The approach that I would suggest to Ms. Daniels is a very straightforward one: verify the validity of your information, ensure you understand the entire situation, then conduct an analysis to see the profitability of the 3 configuration options. First, let’s look at big assumptions made by Ms. Daniels.
• 500,000 m3 of annual demand at $450/ton is reasonable
• Both demand and resources will exist in the long term
• The situation in Indonesia will not change any time soon
• 500,000 m3 is equivalent to 350,000 tons (times 0.7)
This case is about creating a distribution network in Indonesia so IFP can tap into the forest products industry. The difficulty she is facing is understanding ...view middle of the document...
She has no data on custom costs. This is an error on her part, as she must collect EVERY cost in order to produce a good report. In fact, many of the costs she did collect she is unsure about.
But for this analysis, we will assume all her costs are fairly accurate. We will hedge our bets by assuming the worst-case scenario. There are 3 systems to analyze a scattered system with 8 saw mills, a hub system with 1 consolidation point, and a hybrid with 8 saw mills and 1 consolidation point. To begin, let’s assume all one-time set up costs are sunk and focus on the variable cost of maintaining a forest products sourcing network. Tables 1-3 shows variable costs of each of the system. Ms. Daniels mentions that royalty costs given to land owners can be between $10 - $20, so we will use $20. And in the hub system, she mentions that purchasing a cubic meter of logs usually costs $100, but can go as high as $150. We will use $150. As you can see in the data, the scattered system minimizes cost per log by having saw mills, but the limitation on shipping to only carry 10,000 tons makes transportation costs very expensive. The hub system minimizes employee costs by having 1 facility and minimizes shipping costs because the consolidation point can harbor 40,000 ton vessels. However, since they are buying logs of an auction system, this makes their supply uncertain and their costs high. The hybrid system enjoys the reliability and affordability of logs by having saw mills as well as the cheaper transportation cost by having a consolidation point.
The last 2 lines show the profitability, both including and not including shrinkage. As you can see, the scattered...