Cost ORDER PROCESSING No of orders ASS Percent ASS orders No of orders all prods Ave $ size per order No of order takers Calc daily prod rate Daily productivity rate OP labour cost annual Annual compensation OP labour cost OP equipment $ OP supervisory cost Total actual OP cost TOTAL COSTS Actual Logistics Margin

Table I. Format of the spreadsheet

Agency fees Shipment 1: July Shipment 2: Oct Shipment 3: Nov Shipment 4: Apr Shipment 5: June Shipment 6 Aug Total agency fees Stevedoring Shipment 1: July Shipment 2: Oct Shipment 3: Nov Shipment 4: Apr Shipment 5: June INBOUND SHIPMENT Shipment 6: Aug Product shipped tonnes Total stevedoring Shipment 1: July Transport to WH Shipment 2: Oct Shipment 1: July Shipment 3: Nov Shipment 2: Oct Shipment 4: Apr Shipment 3: Nov Shipment 5: June Shipment 4: Apr Shipment 6: Aug Shipment 5: June Totals Shipment 6: Aug Inv holding 1 Sept Total transport Inv holding 31 Aug Storage (Throsby) Product moved Shipment 1: July Product cost/tonne Shipment 2: Oct Frt, US cost, Exch rates: Shipment 3: Nov Shipment 1: July Shipment 4: Apr Shipment 2: Oct Shipment 5: June Shipment 3: Nov Shipment 6: Aug Shipment 4: Apr Total storage Shipment 5: June Total inb costs actual Shipment 6: Aug Total product cost LINE HAUL Freight/tonne Local supply % Shipment charges Ave $/Truck

At the end of the table the costs of performing these logistics tasks are summed. In addition the logistics margin is shown. This is the revenue generated by product sales for the period less the cost of the product and less the total logistics costs. Inbound shipment costs comprised across the wharf costs (which in the model were classified as agency fees including site occupancy and wharfage charges and stevedoring), transport from the wharf to the appropriate Akzo warehouse in Sydney, Melbourne or Brisbane and the costs associated with the need to use a surge shed. During the period under investigation the Throsby shed in the Port of Newcastle (about five kilometres from the K2 wharf) was the only surge shed in use. Mountain View Haulage, the contract carrier being used, ran two circular routes the first from K2 wharf to Throsby shed when the ship was in berth and then later from Throsby to Camellia to complete the movement of product from ship to Akzo warehouse. This process required eight 26 tonne tip trucks over a period of about one week for an average shipment. In this section of the model is shown the sea freight charge per tonne and in total. These shipping costs from the west coast of the USA to the east coast of Australia are not included in this model. In later models where the option of single port discharge was considered the sea freight cost differential between a single port and two or three ports was taken into account. Line haul costs in the current logistics operation were not incurred. This was because with the exception of South Australia no interstate shipments were made. South Australian customers generated only 540 tonnes out of the total demand of almost 32,000 tonnes. These customers are serviced from Melbourne and the cost of doing this was included in the Victorian segment of all the models. Local delivery costs were those generated by servicing customers which were in the same metropolitan area (or occasionally state) as the supplying warehouse. Stock holding costs were derived from the actual number of weeks stock was held in each warehouse. At the time the model was formulated these were seven weeks in Sydney, 15 weeks in Melbourne and 20 weeks in Adelaide. To establish the cost of holding this inventory a rate of 25 per cent was used. This includes the cost of servicing the financial commitment to fund these assets as well as an allocation for the storage facilities and administrative systems required, depreciation and product wastage. Warehouse costs comprised labour and supervisory wages, depreciation of warehouse equipment and the opportunity cost of the warehouse space. Warehouse labour was costed at $500 per week. Equipment valued at around $100,000 with a five year life. In Sydney an opportunity cost of the warehouse space was set at the current rental paid by Akzo for overflow warehouse space close to Camellia. This was not used in the warehouse opportunity cost calculations; rather a mid-point of the current market rate range per square metre per annum was used for Sydney, Melbourne and Brisbane. Bagging rates for 25kg and bulk bags were 15 tonnes per 7 hour shift at Camellia and between 30 and 40 tonnes per day at Spotswood.

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Order processing costs were the labour cost of the order takers. Depreciation of the equipment was not included as this computer equipment was also required for non-order taking tasks at each of the locations. Customer service Akzo had a dominant position in the anhydrous sodium sulphate market. In addition it is a market that is dominated by a very small number of large customers. These two factors taken together meant that it was very easy for Akzo to lose sizeable chunks of market share. To guard against this Akzo worked very closely with all its customers, but particularly with the large ones including the distributor Robert Bryce & Co. With a commodity product opportunities to generate competitive advantage with value added services were limited. But while price was assumed to be the key factor for both Akzo and its customers, other customer service elements were also investigated. Discussions were held with a number of customers. A summary of the major points made by a number of them follows. Colgate Palmolive Anhydrous sodium sulphate is the biggest volume item used by this company. Colgates preferred position is to have an open relationship with all of its suppliers, although it realised that this is more difficult with a commodity supplier. This open relationship would require Akzo to disclose [its] profit margin. Colgate has an open mind on [the appropriate] profit level. Colgate would like to negotiate six monthly contracts with a single supplier of anhydrous sodium sulphate. Quality is the most important customer service element to Colgate, although they are of the view that the quality from any western source is similar. Price is the next most important element. Next is reliability of supply within the requirement of a one week order cycle time. The fourth most important service characteristic is the willingness of the supplier to develop a partnership type arrangement with Colgate. Overall Colgate wants security, stability and comfort in its relationship with its anhydrous sodium sulphate supplier. L&K:Rexona The chief buyer at L&K:Rexona is of the view that there is no room for value added in sulphate because price is the driving force. On this point he expressed concern that of the nine countries in this region where Unlilever companies use anhydrous sodium sulphate, Australian sources were the second most expensive to Japan. In general terms L&K:Rexona was content if they are paying at the average price paid by their sister companies in the east Asia/Pacific region. L&K:Rexona had introduced a supplier quality management program (Gilmour, 1993). Each supplier is evaluated on ten criteria which total 200 points. An unacceptable supplier scores under 120 points, an acceptable

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supplier between 120 and 160 points and a preferred supplier over 160. Akzo had scored 149. Component scores included 49 out of 50 points for quality; but only 29 out of 50 points for price, due in large part to an unexpected third quarter price increase. Technical service was also not so good. In general terms L&K:Rexona felt that Akzos contingency plans for product supply were very good availability was absolutely important; but this was done very well in the past with alternate product sources in Brisbane and Melbourne. L&K:Rexona required daily deliveries into its plant in the outer Sydney suburb of Minto. The company wanted anhydrous sodium sulphate supplied under an annual blanket order: We want to worry about price only once a year. This will remove the potential for conflict it will make the relationship more proactive. In order to achieve product price reductions for anhydrous sodium sulphate L&K:Rexona suggested the possibility of blending the current product with lower priced Chinese material. Chinese sulphate is becoming more respectable with Korea, Indonesia and Thailand now big users of Chinese supplied product. L&K:Rexona also felt that Akzo should be tougher with North American Chemical on price and should realise that it was not a nice and cosy club any more. Cost reductions may also be achieved by tying anhydrous sodium sulphate supply to soda ash supply: Minto requires three truck loads of ash per day which come through Pt Kembla from the same part of the USA as does anhydrous sodium sulphate. Ajax Chemicals Consistency and on time deliveries were paramount for Ajax. Ajax views Akzo as not innovative, but excellent on basic service requirements. Quality was the most important service characteristic for Ajax. While anhydrous sodium sulphate was an inexpensive input it is combined with expensive perfumes in their manufacturing operations. Meeting pre-established delivery schedules was the next most important service element. Next was price. We dont always buy on lowest price. But if the price of anhydrous sodium sulphate is close to that of soda ash we will just use the soda ash which we can easily get from Penrice in Osborne, South Australia. Australian Glass Manufacturers We have not been properly treated. We bought another glass company in New South Wales and found out that Akzos price to them for anhydrous sodium sulphate was less than ours. This showed that Akzo has no loyalty to long term customers. They have treated us very shabbily. AGM at its Spotswood plant has experienced difficulties in the supply of product from the Akzo warehouse also located in Spotswood. Product has not arrived at all when ordered; bulk bags have been lost in the system; trucks have waited for long periods for loading and unloading. The supply manager at AGM considered dependability to be the most important service element, followed by reliability and then price. Overall he felt

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that Akzo has the perception [that] they can do what they like with us but Akzo should realise that [we] have been on the verge of importing sodium sulphate ourselves. Robert Bryce & Co. This company was the largest distributor of Akzos anhydrous sodium sulphate. According to the managing director of Robert Bryce their anhydrous sodium sulphate customers considered product quality as the most important service element followed by availability with price almost number oneor number two. In terms of Akzos service to Robert Bryce availability was number one, quality next, price third and reliability fourth. It was an element of Robert Bryces strategy that they only handle products on a sole distributor basis. They wanted to be the sole distributor of 25kg bagged anhydrous sodium sulphate in both Australia and New Zealand. Robert Bryce would be interested in looking at bagging Akzo anhydrous sodium sulphate. Table II shows the relative rankings of customer service elements by the five largest Akzo anhydrous sodium sulphate customers. Alternative logistics systems Following the emphasis placed by customers on the price of the product a number of optional structures for Akzos logistics operations were examined in terms of total system cost reduction and impact on customer service levels. Modification of the existing system A number of changes could be made to the existing logistics system without changing its basic structure. The first of these was the impact of renegotiated sea freight rates. These rates were examined with the existing structure and then their impact on alternative logistics structures was considered. (The new rate structure included a US$3 per tonne premium for discharge at two ports rather than one and a US$6 per tonne premium for discharge at three ports.) Another change examined was the lowering of inventory levels. With six inbound shipments of product from the North American west coast each year together with improved inventory management (see for example, the method proposed by Labordus for products imported into Australia in Gilmour (1993,
Element Quality Price Availability Reliability/service Technical service Partnership Dependability Ajax 1 3 2 4 4 1 L&K 1 2 3 Colgate 1 2 3 Robt Bryce 2 3 1 4 AGM

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Table II. Ranking of customer service elements

pp. 236-8, 240, 242)) a stock holding of six weeks at each of the three warehouses in Sydney, Melbourne and Brisbane was possible. This was evaluated. Benchmarking data indicated that each storeman could operate at a productivity level of 20 orders per day and that an order processor could handle 40 orders per day. These productivity changes also resulted in logistics savings without changing structure. These together totalled over half a million dollars annual savings and were considered as the least-cost operation of the existing logistics system. Centralisation at Camellia A number of options existed for establishing a national distribution centre at the Akzo Camellia site. Product for any centralised logistics operation would be unloaded at only one Australian port. This resulted in a freight saving of $3 for one discharge point against two and a $6 saving for a single discharge point when compared with three. If the current berth K2 at Kooragang Island in the Port of Newcastle was continued to be used, product could be trucked directly to the national distribution centre at Camellia in Sydneys western suburbs, or to Akzos plant site at Tomago or to TNTs facilities close to the K2 wharf. If Camellia was chosen as the site of the national distribution centre a surge store would be required. This could either be the Throsby shed rented from the Hunter Ports Authority (as had been done in the past) or an existing shed on the Akzo plant site at Tomago (which would require expenditure of about $50,000 to make it suitable for this purpose). Camellia could also be used as the national distribution centre with all product entering Australia through Pt Kembla. This option could work without needing a surge store in Wollongong. All centralised options needed bagging of 25kg bags and bulk bags to occur at the single national distribution centre. For the year under investigation a total of 5,448 tonnes of 25kg bags and 3,818 tonnes of bulk bags were sold. Bagging the annual demand for 25kg bags and bulk bags over 250 working days required a productivity rate of 37 tonnes per day. This could be achieved by the existing equipment at Spotswood. A relatively small cost would be incurred in moving this equipment to the site of the national distribution centre. Inbound port: Newcastle For this option all product shipments were received at the K2 dock at Kooragang Island. Across the wharf costs were consolidated in the following way. To the agency costs for NSW were added 82 per cent of the agency costs actually incurred in Melbourne and Brisbane. Stevedoring costs were assumed to equal those at K2 plus 80 per cent of those at Melbourne and Brisbane. Transport to the Camellia warehouse from K2 was calculated by increasing the NSW costs by the ratio of total transport to the warehouse costs divided by NSW costs. The logic used for the agency and stevedoring costs was that some savings would be generated by using one inbound port instead of two or three.

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Customers in Victoria, South Australia and Queensland were supplied direct from Camellia. Appropriate transport rates were used for bagged product to Melbourne, Brisbane and Adelaide and for pneumatic tanker shipments to the Gold Coast. Local delivery for Sydney customers also came from Camellia. Again the appropriate transport costs for both 25kg bags and bulk bags and for bulk deliveries were used. Camellia warehouse costs for sodium sulphate comprised labour cost (two storemen and one third of a supervisor), depreciation of $100,000 of warehouse equipment and the opportunity cost of the warehouse space. Two order takers, located centrally at Camellia, were allocated to process all national anhydrous sodium sulphate orders. Total orders for the year under consideration were estimated to be 3,400 in NSW, 3,582 in Victoria, 624 in Queensland and 426 in South Australia. Anhydrous sodium sulphate orders comprised 41 per cent of total Akzo orders in NSW, 15 per cent in Victoria, 33 per cent in Queensland and 7 per cent in South Australia. This option generated total logistics costs of $2.6 million and a logistics margin of $2.4 million. (The logistics margin was the sales revenue from the product sold less the cost of the product and less the logistics costs detailed in the model: inbound costs agency, stevedoring, transport to warehouse and any surge shed costs, but only the freight differential for shipping to one inbound port rather than to two or three; line haul costs; local delivery costs; warehouse costs; and, order processing costs.) Inbound port: Wollongong Using Pt Kembla rather than Newcastle as the single inbound port to supply the national distribution centre at Camellia was examined. Product was to be shipped direct from Wollongong to Camellia without the need for a surge shed. Other aspects of this option were the same as the previous option using K2. Total logistics costs for this option were $2.4 million and the logistics margin was $2.6 million. Centralisation at Tomago Akzo had a 30 acre site at Tomago about 15 kilometres from the K2 wharf. One of the two buildings on the site was a magnesium sulphate plant, the other empty but was used in the past to manufacture carbon disulphide. This second building was rather long, high and narrow for use for sodium sulphate but had an operative overhead gantry crane. Preliminary estimates had been made that this building could be renovated to be suitable for use as a surge shed for anhydrous sodium sulphate for about $50,000. Converting the building to a national distribution centre would cost around $250,000 including $195,000 for bagging equipment. But this resulted in a capacity to handle 2,000 tonnes of product compared to the 12,000 tonne capacity at Camellia. TNT quoted an annual cost of $135,000 for a shed to store 6,000 tonnes. There is room on the Tomago site to build a shed of this size.

Total logistics costs for this option were $2.5 million with a logistics margin also of $2.5 million. Transport of product from K2 to Tomago cost $4 per tonne without the need for a surge store. Line haul costs were increased by the costs of moving product from the Tomago central store to customers in Sydney. These costs were $31 per tonne for a pneumatic tanker, $18 per tonne for a tip truck and $16 per tonne for a flat top for bagged product. Warehouse costs included an annualised cost of $25,000 for the building renovations and bagging equipment and an annual charge of $135,000 for an additional new shed with the capacity to store 6,000 tonnes of product. Centralisation at Kooragang Island TNT Bulk had a site close to the K2 berth on Kooragang Island where it had a number of storage facilities for bulk product. There was room on this site for TNT to build a shed for Akzo anhydrous sodium sulphate. TNT quoted a rental of $190,000 per year for a store of approximately 2,000 m2 which would hold 9,000 tonnes of sodium sulphate and an 80 tonne silo. The annual rental for a 6,000 tonne store was $135,000. Using TNTs facilities as a surge shed The agency component of the across the wharf costs of this option would be the same as for the previous options. Stevedoring was quoted by TNT Bulk at $13.20 per tonne and transport from the TNT facility on Kooragang Island to the national distribution centre at Camellia at $18 per tonne. While there were no surge store costs from the Hunter Ports Authority for this option the TNT facility was in fact a surge store which costs $135,000 per annum. For this alternative logistics costs totalled $2.75 million and the logistics margin was $2.25 million. Using TNTs facilities as a national distribution centre These facilities could also be used as the national distribution centre for anhydrous sodium sulphate. Line haul shipments made from here cost $31 per tonne for a pneumatic tanker to Sydney and $75 for Labrador. Bulk product in a tip truck to Sydney will cost $18 per tonne. Bagged shipments on pallets on a flat top truck will cost $16 per tonne to Sydney, $60 per tonne to Melbourne, $70 per tonne to Brisbane and $70 per tonne to Adelaide. No local delivery charges were incurred under this option. There was the annual TNT facility charge of $190,000. Orders would still be initially taken by Akzo staff at Camellia and then on forwarded to TNT at Kooragang Island. Logistics costs of $2.0 million are generated by this option with a logistics margin of just under $3 million. Comparison of alternative logistics structures All the optional structures discussed are listed in Table III. This table shows the costs of each logistics element, total logistics costs and the logistics margin

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Inbound shipment Freight Agency fees Stevedoring Transport to warehouse Surge storage Line haul Local delivery Stock holding Warehousing Order processing Total costs Logistics margin

Table III. Summary of logistics alternatives Current system 3,512 1,980 263 593 647 29 0 369 426 416 120 4,843 158 Current freight system 3,344 1,812 263 593 647 29 0 369 426 416 120 4,673 326 Current system modified 3,344 1,812 263 593 647 29 0 369 260 284 45 4,301 700 Centralisation at Camellia ex Newcastle ex Pt. Kembla 3,126 1,645 236 553 647 45 641 234 216 215 56 4,489 513 3,051 1,645 236 553 482 0 641 234 216 215 56 4,246 756 Centralisation at Tomago 2,758 1,645 236 553 156 0 979 234 216 240 56 4,316 686

TNT surge Store 3,308 1,645 236 422 702 0 641 234 216 350 56 4,638 364

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Centralisation at Koorangang Island 2,471 1,645 236 422 0 0 905 0 216 210 76 3,710 1,291

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generated. While the use of TNT as a national contracted distribution centre generates the largest logistics margin it does mean some loss of operational control by Akzo (see the advantages and disadvantages of contract warehousing summarised in Gilmour (1993, pp. 129-130).) Other issues Purchasing a b-double Akzo had only one bulk customer outside the Sydney metropolitan area. An option would be for Akzo to buy a b-double which would be used exclusively on the Sydney to Labrador route. At the time an appropriate prime mover cost around $200,000 and the two tankers without mounted discharge equipment cost $230,000. Stationary pneumatic discharge equipment cost between $50,000 and $60,000. Operating costs (fuel, maintenance and labour) were about $1 per kilometre or $1,800 per trip. Two pneumatic tankers in a standard configuration carried 38 tonnes of product. Two trips per week more than satisfied this customers annual demand. Given a five-year life the annual costs of running this equipment are: equipment cost $430,000/5 = $86,000 and operating costs 2,711 tonnes/38 tonnes per trip = 72 trips @ $1,800 per trip = $129,600 per year. This contrasted with a contract carrier rate of $100 per tonne from Camellia (annual cost of $271,100) and the TNT quoted rate of $75 per tonne from Kooragang Island (annual cost of $203,325). Mixed product supply Mixing Chinese material with North American material was an option. While the base price of the Chinese material is cheaper, freight costs are more expensive (and the reduced quantities from existing suppliers will put upward pressure on product cost and freight rates per unit will be higher) and quality is suspect. For these reasons detailed analysis of this option was not carried out. An expanded distributor role Robert Bryce & Co. was keen to assume an expanded role in the distribution of bagged anhydrous sodium sulphate. Such a move had deleterious implications for Akzo if the end result was the creation of a domestic competitor. Additional logistics cost savings would be generated if Robert Bryce handled all 25 kg bags nationally for Akzo. Sensitivity analyses The TNT options were sensitive to freight costs and stevedoring charges. If the option to have TNT operate a national sodium sulphate distribution operation from Kooragang Island was chosen, Akzo should maintain the flexibility to readily resume the operation should better economic times result in these costs increasing.

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Results In terms of logistics costs the best option was for TNT to set up a national distribution operation for anhydrous sodium sulphate at Kooragang Island. The next best alternative was for this operation to be centralised at Camellia with product supplied through Pt Kembla. This option had the advantage that Akzo maintained complete control. Centralisation at Tomago was not financially satisfactory. It was interesting that all options examined generated worthwhile cost savings over the existing system. A number of easily implemented changes to the existing system without changing its structure results in savings of around $500,000. All options generating the greatest cost savings involved restructuring the logistics operation into a centralised system with inbound supply through a single port. It was important for Akzo to be satisfied that this structural change will not degrade customer service. Several of the larger customers were not that happy with the current level of customer service being received. Akzo needed to be more open with all customers. They should be made aware of the extensive efforts undertaken by Akzo to reduce the costs generated in the supply channel. They should be involved in the process by which these cost savings will eventually be shared with them by Akzo. Conclusions The model described in this paper assisted the managing director of Akzo Nobel in deciding the appropriate structure for the companys logistics operations. It provided cost information for a range of options that the management of the company had considered of interest. But the model alone did not generate the accepted option. This was because the model did not explicitly consider the total impact on customer service. Nor did it adequately consider issues of medium to long term control and flexibility for each of the logistics options. All of these factors were brought together by the managing director in order to make a strategically appropriate decision.
Reference Gilmour, P. (1993), Logistics Management: An Australian Framework, Longman Cheshire, Melbourne, pp. 39-44. Further reading Allen, M.K. and Emmelhainz, M.A. (1984), Decision support systems: an innovative aid to managers, Journal of Business Logistics, Vol. 5 No. 2, pp. 128-42. Bowersox, D.J., Helferich. O.K., Marien, E.J., Gilmour, P., Lawrence, M.L., Morgan, F.W. and Rogers R.T. (1972), Dynamic Simulation of Physical Distribution Systems, Michigan State University Press, East Lansing, Michigan. Disney, S.M., Naim, M.M. and Towill, D.R. (1997), Dynamic simulation modelling for lean logistics, International Journal of Physical Distribution and Logistics Management, Vol. 27 No. 3/4, pp. 174-96.

Haley, G.T. and Krishnan, R. (1985), Its time for CALM: computer-aided logistics management, International Journal of Physical Distribution and Materials Management, Vol. 15 No. 7, pp. 19-32. Langley, C.J. Jr (1985), Information-based decision making in logistics management, International Journal of Physical Distribution and Materials Management, Vol. 15 No. 7, pp. 41-55. LeMay, S.A. and Wood, W.R. (1989), Developing logistics decision support systems, Journal of Business Logistics, Vol. 10 No. 2, pp. 1-23. Murtagh, B.A. and Sims, J.W. (1995), Improved modelling of physical distribution, International Journal of Physical Distribution and Logistics Management, Vol. 25 No. 8, pp. 47-52. Shapiro, J.F., Singhal, V. and Wagner, S.N. (1993), Optimizing the value chain, Interfaces, Vol. 23 No. 2. Sharma, A., Grewal, D. and Levy, M. (1995), The customer satisfaction/logistics interface, Journal of Business Logistics, Vol. 16 No. 2, pp. 1-23. Towill, D.R. (1996), Industrial dynamics modelling of supply chains, International Journal of Physical Distribution and Logistics Management, Vol. 25 No. 2, pp. 23-42. Waller, A.G. (1995), Computer systems for distribution planning, International Journal of Physical Distribution and Logistics Management, Vol. 25 No. 4, pp. 35-45.

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