Catalysis Corporation

Catalysis Corporation:

Outbound Freight Transport

Introduction

NB: This case study has been based on true trading data but made anonymous to protect the identity of the company. For the purposes of this case study the focus is restricted on the outbound logistics of specialist silicas from the main UK site (North West – Manchester Area)

The Catalysis Corporation is a global chemical business producing speciality inorganic chemicals and operates over 60 manufacturing sites in 21 countries. Annual sales revenues are in excess of $1 billion.

Silica is produced in two manufacturing plants at the main UK site located in the North West. There is a wide range of Stock Keeping Units (SKUs) created through multiple production routes. The customer end use of silica is extensive, as a; flow aid in food; mild abrasives in toothpaste; filter aids in beer manufacture; catalyst support in ethylene polymerisation, to name a few. The sales value and contribution margin of these more speciality chemical products are significantly higher than the other bulk commodity chemicals produced at the site. Whilst Silica only accounts for 25% of sales tonnage, it contributes 70% of the site’s total sales by value and accounts for 74% of the site’s outbound freight costs (see Appendix A).

The marketplace for silica is global. Silica product is provided in a variety of pack formats but mainly in valve sacks, drums, and bulk bags all of which are palletised. However, pack configuration and dispensing technology lead to poor vehicle fill as the product cannot be stacked. Tanker supply is limited to a few major customer accounts in Europe. Transportation of silica products to customers is predominantly by road haulage or sea containers. Road haulage dominates the UK and European markets whilst more distant regions of Asia Pacific and North America are serviced by sea freight.

Catalysis ’s Supply Chain

For Catalysis there are a number of fixed factors that constrain the supply chain and transport options for servicing the market. Chemical manufacturing sites are capital intensive and aim to operate on a 24 hr/7day basis in order to generate a satisfactory return on investment. Operational focus is on lean manufacture through Economic Order Quantities (EOQ) and supply of full pallets/loads. This gives rise to a mismatch in supplier/ customer goals. With historical investment at locations close to key raw materials, the UK site has found itself remote from the more global silica markets it now competes in. For the silica business, some products are only produced at the UK site due to a combination of processing technology and local raw material quality. These products cannot be supplied to global customers from closer regional sites. Freight costs, therefore, have to be kept low in order to service distant markets and maintain profitability against the more local based competition. Sea freight in the format of full container loads is therefore predominantly used. However, the supply lead time is obviously extended (6 – 8 weeks) and there is a higher level of inventory through these supply chains.

Catalysis, European Distribution

For silica packed goods, a 7000 pallets capacity warehouse is located on the UK site as well as additional third-party storage located 30 minutes away. No other company owned and operated regional distribution centres exist. Product is supplied to the UK and European end users either directly in the case of silica brewing and personal care customers on relatively short lead time by road freight, or through key regional distributors in the case of surface coatings with longer lead times. There has been a conscious commercial decision to follow this pattern of trading.

For surface coatings, end users are numerous, vary in size of activity, and use a wide range of raw materials. By using distributors, silica product is consolidated with other chemical raw materials and delivered in smaller grouped loads to the customers on short lead times. Visibility of demand and inventory levels throughout this supply chain is poor and product quality problems do not show up immediately. Both damage to packs and issues with product performance (fit for purpose) have occurred up to 6 months following despatch and have been costly to resolve. The freight cost per tonne across Europe varies significantly in direct relationship to distance with near markets such as the Benelux having a lower cost than markets in Italy and Spain.

Silica to Distributor, Barcelona, Spain

A majority of the UK site’s freight spend is through the export shipments of silica. European shipments are dominated by road freight, but some opportunities exist to provide more cost effective and energy efficient intermodal routes. In using these routes, the transit lead time is extended to the limit of service level acceptable to customers. It is therefore recommended that the logistics teamwork with their freight forwarder to actively seek other intermodal opportunities within the European region.

Silica pallets are supplied into key distributors throughout Europe. One particular distributor in Spain receives product by road freight with a transport lead time of 4 days. Catalysis ’s freight forwarder has recently suggested switching to an intermodal transport route of rail and sea to reduce the cost of supply. A container loaded at the UK site is transferred to Liverpool port by road, loaded onto the carrier’s ship, sails to Bilbao port on the north coast of Spain and is then loaded onto rail for onward transfer to Barcelona. The comparative costs for this transport option are shown in Appendix B along with the existing (DSV) road freight rate.

Silica to Houston, North America

A significant proportion (480t) of silica catalyst is supplied to the petrochemical industries in Texas, North America. This is the UK site’s highest margin business relative to tonnage and the most specialised area of the silica product range. Customer lead times are relatively short at 1-2 weeks and 100% On Time In Full (OTIF) has to be maintained for these ‘A’ list customers. Product is routinely shipped from the UK to a third-party regional distribution warehouse near to the port of Houston from where the product is transferred into the control and ownership of Catalysis ’s North American company who provide onward delivery and customer service. The average inventory holding in North America to support catalyst sales and service levels was 200 tonnes in 2019.

Historically there have been occasions when customer demand has overtaken plant capacity, stocks have dropped, and continuity of supply has been threatened. On these occasions, the site has used airfreight to reduce the transport lead time. Airfreight has also been used in the event of plant quality problems or sudden high un-forecast demand. It is believed by many in the company that a full switch to airfreight would remove approximately 100 tonnes form the average inventory holding in Northe America with obvious cost savings for the company (weighted cost of capital in Catalysis is set at 15%).

The comparative costs for this transport option are shown in Appendix C. A former college had developed a landed cost evaluation framework but never completed the cost comparison.

Assessment

You have recently taken the position of Supply Chain Director at Catalysis in the UK and you have been tasked with evaluating the options for outbound transport for silica products to both Spain and North America. You have been asked to compile a concise report detailing:

1. Which of the alternative transport routes/modes would you recommend on costs grounds to serve the Spanish distributor? (20% of Marks)

2. Which of the alternative transport modes would you recommend on cost grounds – to North America? You should use the framework provided in Appendix C to calculate the two modal options. (40% of Marks)

3. What are the relative strengths and weaknesses of the modal options you are recommending and the wider issues that need to be considered? (30% of marks)

An additional 10% of marks will be awarded for the structure, presentation and referencing (if relevant).

The report should be divided into appropriate sections and be no more than 1,500 words. Assumptions, logic and justifications should be carefully stated and freight costs for each European option presented as a total weekly cost. Whilst this is a report, based on the case study material provided, you may still use references where they support the arguments and recommendations you put forward, particularly in Q3.

You should pay particular attention to achieving a good structure and consistent logic throughout the report rather than just reporting detailed calculations (additional 10 marks). Detail calculations or spreadsheets, if required, should be attached as a supporting appendix and should be part of the document submitted for assessment via Turnitin.

You are not required (and no additional marks will be awarded) for research into current freight rates or named operators. Use the costs provided in the case.

Maximum words: 1,500 (see assessment guidelines)

Appendix A: Annual Sales and Trading Data

Total annual sales tonnes, revenue and costs for the UK by product groups (2019).

Product GroupSalesSalesFreight CostFreight Cost
 (tonnes)(Million €)(Million €)% of Sales
     
XXXXXXXXX,XXXXX.XXXX.XXXX.X%
YYYYYYYYY,YYYY,YYYY.YYYY.Y%
Silicas27,67157.1683.3705.9%
 



Total109,39081.5604.539

Annual Sales for the UK by product groups (2019)

SILICAS Product Group







Sales RegionsSalesSalesFreight CostFreight Cost

(tonnes)(Million €)(Million €)% of Sales





UK6,6878.8700.5115.8%
Europe (excl. UK)13,14029.9901.6455.5%
Asia PacificX,XXXXX,XXXX.XXXX.X%
North America3,1606.3300.5508.7%
AfricaXXXX.XXXX.XXXX.X%
Latin AmericaXXXX.XXXX.XXXX.X%





Total27,67157.1683.3735.9%





Annual sales and trading data by Silica product types (NB: trade names and sensitive information blanked out)

Business Unit
Product Group
Sales (tonnes)Sales (Euro)
Freight (Euro)
SKUsNo. Customers

Appendix B

Exchange Rate €1.14 Euros / £1GBP (average over 12 month period 2019)1

Export Container Shipping Rates – June 15 freight table

OriginCountryDestinationCarrierEquipmentOrigin Haul. OTHC Ocean Freight DTHC Other Charges Total
Exit PortEntry Port
UK SiteSpainBarcelonaTurkon40 ft GP368GBP160GBP435GBP456EUR10GBP1370GBPFelixstoweBarcelona
UK SiteSpainBarcelonaMacAndrews40 ft GP0 GBP15GBP1035GBP0EUR0 GBP1050GBPLiverpoolBilbao
UK SiteSpainBarcelonaMSC (UK)40 ft GP385GBP125GBP1208EUR390EUR0 EUR2185EURFelixstoweBarcelona
UK SiteSpainBarcelonaMaersk40 ft GP174GBP135GBP1615EUR352EUR35EUR2358EURFelixstoweBilbao

Transit time 14 Days Container holds 8.82 tonnes

Origin haul (haulage to port), OTHC (Origin Terminal Handling Cost) ….DTHC (Destination Terminal Handling Cost)

Road Freight Table – 2019 latest (existing service)

UK SiteSpainBarcelonaDSVEUR1897Door-to-Door

Transit Time 4 days Truck holds 10.18 tonnes

Appendix C:

Silica supply to North America: Total Landed Cost (£) Model (draft 2019)





SeaAir
Annual sales (tonnes)

Cost price per tonne$7060$7060
Cost price p.a.




Shipping Cost per tonne£180£1750
Shipping Cost p.a.2




Insurance3




Duty p.a.4




Average Catalyst Inventory (tonnes)

Inventory Value per tonne

Total Inventory Value

Inventory holding cost p.a.




Warehousing costs p.a. (storage & handling)




Total Costs p.a.




Data (for 2019)

  • Annual sales of Catalytic Silica to North America 480 tonnes
  • Average US cost price per tonne $7,060
  • Sea freight costs per tonne £180 (based on average of previous rates 2018-19)
  • Air freight costs per tonne £1,750 (based on average of previous rates 2018-19) and adjusted for volumetric weight)
  • Average inventory held – 200 tonnes (if using sea)
  • Allocated warehousing costs for catalyst £55,500 pa (North America)

Assumptions:

  • Exchange rate ($1.285 to the £1, average 2019)
  • Weighted cost of capital 15%
  • Import duty 3.7% For the purposes of this assignment assume there are no additional state/local or sales taxes
  • International freight insurance – 1.07% Sea and 0.92% Air

1 http://www.ukforex.co.uk/forex-tools/historical-rate-tools/yearly-average-rates

2 Assume freight rates are door to door and include documentation and declaration charges

3 All risk insurance coverage is equal to the (commercial invoice value + cost of insurance + the cost of freight) * 110%. https://priorityworldwide.com/cargo-insurance/#1557345800452-60187b0b-026a

4 You are advised to check methodology for the calculation US import duties and any additional taxes or fees which might apply.

https://help.cbp.gov/s/article/Article-810?language=en_US

5 https://www.ofx.com/en-gb/forex-news/historical-exchange-rates/yearly-average-rates/

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