Sl l b l G h tMiM anaging the Global Supply Chain at COGMA · Long term direct procurement strategy from China reduces procurement costs by 5% 600 Total yearly steel procurement cost,

M i th Gl b l S l Managing the Global Supply Chain at COGMADealing with uncertainties

© Balani, Kadyan, Mois, VansnickTeam Number 6 1

Executive Summary Executive Summary • Short term: Keep options open

R d ti d ki it l b d i i t i– Reduce tied up working capital by reducing inventories• Close Central Distribution Center Feta to reduce pipeline inventory• Switch to JIT deliveries to reduce pipeline inventory• Procure steel locally to reduce raw material inventory

– Mitigate risks by financial hedging of revenues in Won• In the mid to long term further measures can be taken depending on how the

uncertainty resolves– If the Obama stimulus package reduces the cost of capital and revives the economy

( ti i ti i )(optimistic scenario):• Optimize supply chain flows through Vendor Managed Inventory• Procure base load demand of steel from low cost supplier and volatile part from

local supplierI i S h E A i d i bili i i i k• Invest in South-East Asian production capabilities to tap into growing markets

– If the stimulus package has no relevant effects (pessimistic scenario)• Reevaluate supply chain flows and use excess capacity to be more responsive• Continue to manage cash and keep inventories low

© Balani, Kadyan, Mois, VansnickTeam Number 6

• Develop into foreign markets

2










3

Closing Feta saves cost in any caseClosing Feta saves cost in any case

Cost Savings of closing Feta, USD, millions

0.02

0.02

4.72

1.92

• Closing Feta reduces the Pipeline inventory cost by $3 to $4m in any case

0.3

4.4

3.1

0.02• Transportation cost would reduce by $300k in an optimistic scenario because reduced holding cost allows holding inventory at the assembly l t0.3

-1.2

Optimistic Pessimistic

plants

• In a pessimistic scenario transportation cost would increase by closing feta due to frequent low

Transportation cost Pipeline inventory

Feta operating cost*

g qvolume JIT delivery

• In both cases the total cost would be reduced between $1.9m and $4.7m


* Includes one time costs associated with closing Feta

The pros of closing Feta i h houtweigh the cons

• Reduced Pipeline inventory and Reduced Pipeline inventory and

cost

• Faster or equal response time

• Social cost from closing

from most plants thanks to

fewer transit days (≈ 67%) and

lower total miles (≈ 64%)

• More storage space needed at

production plants for safety

inventorylower total miles (≈ 64%)

• Reduced handling costs

• Reduced transportation costs (if

inventory

• Higher transportation costs (if

cost of inventory is normal)

• Risk pooling through safety

inventory is unaffected

cost of inventory are very high)


inventory is unaffected

Reduce pipeline inventory in order to t h i th h t t

Negative

Positive

Short term impact Long term effects

generate cash in the short term ? Depends

Strategic priorities

p g

Cash Costs Pipeline inventory

Reversibility Cost Responsiveness

Closing CDC FETA

• Quick win with long term

High

FETA

Daily JIT deliveries ?

with long term benefits

• Quick win but reevaluate in time

Vendor Managed Inventory

?• No immediate

impact but creates options for the futureCostly and Investment

in Capacity ?• Costly and

irreversible, can be considered in the future if market picks upLow


Current economic conditions make local steel p oc ement e att acti e in the sho t te mprocurement very attractive in the short term…

Short term steel procurement Benefits Risksstrategy decisions

Negotiate purchasing contracts two months in advance with local steel mills

Flexibility to order from China if local price exceeds the price in China

Have to plan for base demand two months in advance

Order Bi-monthly from local steel Reduces the cycle inventory costs Delivery costs to supplier might Order Bi monthly from local steel mills

Reduces the cycle inventory costs and also reduces the working capital requirements

Delivery costs to supplier might increase

Continue ordering from China with half the order frequency

Maintains the relationship as in long term this is the most cost effective option

Steel prices are higher and hence incurring extra cost to maintain relationship

Long term steel procurement strategy decisions

Benefits Risks

Procure directly from China to meet base demand

Reduces total landed costs for the base demand

High lead times, lowerresponsiveness and risks of a global supplier networksupplier network

Use local suppliers to meet peak demand variations

Provides flexibility and reduced inventory requirements

Suppliers will charge a price premium for serving this demand

Leverage low cost opportunities from local suppliers

Dual sourcing tailored approach will reduce our procurement costs

Maintaining relationship with both the suppliers


from local suppliers reduce our procurement costs the suppliers

…However, higher average per ton steel price in US fa o p chasing f om China to achie e cost sa ings

1200

favor purchasing from China to achieve cost savings

Average annual steel price per ton in US, USD

800

1000

1200Normal Distribution Analysis – 1990-2008 Steel Price

Mean [price/ton] $493

Standard deviation [price/ton] $165

Source demand from China

200

400

600 Probability Steel Price ≤$400/ton 29%

Probability Steel Price >$400/ton 71%

Source demand locally

0

1988 1993 1998 2003 2008

locally

• Highly variable prices call for a dynamic procurement strategy

• On average procuring steel from china cheaper than procuring from local steel mills

• Hedging strategy on steel prices expected to be profitable in the long run

St t i i d d l i b i i t i t th t d i i i ifi tl


• Strategic issues and underlying business environment can impact the procurement decision significantly

Long term direct procurement strategy from China reduces procurement costs by 5%

600

procurement costs by 5%

Total yearly steel procurement cost, USD, millions COGMA Demand Volatility, tons by month

400

500

600

2.2 2.03

4

5

Delivery Cost

-5% Source peak demand from local supplier

100

200

300

2.2 2.2

0

1

2Cost

Steel Cost

Source base demand from China

0Distributor Direct Time

• Procuring from China is more cost effective than procuring locally despite higher lead times

• Ordering full container load is essential to maintain cost effectiveness due to high per container costs

• Use local steel manufacturer to meet the peak demand or demand variations


Steel Procurement long term: Local d Chi i

Least Optimal

Optimal

and China sourcing

Decision Factors Description Local China -DirectDirect

Cost Total landed cost of acquiring steel

Quality The quality of steel may be impacted by Quality The quality of steel may be impacted by transportation distances and visibility of steel mills and distributors.

Responsiveness The higher the lead time, the less quickly COGMA can respond to demand fluctuations.

Currency Sourcing steel internationally exposes COGMA to currency fluctuations, which can be hedged at a cost.

Ownership/visibility

Purchasing internationally requires COGMA to take ownership before the steel arrives in the U.S..ility ownership before the steel arrives in the U.S..

Demand uncertainty

Higher lead times expose COGMA to more demand uncertainty, requiring high safety inventory.

Non-Market (i.e. International sourcing increases exposure to non


Non Market (i.e. environment, labor)

International sourcing increases exposure to non market factors such as increasing the carbon footprint.

Commit exports at same price in Won to maintain share and hedge revenues using call options to mitigate risk from g g p gexchange rate fluctuations in a fixed price contract

S. Korean Won per One U.S. Dollar

1350

1450

1550

-17%

+49%

950

1050

1150

1250+49%

950

Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

• Fixed price in Won required to maintain share in a price sensitive market • Fixed price in Won required to maintain share in a price sensitive market

• Fixed price contract will result in fixed Won revenue stream but a volatile USD revenues stream

• Future exchange rate predictions expect Won to appreciate against US hence leaving the revenues un-

hedged can lead to huge losses if Won appreciates


Source: http://www.x-rates.com

Hedging Won revenue coming from fixed price contact using call options is the optimal strategy in short term

CONCEPTUAL

using call options is the optimal strategy in short term

Fixed price revenue returns, USD

100

110

120No Hedging

Partial Futures Hedging (50% Revenue)

Complete Futures Hedging

Hedging by buying call options on USD

Production cost in USD for COGMA

Without hedging COGMA will incur losses due to volatility of exchange rates

• Hedging by buying call option on USD limits down side while allowing

80

90

100COGMA to benefit from upside

• Hedging using futures contracts:

• Complete hedging eliminates the impact of exchange rate volatility Minimum

60

70

impact of exchange rate volatility but limits our upside

• Partial hedging for 50% of expected revenue can limit our downside

Minimum required margin

40

50

900 1000 1100 1200 1300 1400 1500 1600Exchange rate

1208 won/$ 30 day future rate

• Operational hedging by setting manufacturing plants in that region too expensive and risky at this point but should be explored if business expands significantly


Note: Analysis done using a fixed 100K won revenue

Exchange rateWon/USD










13

Long term action planLong term action plan

Scenario Description

Supply ChainFlows

• Cost of capital

Area Action plan

• Optimize transportation and inventory levels through VMI

OptimisticSteelprocurement

Internationalk t

returns to normal levels

• Demand picks up• Dollar remains

volatile

• Direct procurement from China for base demand

• Local supply for volatile demand

• Investigate potential for investing in foreign production capabilities markets

• Cost of capital stays high

Supply ChainFlows

foreign production capabilities

• Keep inventory levels low• Use excess capacity to increase

responsiveness and generate sales

Pessimistic

stays high• Demand stays

weak• Dollar remains

volatile

Steelprocurement

Internationalmarkets

• Keep raw material inventory low• Renegotiate steel contracts

• Develop foreign clients to fill excess capacity and secure contracts (avoid


p y (hold-up)

Producing in South-East Asia offers a lot of potential but requires COGMA to develop new capabilities and q p pdevelop a risk mitigation strategy

Cost advantages• With an international production

network COGMA can take advantage of real option value of currency fluctuations

D ll i t i t

Competencies• Does COGMA have international

experience?• Does COGMA have knowledge in

Take full advantage of international production network

• Dollar appreciates import from China

• Dollar depreciates export from US

• Produce locally to reduce t t ti t

• Does COGMA have knowledge in South-East Asian Markets?

• Can COGMA grow and remain a family business?

Risks

• Cost and revenue

Develop capabilities• International• Management

O i i ltransportation cost• Production cost (especially labor and

steel) are lower in China• Increase economies of scale (e.g.

purchasing and R&D efforts)R t ti l

• Building a plant demands large, irreversible investment

• IP-related risks• Increased competition from local

playersR d d lit f d t d

• Organizational

Mitigate risks• Assess financial risks• Select best entry strategy• Gain experience (e g Revenue potential

• Close to booming automotive market• Add additional car manufacturers to

client portfolio

• Reduced quality of products and service

• Gain experience (e.g. through Korean client)


COGMA could benefit by a Contract M f t i tManufacturing agreement

Building a Contract Building a plant in China

Contract manufacturing

Additional revenuepotential

High High

Long term cost Low High

• Contract manufacturing and building a plant have

Low

High Low

HighInitial financialinvestment

Flexibility to pull out

Long term costadvantage

Low High building a plant have similar revenue potentials

• On the long term building a plant has

High LowFlexibility to pull out

Control over quality Low High

Intellectual propertyrisk

High Low

a better cost structure and more guarantees on protection of IPContract

q y g

(Over)Capacity risk Low High

Required international High Higher

• Contract manufacturing offers a low risk opportunity to try out the market and


qexperience

g gdevelop international capabilities

Questions?


APPENDIX


Feta’s location is b lsub-optimal

1 day

300 miles

Provolone

F t

Mozzarella

Chester

Feta

Roquefort

2 days

500 miles


500 miles

Appendix 9: Hedging analysis against the Korean Wonpp g g y g

• Fixed price contract will Fixed price contract will lead to a fixed revenue in won. We have assumed that our won revenue is 100,000 won

• Based on range of exchange rate we analyzed exchange rate we analyzed the USD revenue under the following scenarios

• Un hedged position

• Fully hedged position y g pusing futures contract

• Partially hedged position for 50% of revenues using futures contract

• Hedging using options by buying call options for strike price of 1208 won/USD


Our recommendationsOur recommendations

• COGMA can save up to $7m per year by closing Feta CDC and optimizing delivery frequency to assembly plants

• Procuring steel directly from Chinese manufacturer can reduce 5 to 7% of the steel cost

• Supplying Korean client from US plants is an opportunity to learn about foreign markets

– Should consider hedging revenues using call options in short term– Should consider hedging revenues using call options in short term– Contract manufacturing in South-East Asia can be considered in the

medium to long term





• Supplying Korean client from US plants is an opportunity to learn about foreign marketslearn about foreign markets

– Should consider hedging revenues using call options in short term– Contract manufacturing in South-East Asia can be considered in the

medium to long term


Closing Feta and internalizing inventory cost at assembly plants reduce total supply chain cost by y p pp y y$7mTotal Supply Chain Cost (TSCC), USD, millions

3.5

0.9

1.210

12

14

Inventory at assembly

• Pipeline inventory takes the largest share of the supply chain cost

13.1

11.1

6 7 6 7

1.0

6

8

10 assembly plantsInventory at Feta

• Closing Feta reduces both inventory and transportation costs

• Although overall costs 6.0

2 0 2 2 1 9

6.7 6.7

2.30.01.8

2

4Pipeline inventory

Transportation cost

gdecrease, inventory costs at assembly plants doubles from current to optimal scenario

2.0 2.2 1.90

Current OptimalFeta open

OptimalFeta closed

cost

• Incentives can be aligned using VMI (Vendor Managed Inventory)


Closing Feta reduces the pipeline i t t b $4 4inventory cost by $4.4m

Optimal OptimalCurrent

FTL• 3,200

OptimalFeta open

OptimalFeta closed

LTL• 800-1,200

N/A• N/A

Delivery to Feta• Units per truck

• 2-4

LTL* (JIT)• 800• 4-5

LTL*• 1,000–1,200• 4-5

• 2-4 • Eliminated

LTL• 200-600• 1-4

• Days in transit

Delivery to Assy plants• Units per truck• Days in transit 4 5 4 5 1 4Days in transit

Pipeline inventory cost[USD illi ]

6.7 6.7 2.3

Total days in transit 7-9 7-9 1-4

[USD, millions]

-$4.4m(-67%)


* These trucks carry different type of components

24

Pros and Cons of closing FetaPros and Cons of closing Feta

• Reduced Pipeline inventory and • Reduced Pipeline inventory and

cost

• Faster or equal response time

• Social cost from closing

• If demand from assembly plants

becomes more variable and with from most plants (e.g. only 1

day travel time between

Provolone and Mozzarella)

becomes more variable and with

no strong correlation between

them, centralizing inventory at Provolone and Mozzarella)

• Handling cost at Feta is

eliminated

Feta might become again

attractive*

• More storage space needed at • Reduced transportation cost

g p

production plants in case of

variable demand


* However, seen the large cost savings, it seems unlikely that this would outweigh the $7m savings

VMI enables COGMA to take full advantage of potential sa ings and allo s fle ibilit

Mozzarella

COGMA

potential savings and allows flexibility Roquefort

Inventory cost at assembly plants optimistic scenarioUSD millions

Option 1: Retain the daily deliveries

E h f li t

Discount

0.80 9

1.8

USD, millions

0.45 0.450.45 0.45

• Easy, no changes for clients• Savings potential for

COGMA is reduced from $7.0m to $6.0m*

• Total Supply Chain costs are not minimized

0.451.00.45

Current OptimalFeta closed

0.9

Potentialsol tions

are not minimized

Option 2: Incentivize to order larger batches

1 00.45

0.8• Can involve complex

pricing structures (differs from source and location)N d t b ti t d Feta closed

• In the optimal scenario cost at Mozzarella and Roquefort double from the current situation

• How to convince customers

solutions0.45

1.00.45

-0.9

• Needs to be renegotiated when demand or logistic costs changes

• TSCC can be minimized

Option 3: Vendor Managed Inventory (VMI)I d d t How to convince customers

to change supply chain flows?

0.45 0.450.45 0.45

0.9

Curent Optimal

• Increased product availability for client

• TSCC are minimized• COGMA takes full advantage• Flexibility to adapt strategy

when cost of inventory


* See appendix for calculation

Curent OptimalFeta closed

when cost of inventory changes





– Should consider hedging revenues using call options in short term– Should consider hedging revenues using call options in short term– Contract manufacturing in South-East Asia can be considered in the

medium to long term


Procuring steel from China reduces delivery cost by 11% and total p oc ement cost b 5%11% and total procurement cost by 5%

Total yearly steel procurement cost, USD, millions

Analysis of cost breakout for total

4

54.4

4.2 -5%

breakout for total procurement cost in last 12 months:

• Steel cost is

2.2 2.03 Delivery Cost

constant in both scenarios

• Annual delivery costs in both

2.2 2.21

2

Steel Cost

costs in both scenarios differ by 11%0

Distributor COGMA


Purchasing directly from the manufacturer will h 5% i t th b tt lihave a 5% impact on the bottom line

Total monthly steel procurement cost, USD, thousands$237,560/year savings through $237,560/year savings through

direct procurement

• Cost savings coming from:

• Lower delivery costs

• Cheaper total steel price/ton

450

500

• Cheaper total steel price/ton

reduces the cycle inventory

holding cost ( ~ $11,000/year)

• Additional Costs incurred for:

d h ld f

350

400 Monthly procurement cost through distributor

• Need to hold safety inventory

(30 day safety inventory holding

cost is $ 18,000/year)

• Administrative overheads will cost 250

300 Monthly procurement cost through direct

increase our costs marginally

• Assumption

• COGMA receives same steel

price/ton as the distributor from 150

200

1 2 3 4 5 6 7 8 9 10 11 12

procurement

M th


manufacturerMonth

Delivery cost savings occur only when steel i i t th $410/tprice is greater than $410/ton

Total monthly steel procurement cost, USD, thousands

450

500

350

400

Distributor

$410/ton

200

250

300 COGMA

150

200

200 300 400 500 600 Steel price[$/t ]


[$/ton]

Savings can be increased to 7% by combining direct purchase and distributor procurementpurchase and distributor procurement

Normal Distribution Analysis – 12 Months Steel Price

Mean [price/ton] $459.54

Standard deviation [price/ton] $74.31

Probability Steel Price ≤$410/ton 25%

• Optimal tailored approach

Probability Steel Price ≤$410/ton 25%

Probability Steel Price >$410/ton 75%

Optimal tailored approach– 75% direct purchasing (steel price ≤ $410)– 25% distributor procurement (steel price > $410)– Faster response time (utilizing distributor to mitigate safety inventory)

In case of demand volatility distributor can be used to meet peak demand – In case of demand volatility, distributor can be used to meet peak demand fluctuations

• Optimal tailored model results in 7%* reduction in total procurement costs


* Detailed calculation in appendix 8

Recommended steel procurement strategyp gy

• Tailored procurement reduces total steel costs by 7%. However, a base monthly purchase level should be agreed upon with the distributor to maintain a relationship purchase level should be agreed upon with the distributor to maintain a relationship with them

Guaranteeing the distributor a base demand and using direct purchasing results in:

Increased bargaining power for COGMA on distributor pricing

Mitigating safety inventory that would be needed in direct purchasing scenario

Reducing lost sales by having access to the distributor if demand uncertainty arises






– Should consider hedging revenues using call options in short – Should consider hedging revenues using call options in short term

– Contract manufacturing in South-East Asia can be considered in the medium to long term


Hedging using call options is effective way to mitigate risk from currency exchange rate fluctuations in a fixed price contractcurrency exchange rate fluctuations in a fixed price contract

• Fixed price contract will result in fixed Won revenue stream but a very volatile USD revenues streamp y

• COGMA should consider the following hedging options based on its revenue projects from Korean partner

• Hedging through buying call options

• COGMA benefits from won appreciation and limits the downside when won depreciates by exercising the optionCOGMA benefits from won appreciation and limits the downside when won depreciates by exercising the option

• Cheaper compared to fututre contracts

• Determine strike price of option based on minimum margin requirements on won revenue

• Cost of call option can be built into the per unit price using the minimum margin requirement

• Hedging using future contracts to buy USD

• Fully hedge the projected revenues using the futures contract

• Limits the upside if won appreciates but also eliminates the downside if won depreciates

• Costly compared to options

• Operational hedging

• Building manufacturing plants in that region of world will lead to both costs and revenues in same currency and eliminate

the risk of currency fluctuations (natural hedging)

• Should be explored as a long term strategy in case COGMA generates significant share of its revenues from this region


Should be explored as a long term strategy in case COGMA generates significant share of its revenues from this region

Fixed pricing structure in won results in risky USD cash flows due to exchange rate volatilitydue to exchange rate volatility

S. Korean Won per One U.S. Dollar

1350

1450

1550 Fixed Contract Pricing Analysis

Fixed Price in Won 100Won/unit

Unit Sales 1,000 units+49%

-17%

950

1050

1150

1250Expected Revenue fixed in Won 100,000 won

Spot exchange rate ( volatile) 1,347won/USD

USD Revenue (volatile) = Revenue(Won)/Spot exchange rate950

Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

USD Revenue (volatile) Revenue(Won)/Spot exchange rate

• Fixed pricing contract in Won results in fixed Won revenues but volatile USD revenueFixed pricing contract in Won results in fixed Won revenues but volatile USD revenue

• Future exchange rate predictions expect Won to appreciate against USD

• Leaving the revenues un-hedged can lead to huge losses if Won appreciates


Source: http://www.x-rates.com

Hedging Won revenue coming from fixed price contact using call options is the optimal strategy in short term

CONCEPTUAL

using call options is the optimal strategy in short term

Fixed price revenue returns, USD

100

110

120No Hedging

Partial Futures Hedging (50% Revenue)

Complete Futures Hedging

Hedging by buying call options on USD

Production cost in USD for COGMA

Without hedging COGMA will incur losses due to volatility of exchange rates

• Hedging by buying call option on USD limits down side while allowing

80

90

100COGMA to benefit from upside

• Hedging using futures contracts:

• Complete hedging eliminates the impact of exchange rate volatility Minimum

60

70

impact of exchange rate volatility but limits our upside

• Partial hedging for 50% of expected revenue can limit our downside

Minimum required margin

40

50

900 1000 1100 1200 1300 1400 1500 1600Exchange rate

1208 won/$ 30 day future rate

• Operational hedging by setting manufacturing plants in that region too expensive and risky at this point but should be explored if business expands significantly


Note: Analysis done using a fixed 100K won revenue

Exchange rateWon/USD

Appendix 1: AssumptionsAppendix 1: Assumptions

• 360 Working days per year were considered

• For optimizing units per truck/route, units were constrained to be a multiple of 200, so it can be expressed as a number of times the daily demand

• In-transit inventory costs were calculated at $1.5 per day per unit, same as the holding cost at Fetag

• Monthly steel price data used to calculate mean and standard deviation of prices

• COGMA receives same steel price/ton as the distributor from manufacturer

• COGMA is able to maintain relationship with distributor while also purchasing steel p p gdirectly

• Purchasing steel directly, without utilizing the distributor, reduces responsiveness and thus requires 30 days of safety inventory


Appendix 2: Linear Programming Model C tCurrent

Assumptions and data Section

Binary Variables ( t ti ti )

Optimization Variables (units sent for each Section(route activation)(units sent for each

route, multiples of 200*

Optimization Target = Min (Total SC Costs)

Optimization Constraints


( )

Appendix 3: Linear Programming Model O ti l S l ti F t OOptimal Solution - Feta Open


Appendix 4: Linear Programming Model O ti l S l ti F t l dOptimal Solution – Feta closed


Appendix 5: Linear Programming Model O ti l l ti F t l d d il d li iOptimal solution – Feta closed, daily deliveries


Appendix 6: Linear Programming Model O ti l l ti F t l d d il d li iOptimal solution – Feta closed, daily deliveries


Appendix 7: Overall transit days are reduced d ti ll h l i F tdramatically when closing Feta

Total Days to Roquefort Total Days to Mozzarella

Through Feta Direct Through Feta Direct

Gouda 9 4 8 2Chester 8 2 7 28 2 7 2Brie 7 4 6 4Provolone 9 2 8 1Average 8 3 7 2Difference -5 -5

% Reduction 63% 71%


Appendix 8: Steel Procurement Scenario A l iAnalysis

400 100 $/ton4 10 $/ton

Input DataMonthly Demand (tons)Containers required

Import related costsTransport from the steel plant to the portHandling costs at the port4 10 $/ton

400 25 $/ton4 2000 $/per container

30 500 $/container10% 5 $/container

183,817 100 tons18,382 100 tons

2 days44 days4 days5 $/ /d

Safety Inventory Holding Cost

H ldi i i i $/ /d

Containers requiredShipment Ordersize (tons)Trucks required from port to plantDays of safety inventory (days)Cost of capitalSafety inventory cost

Customs clearanceContainer capacityTruck ContainerTransit time from steel plant to portTransit from Overseas port to US portTransit from US port to plant

Handling costs at the portUnloading charges at US portShipping charges per container of productLocal transport cost from the port to the appropriate plant.

5 $/ton/day50% of distributor prices

MonthDistributor Direct Distributor Direct Tailored Distributor Direct Tailored Distributor Direct Tailored

1 639$ 320$ 255,600$ 291,820$ 255,600$ 127,800$ 164,020$ 127,800$ 12,780$ 14,591$ 12,780$ 2 699$ 350$ 279,600$ 303,820$ 279,600$ 139,800$ 164,020$ 139,800$ 13,980$ 15,191$ 13,980$ 3 800$ 400$ 320,000$ 324,020$ 320,000$ 160,000$ 164,020$ 160,000$ 16,000$ 16,201$ 16,000$ 4 915$ 458$ 366,000$ 347,020$ 347,020$ 183,000$ 164,020$ 164,020$ 18,300$ 17,351$ 17,351$

Holding cost per ton in transit in $/ton/daySteel price at the manufacturing plant/month

Steel price/ton Total Steel Procurement Cost/400 ton Implied Delivery Cost/400 ton Monthly Cycle Inv CostProcurement Costs ‐ Scenario Analysis

5 998$ 499$ 399,200$ 363,620$ 363,620$ 199,600$ 164,020$ 164,020$ 19,960$ 18,181$ 18,181$ 6 1,073$ 537$ 429,200$ 378,620$ 378,620$ 214,600$ 164,020$ 164,020$ 21,460$ 18,931$ 18,931$ 7 1,099$ 550$ 439,600$ 383,820$ 383,820$ 219,800$ 164,020$ 164,020$ 21,980$ 19,191$ 19,191$ 8 1,093$ 547$ 437,200$ 382,620$ 382,620$ 218,600$ 164,020$ 164,020$ 21,860$ 19,131$ 19,131$ 9 973$ 487$ 389,200$ 358,620$ 358,620$ 194,600$ 164,020$ 164,020$ 19,460$ 17,931$ 17,931$ 10 865$ 433$ 346,000$ 337,020$ 337,020$ 173,000$ 164,020$ 164,020$ 17,300$ 16,851$ 16,851$ 11 900$ 450$ 360,000$ 344,020$ 344,020$ 180,000$ 164,020$ 164,020$ 18,000$ 17,201$ 17,201$ 12 975$ 488$ 390,000$ 359,020$ 359,020$ 195,000$ 164,020$ 164,020$ 19,500$ 17,951$ 17,951$

Total (Annual) 4,411,600$ 4,174,040$ 4,109,580$ 2,205,800$ 1,968,240$ 1,903,780$ 220,580$ 208,702$ 205,479$ 237 560$ 302 020$ 237 560$ 302 020$ 11 878$ 15 101$237,560$ 302,020$ 237,560$ 302,020$ 11,878$ 15,101$

Procurement: Direct = $237K savings (5% savings)

Tailored = $302K (7% savings)

Holding Costs: Direct = $12K

savings


(7% savings) Tailored = $15K savings

Appendix 9: Hedging analysis against the Korean Wonpp g g y g

• Fixed price contract will Fixed price contract will lead to a fixed revenue in won. We have assumed that our won revenue is 100,000 won

• Based on range of exchange rate we analyzed exchange rate we analyzed the USD revenue under the following scenarios

• Un hedged position

• Fully hedged position y g pusing futures contract

• Partially hedged position for 50% of revenues using futures contract

• Hedging using options by buying call options for strike price of 1208 won/USD


0.9

1 2

12

14

I t t 3.51.01.2

6

8

10 Inventory at assembly plants

Inventory at Feta

6.7 6.7

2.30.01.8

2

4

6 Feta

Pipeline inventory

2.0 2.2 1.90

2

Current OptimalFeta open

OptimalFeta closed

Transportation cost


p

46

Documents

Sl l b l G h tMiM anaging the Global Supply Chain at COGMA · Long term direct procurement strategy from China reduces procurement costs by 5% 600 Total yearly steel procurement cost,