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PNWCHEMICALS
Susan Mineris the VP of Supply Chain at PNWChemicals, a company that produces specialty chemicals.
After PNWChemicals end of year meeting, she was distraught to have learned that the company has
achieved only two inventory turns last year. After analyzing the records, she realized that this low
inventory turns were tied to the fact that more than 50% of their inventory was on consignment to its
customers (below their consignment structure is explained in more detail). This occurred despite the
fact that only about 20% of their customers held consigned inventory. Susan was responsible for the
inventory and the transportation costs. She decided that it was time that the consignment plan was
examined carefully, and that a more advanced inventory plan was put in place.

PNWChemicals Operations
PNWChemicals operated eight production facilities and 40 distribution centers to manufacture and
transport their specialty chemicals. Base chemicals were manufactured at the production facilities and
they were mixed at the distribution centers, so that a variety of end products that would match a range
of customer requirements could be produced. In the specialty chemicals market, PNWChemicals
decided to differentiate itself in the western portion of the state of Washington by providing
consignment inventory to its customers. PNWChemicals kept the chemicals required by each customer
in the western Washington region on consignment at the customers’ sites. Customers used the
chemicals as needed, and PNWChemicals managed replenishment to ensure availability. In most
instances, consumption of chemicals by customers was stable. PNWChemicals owned the consignment
inventories and was paid for the chemicals as they were used. The company aimed to make this strategy
national if it proved effective.

Distribution at PNWChemicals
PNWChemicals used Evergreen trucking, a full-truckload carrier, for all its shipments. Evergreen has
dedicated a truck to PNWChemicals, which had a capacity of 100,000 pounds; Evergreen charged a fixed rate given the origin and destination, regardless of the quantity shipped on the truck. PNWChemicals sent full truckloads to each customer to replenish its consignment inventory.

The Western Washington Pilot Study
Susan decided to carefully investigate the company’s distribution operations. She focused on western
Washington, which was supplied from the Snohomish distribution center. She broke up western
Washington into a collection of areas with codes that were contiguous, as shown in Figure 1 below. He
restricted attention to the Pierce county region, which was classified as code 615. A careful study of the
Pierce county region revealed two large customers, six medium-sized customers, and twelve small
customers. The annual consumption at each type of customer was as shown in Table 1. Evergreen
charged $400 for each shipment from Snohomish to Pierce, and PNWChemicals’s policy was to send a
full truckload to each customer as needed.2
rate given the origin and destination, regardless of the quantity shipped on the truck. PNWChemicals
sent full truckloads to each customer to replenish its consignment inventory.

The Western Washington Pilot Study
Susan decided to carefully investigate the company’s distribution operations. She focused on western
Washington, which was supplied from the Snohomish distribution center. She broke up western
Washington into a collection of areas with codes that were contiguous, as shown in Figure 1 below. He
restricted attention to the Pierce county region, which was classified as code 615. A careful study of the
Pierce county region revealed two large customers, six medium-sized customers, and twelve small
customers. The annual consumption at each type of customer was as shown in Table 1. Evergreen
charged $400 for each shipment from Snohomish to Pierce, and PNWChemicals’s policy was to send a full truckload to each customer as needed.

Susan checked with Evergreen to find out what it would take to include shipments for multiple
customers on a single load. Evergreen informed him that it would charge $400 per truck and add $75 for
each drop-off for which Evergreen was responsible. Thus, if Evergreen carried a truck that had to make
one delivery, the total charge would be $475. However, if a truck had to make four deliveries, the total
charge would be $700. Each pound of chemical in consignment cost PNWChemicals $1.5, and
PNWChemicals had a holding cost of 30 percent. Susan wanted to analyze a few different options for
distribution available in the Pierce county region to decide on the optimal distribution policy. First
option was to aggregate all 20 customers into each truck going to Pierce county. Second option was to
have separate groups for the small, medium and large customers (i.e. all small customers would be in
one group, all medium ones in another and all large ones in a third group). The detailed study of the
Pierce county region would provide the blueprint for the distribution strategy that PNWChemicals
planned to roll out nationally.

1. Consider different delivery options (options one and two described above)) and evaluate the cost of
each. (Hint, for option two use the same procedure used for full aggregation, except, for each group,
aggregate demand and calculate S* separately for each group to find n* unique to each group). What
delivery option do you recommend for PNWChemicals? Why?