“Synchronization of Ocean Export Supply Chain”

Barcelona, July 12, 2022.- The SCM thesis Synchronization of Ocean Export Supply Chain was authored by Michelle Ramirez and Yulu Li and supervised by Dr. Ilya Jackson (ilyajack@mit.edu) and Dr. Maria Jesús Sáenz (mjsaenz@mit.edu).

Ocean freight represents more than 70% of global trade by volume. Economic activity on the ocean is expanding rapidly, mainly behind the economic growth, increase in trade, rising income levels, and technological progress around the world. However, in early 2020, the COVID-19 pandemic disrupted supply chains, leading to canceled sailings, port delays, and container shortages. Additionally, the pandemic generated changes in demand that led to increased volatility, contributing to significant delays.

As trade recovered from the COVID-19 pandemic in the second half of 2020, ocean carriers struggled to restore capacity to previous levels. Additionally, distrubition systems were shocked by the unexpected recovery in demand; companies had trouble getting products to customers. This imbalance between demand and supply impacted freight costs and schedule reliability. Given the increases in transportation rates, companies are more interested in driving efficiencies and cost optimizations through supply chain synchronization.

Supply chain synchronization refers to the ability to coordinate costs, inventory, and service level, while considering flexibility and sustainability. In order to provide a solution to consumer packaged goods (CPG) companies, this article is focused on understanding what should be considered in designing a synchronized supply chain for ocean export. It is also about how companies can make trade-offs among factors affecting supply chain synchronization.

Source: MIT

Intuitively, synchronization is beneficial to companies; however, many find it hard to objectively evaluate the costs and benefits of synchronization, not to mention the design of a synchronized supply chain. Companies need a framework to guide their efforts in driving supply chain synchronization within the organization. Through studying the complex supply chain network of a CPG company, we have identified five main factors that affect synchronization: cost, service level, lead time, flexibility, and sustainability.

Considering these five factors, how do companies implement this strategy? We developed an adaptable model that can help companies design a synchronized ocean export supply chain under different circumstances.

In order to address the problem, a mathematical model can provide an optimal solution considering the critical variables and constraints for the company. A mixed integer linear programming (MILP) model is an approach to minimize costs; these include transportation cost, the inventory holding cost based on the service level and lead time, and the cost of running a mixing center where different categories are consolidated. When driving supply chain synchronization, it is also important to consider flexibility and provide a model that can be easily updated with the latest supply chain information or be adapted to different business environments. At the same time, more sustainable supply chains can be achieved when striving for volume consolidation that leads to fill rate improvement and greenhouse gas emission reduction.

The framework presented in the figure above helps CPG companies understand the trade-offs between relevant synchronization factors. Improved synchronization is critical to offsetting increasing costs, optimizing inventory, improving lead time, and moving toward a more sustainable supply chain. Given the dynamic nature of supply chains, companies need to incorporate quantitative models that allow them to make decisions quickly and include different transportation mode alternatives.

Based on our results for the CPG company case, we concluded that offering both truck and rail options for inland transport reduces costs and increases flexibility. An optimal design might represent a reduction of supply chain costs by 9%, while inventory holding cost increases by 60%, and the transportation cost might be reduced by 28%, outweighing the inventory cost increase. To gain cost and flexibility benefits like these, companies must challenge the status quo and leverage quantitative models to consider possible supply chain network design options that lead to supply chain synchronization.

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