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1 MGMT20005 Business Decision Analysis Assignment 2: Group Assignment Case Study 1 – DHL Supply Chain (This case study has been adapted from a case by NUS and Ivey School of Business.) A 2015 World Economic Forum publication declared, “Human activity generates annual greenhouse gas emissions of around 50,000 mega tonnes CO2 (Carbon Dioxide emission). We estimate that 2,800 mega tonnes of 5.5% of the total are contributed by the logistics and transport sector.” The executive summary stated, “Significant movement is expected towards reduced supply chain carbon intensity. This will create both opportunities and risks for logistics and transport firms, with changes in supply and demand driven by regulation of carbon emissions, higher and more volatile fuel prices and evolving consumer demand. The sector can play an influential role in decarbonisation, both in its own operations and through broader supply chain optimisation. This provides direct benefits through reduced costs, managed risks and business growth.” It concluded with several recommendations for supply chain stakeholders. Among the six recommendations for logistics and transport providers was to “switch (transport) modes where possible.” For shippers and buyers, it was recommended to “plan to allow slower and better optimised transport.” Finally, policy makers were also invited to “reflect the cost of carbon in energy tariffs; support carbon measurement and labelling standards and build open carbon trading system.” COMPANY INFORMATION After reading the report, Lun-Hsuan Yang, a member of the solutions team at DHL Supply Chain, recognized the very findings he had uncovered in a recent analysis, undertaken as part of the Go Green environmental protection program initiated by the parent firm, Deutsche Post DHL. As a thought leader on sustainability in the industry, Deutsche Post DHL recognised there were clear opportunities to begin resolving the carbon emission problems faced by many of its customers. DHL even stated on its website, “We recognised environmental protection as our responsibility as well as a business opportunity.” Deutsche Post DHL was the first logistics company to set a quantified carbon efficiency goal – to improve its CO2 efficiency across global operations by 30 per cent compared to the 2013 baseline. THE PROBLEM The exercise Lun-Hsuan undertook pertained to a consumer electronics company (CEC). Prominent among its line of products were 32” and 42” LCD TV sets (LCD32” and LCD42”). Production of the LCD TV sets was subcontracted to various original design manufacturers (ODMs) located in China and Taiwan. The responsibility of DHL Supply Chain was to ship the LCD TV sets from the ODMs to the distribution centre (DC) located in Shanghai. In the latest contract, the CEC had allocated a budget of CNY 3 billion (Chinese Renminbi) for the production and shipping of 700,000 units of LCD42” and 440,000 units of LCD32” TV sets to its DC. Lun-Hsuan had worked with the CEC to configure the optimal supply chain that would fulfil this order within the CNY 3 billion budget while satisfying various constraints pertaining 2 to economy of scale, production capacity, supplier risk management and service level requirements on the shipping front. At that point, this optimisation exercise did not consider the volume of CO2 emissions. The CEC had a list of seven ODMs to which it could subcontract the production of LCD TV sets. ODM1 and ODM2 were the only companies that could produce both LCD32” and LCD42”. The remaining five ODMs produced LCD 42” exclusively. Their unit production costs are listed in the data sheet (see Excel sheet ‘BDA DHL Supply Chain.xlsx’). To engender economies of scale in the production, the CEC guaranteed a minimum order of 180,000 to any selected ODMs. Also, to mitigate dependency risk on any ODM, the maximum order (with each ODM) for either LCD32” or LCD42” was capped at 400,000 units. ODM1 and ODM2 had high production capacities, and if chosen, they each had the ability to produce up to 400,000 units of LCD32”, as well as up to 400,000 units of LCD42”. Several transportation modes were available to ship the TV sets from the ODMs to the DC: regular air, air express, road, road LTL (less than truckload), road network, rail and water. The distances from the ODMs to the DC and the various shipping rates are tabulated in the Excel data sheet. ODM5 was located near the DC, restricting shipping to road, road LTL or road network. ODM6 was located in Taiwan and shipping could only be conducted via air or water. Across shipping modes, the rates of carbon emission in kilograms (kgs) varied greatly from regular air to water per ton shipped per kilometre (km) travelled (see Excel data sheet). Each LCD32” weighed about 16.5kgs and each LCD42” weighed about 22kgs. Shipping times varied from two days (via air express) to 10 days (via water). Based on historical information on shipping times and customer order cycle times, the CEC decided that to maintain satisfactory inventory levels, DHL supply Chain had to ship a minimum number of 32” and 42” LCD TV sets, according to the criteria listed at the bottom of the Excel data sheet. There was no constraint on shipments via water. Lun-Hsuan also had to take into account of some additional OMDs pre-existing contractual arrangements with shipping the TV sets from the ODMs to the DC. For example, these arrangements were: at least one of ODM 5 or 7 must be used to ship the LCD 42”. And, if ODM 3 or ODM 4 was used, then ODM 6 must also be used. In the exercise, Lun-Hsuan assumed a likely consequence of government legislation to reduce emission of CO2 would appear in the form of a tax incentive. He also anticipated the brand value of the LCD TV sets could rise as a result of customer awareness. Lun-Hsuan estimated these factors could translate into a 10 per cent increase in the budget for this specific supply chain. He was eager to find out the maximum potential reduction in CO2 emission made possible through a potential CNY 3.3 billion budget for manufacturing and shipping the TVs from the ODMs to the DC. Lun-Hsuan has come up with a few questions that he wants answers to and this may help you with your analysis and discussions of this problem. 1. Demonstrate how the original supply chain can be optimised on a budget of CNY 3 billion. 2. Evaluate the extent of the reduction in CO2 emission if the budget were increased by 10% to CNY 3.3 billion. 3. What are some other interesting observations and findings you can uncover?