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Business, ManageMent and education
ISSN 2029-7491 / eISSN 2029-6169
2014, 12(1): 109–126
doi:10.3846/bme.2014.08
THE IMPACT OF SUPPLY CHAIN COST ON
THE PRICE OF THE FINAL PRODUCT
Indrė Lapinskaitė1, Justina Kuckailytė2
Vilnius Gediminas Technical University, Saulėtekio al. 11, LT-10223 Vilnius, Lithuania
E-mails: 1indre.lapinskaite@vgtu.lt (corresponding author); 2j.kuckailyte@gmail.com
Received 19 May 2014; accepted 4 June 2014
Abstract. Nowadays, as consumption and production are growing enormously
fast, companies are seeking for costs reduction aimed at ensuring competitiveness.
In manufacturing companies, supply chain expenses play a colossal role in the
cost of the nal product. This paper focuses on the main processes in the logistics
chain and their components. The authors analyse the relationship between the sup-
ply chain expenses and the price of the nal product, the classication of logistics
chain costs and their minimization as an assumption for the competitiveness of the
nal price.
Keywords: pricing, supply chain cost, linear programming, optimisation.
Reference to this paper should be made as follows: Lapinskaitė, I.; Kuckailytė, J.
2014. The impact of supply chain cost on the price of the nal product, Business,
Management and Education 12(1): 109–126. http://dx.doi.org/10.3846/bme.2014.08
JEL Classication: C61, D4, D23, L91.
1. Introduction
Due to the increasing globalization, companies need to become more and more com-
petitive in order to sustain in the market. The only way to stay competitive and to keep
customers is to provide a reasonable price of the product. Supply chain costs compose
around 55% of the total product cost. Since the supply chain has a big inuence on the
cost of the nal product, it is necessary to continually improve the processes within the
supply chain and thereby reduce the overall cost. The need to keep the price competi-
tive on the market empowers the company to be exible and adaptable, offering dif-
ferent prices to different customers (Shaffer, Zhang 1995, 2002; Feinberg et al. 2002;
Liu, Zhang 2006). The supply chain can be described as a tool for cargo movement, in
our case – industrial tools. The chain is considered as the total sum of supply, material
management and distribution actions.
The topic was chosen to determine the impact of the supply chain cost on the cost of
the nal product in a small-sized German tools manufacturing company Holger Clasen
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I. Lapinskaitė, J. Kuckailytė. The impact of supply chain cost on the price of the nal product
GmbH & Co. KG (hereinafter – Holger Clasen). The supply chain costs will be ana-
lysed regarding costs related to four components: transportation, inventory, warehousing
and packaging (Rushton et al. 2010). Considering the total supply chain costs, the real
impact on the cost of the nal product will be presented as well as and opportunities
for its reduction.
The goal of this paper is to discuss the nature of the supply chain, the key processes
and their accompanying component costs; to practically analyse activities of Holger
Clasen and explore transportation, warehousing, inventory and packaging costs aiming
to develop and optimise opportunities for the cost of the nal product.
The work is dedicated to nding a solution to the main problem, namely, the enor-
mous role of supply chain costs in the price of the nal product. In order to stay com-
petitive in the market, it is necessary to nd a way to reduce supply chain costs. The
paper suggests the optimisation task as means of solving the problem related to the
reduction of supply chain costs.
2. Supply chain concept
In the 21st century, more and more companies understand and evaluate the importance
of the supply chain concept. In a company, the supply chain is strategically relevant for
internal and external areas of activity. Also, it is considered as one of the best ways to
control distribution processes of the company. Generally, the supply chain is not focus-
ing on nancial improvements; nevertheless, it has a big inuence on the prot of the
company by optimizing processes and reducing nal product cost (Morana 2013).
There are many different denitions of the term “supply chain”. Results of the
in-depth analysis of denitions present in the literature are given in the Table 1 below.
To sum up the table, the supply chain is the overall processes of the product move-
ment starting from the supplier to the end customer.
The goal of a supply chain is to control all planning functions. This includes the
planning of supply, demand, inventory, logistics capacity and sourcing. The core task
of the supply chain is to connect customers with suppliers; in order to accomplish the
task; the supply chain is responsible for all execution functions: purchasing, warehous-
ing and transportation (Sehgal 2011). Aiming at the best result, a supply chain should
balance all functions, which are mentioned above. Moreover, by providing a developed
and functional supply chain strategy, the supply chain management can support the
business strategy. It can be implemented in the overall enterprise process by acceding
the meaningful asset at the end.
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Table 1. Comparison of supply chain denitions (created by the authors)
Denition Authors
“A set of approaches utilized to efciently integrate suppliers, manu-
facturers, warehouses and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and the right
time, in order to minimize system wide costs while satisfying service
level requirements.”
Simchi-Levi et al.
2008; Kumar,
Nambirajan 2013
“Logistics is essentially a planning orientation and framework that
seeks to create a single plan for the ow of products and information
through a business. Supply chain management builds upon this frame-
work and seeks to achieve linkage and co-ordination between the pro-
cesses of other entities in the pipeline, i.e. suppliers and customers, and
organization itself.”
Christopher 2011
“<…> the supply chain should be understood as a network 1 of enti-
ties delivering the product (or service) to the market, end-customer or
consumer.”
Szymczak 2013
“A supply chain is a network of facilities and distributions that performs
the functions of procurement of materials, transformation of these ma-
terials into intermediate and nished products, and the distribution of
these nished products to customers. Supply chain exists in both ser-
vice and manufacturing organizations, although the complexity of the
chain may vary greatly from industry to industry and rm to rm.”
Bhatnagar 2009
“SCM is the management of a network of interconnected businesses
involved in the provision of product and service packages required by
the end customers in a supply chain. Supply chain management spans
all movement and storage of raw materials, work-in-process inventory,
and nished goods from point of origin to point of consumption.”
Dhakry, Bangar
2013
Product costing is a powerful tool. Determining the costs of products can enable
management to discern, which of its products are viable, which cost more, and which
contribute most to the bottom line. In fact, understanding the savings of product costs
can be a key to improving the viability (Hirschland 2005). Logistics is a diverse and
dynamic function that has to be exible and has to change according to the various
constrains and demands imposed upon it and respect to the environment, in which it
works (Rushton et al. 2010). Below is the formula of logistics described theoretically:
Logistics = Materials Management + Distribution.
Nevertheless, logistics is a part of a supply chain, which describes the overall pro-
cess and takes into account suppliers and customers. The theoretically described formula
of a supply chain (Rushton et al. 2010):
Supply chain = Suppliers + Logistics + Customers.
All in all, importance of the problem (how much do logistics costs impact on the cost
of the nal product) in the following papers will be analysed. Naturally, the optimisation
goal is to optimise the overall process including suppliers and customers.
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I. Lapinskaitė, J. Kuckailytė. The impact of supply chain cost on the price of the nal product
3. Comparison of supply chain components
Reduction of the cost of a nal product is based on analysing different logistics supply
chain components. Different authors have different opinions on the components. The
most essential activities of the logistics supply chain in industrial tools manufacturer
industry will be analysed more in detail.
Table 2. Comparison of supply chain components (created by the authors)
Rushton
et al.
2010
Vierasu,
Balasescu
2011
Chopra,
Meindl
2007
Sadler
2007 Bhatnagar
2009
Vogt
et al.
2007
Transportation X X X X X X
Inventory X X X X X X
Procurement X X
Materials
Handling
X X X
Reverse
Logistics
X
Warehousing X X X X
Information X X X X X X
Order
processing X X
Customer
Service
X
Location X X
Production X
Price X X
Packaging X X
Some comments regarding the Table 2 should be provided. Vogt et al. divide inven-
tories in to two parts: manufacturing inventory and nished goods inventory. Sadler
denes procurement as provision. Both terms are used synonymously. Chopra and
Meindl (2007) dene material handling as sourcing. In this book, both terms are used
synonymously. Vierasu and Blasescu dene warehouse as facilities. In this article, both
terms are used synonymously. Chopra and Meindl (2007) dene warehouse as facili-
ties. In this book, both terms are used synonymously. Vogt et al. connect information
and communication activities. Sadler denes material handling as order-picking and
forecasting demand.
Based on analysis provided in the Table 2, there are ve tools more commonly used
in the sources: transportation, inventory, information ow, warehousing and packaging.
The fth component, packaging, was chosen because it is important for the analysed
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company. To clarify each of the components, there short denitions are provided. Also,
information ow will not be analysed as the inuencer factor to the nal product cost,
because it does not have direct connection with the product cost. Each of the relevant
components is described below.
In transportation, the key activity is the movement of goods from one place to the
other. The transport system is indispensable in determining whether customers receive
goods as and when required (Vogt et al. 2007). According to Tseng et al. (2005), trans-
portation plays one of the biggest roles in the logistics chain and it is considered as the
most important component because it takes the biggest part in the life cycle of a product.
Transport system makes goods and products movable and provides timely and regional
efcacy to promote value-added under the least cost principle. During transportation
activity, time and quality aspects are considered as the most important.
Inventory encompasses all raw materials, work in process, and nished goods with-
in a supply chain (Chopra, Meindl 2007). Inventory is expressed though the carrying
costs. Inventory carrying costs are all costs required to keep the stock, which includes
all operating costs, such as utilities, rent and salaries. It is counted over the period of
time, usually one year. Several ways how to improve inventory and to reduce costs are
considered: reduce the inventory capacity, handing-over some operations to third party
companies and improving the stocks in timely manner (Lee 2013).
Warehousing entails the activities related to managing the space needed to hold
or maintain inventories. Goods must be stored for later sale and consumption unless
customers need them immediately after production (Vogt et al. 2007). Olayinka (2010)
pointed out three types of costs: picking/retrieval costs, packing costs and loading costs,
as important factors to minimize the cost and enhance effective warehousing services
in manufacturing companies.
Packaging basically performs two roles: marketing and logistics. From the logistics
point or view, packaging also has a dual role. Firstly, the package protects the product
from damage and sometimes prevents potentially hazardous products from damaging
other goods. Secondly, packaging can make it easier to store and move products, thereby
lowering materials handling and distribution costs (Vogt et al. 2007).
4. Understanding the supply chain material ow
Supply chain system consists of three processes: sourcing, production and distribu-
tion. Each of them is special in terms of supply chain functioning. A supply chain is
a dynamic process and includes information ows, production, warehousing services,
packaging services and transportation components. A business is considered as a node
where all activities are confronted (Xin et al. 2011).
In Figure 1, the supply chain processes are presented graphically. Supply chain sys-
tem would not exist without two core components: a customer (demand) and a supplier
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I. Lapinskaitė, J. Kuckailytė. The impact of supply chain cost on the price of the nal product
(supply). This is why the processes of supply chain starts with management of the
customer and supplier relationship and service level management. In this case, sup-
ply chain is a stepping stone, which makes it easier to understand and complete the
demand and supply needs. In order to satisfy customers, the remaining processes have
to be ensured; and in this case, order fullment and product development are the most
important. The importance of these two processes lets business maintain its customers
and run operations appropriately.
Fig. 1. Supply chain processes (adopted from Braškienė 2009)
According to Braškienė (2009), supply chain processes can be classied into three
sections: sourcing, production and distribution. Sourcing function is required to ensure
supply of material resources for the company, often identied as a purchase manage-
ment system. Production is a function ensuring the production preparation and continui-
ty of the production process. Distribution covers all activities related to the ow of trade
(tangible) and services (intangible) or nished goods from the warehouse to outlets.
5. Research methodology
Holger Clasen Data Analysis. Data analysis (Table 3) is one of the most popular ways
for formatting and modelling loads of information. Statistical data helps different busi-
ness, organisations or research groups to forecast the up-coming situation, to make
decisions and nd out the trend.
Table 3. Strengths and weaknesses of statistical data analysis
(adopted from Statistical data analysis 2014)
Strengths Weaknesses
− Objective information
− The possibility to see the trend − Difcult to observe loads of data
A four-year period is analysed in the paper from 2010 to 2013 with over 60.000 of
data units. Several sources were used to get the data such as internal company’s ERP
system proAlpha and historical Excel tables made by HC controller. Statistical data
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summarizes the overall period information about suppliers, customers, internal com-
pany’s operations and nancial data.
In-Depth Interviews. A personal interview (Table 4) is a lengthy personal conversa-
tion with a group of people or an individual. The goal of personal interviews is to get
valuable information and experience-based knowledge from each respondent.
Table 4. Analysis of strengths and weaknesses of in-depth interviews
(adopted from Social research methods 2014a)
Strengths Weaknesses
− Detail answers
− Arguments are stated more clearly compa-
red to written answers
− Summarise difcult answers
− Possibility of interpretation
− Data can be inaccurate
− Subjective opinion
Interviews were made during a three months internship at the company. Information
was collected through short interviews based on daily communication or special meet-
ings in the particular case; the meeting were made with sales managers, supply chain
manager, controller and internship supervisor.
Observation. The observation method (Table 5) is used to study dynamic situations
and to preserve the interrelationships of the person and situation. The observation me-
thodology is observing the person or group of persons based on their professional eld.
Observation method was used on the same bases as in-depth interviews.
Table 5. Analysis of strengths and weaknesses of observation
(adopted form Social research methods 2014b)
Strengths Weaknesses
− Flexibility (approach can be changed as needed)
− Learning from professionals
− Language barrier
− Cultural barrier
− Risks ofmisunderstanding
Linear Programming. Linear programming (Table 6) is a mathematical method,
which achieves the best outcome (minimized or maximized value). Usually, it is used
as a technique of the optimisation model, as well can be called a multi-criteria decision
analysis. In this paper, lp_solve 5.5.2.0 linear programming tool is used. Programming
solver is based on the revised simplex method and the branch-and-bound method for the
integers (lp_solve 5.5.2.0 2014). Optimisation problems are mostly closely related with
the limited number of costs or distribution of raw materials. Usually, resources have
more than one way of distribution. It is rational to formulate the cost or product distri-
bution, which would bring the biggest protable effect to the company (Kalanta 2007).
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I. Lapinskaitė, J. Kuckailytė. The impact of supply chain cost on the price of the nal product
Table 6. Strengths and weaknesses of the linear programming method (adopted from Kalanta 2007)
Strengths Weaknesses
− Basically no limit on model size
− Supports Integer variables, Semi-continuous variables and
Special Ordered Sets
− Easy callable from other programming languages
− It is difcult to determine
constrains and bounds
The linear programming problem is mathematically formulated as follows. The main
function of linear programming tool is to minimize or maximize the value, which can
follow as an example (1):
max f (x) or min f (x). (1)
After, settling the main function, problem constraints should be determined.
For example (2):
gi(x) = bi , i = 1,2, …, m1; gi(x) ≤ bi , i = m1 + 1, …, m; (2)
gi(x) is a function, which described the costs of production or transportation; x is vari-
ables (unknowns); bi is bounds for a particular problem, for example it can be expressed
as quantity of raw materials (Kalanta 2007). It is very important to mention, that both
objective function and constraints must be linear equations. This means that no vari-
ables can be multiplied with each other. Such formulation is called a standard form and
will be used in the practical part to optimise supply chain cost (lp_solve 5.5.2.0 2014).
In our case, the following expressions for task minimisation were used:
min: c1/t1*x1+c2/t2*x2+…+cn/tn*xn; (3)
∑ xn = A, (4)
where:
xn – amount of goods transferred in a specic way;
cn – transportation costs of goods transferred in a specic way;
tn – transportation time of goods transferred in a specic way;
A – the amount of goods needed for the process.
6. Introduction of Holger Clasen GmbH & Co. KG
Holger Clasen GmbH & Co. KG was founded in 1932 in Hamburg. It is a family owned
business that has been known for its high-quality tools and excellent service for three
generations. Company is guided by philosophy, which states that industrial tools both
reect and drive human progress because they make work easier. Holger Clasen GmbH
& Co. KG manufactures and procures high-quality pneumatic, electronic and hydraulic
tools and tool components all over the world. The company has over 100 suppliers and
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around 2000 customers. Also, it provides customised and innovative tools solutions
for the automotive sector, the power industry and the maritime industry. From the year
2000, the company runs Technical Service Centre which maintains and repairs Holger
Clasen tools, as well as tools made by other manufacturers. In addition, it provides ex-
tra activities such as picks up and returns customer-owned tools, provides maintenance
service in 24 hours and offers an extra reminder for the tool current status.
In April 2009, the company successfully introduced the quality management system
DIN EN ISO 9001, which assures high quality of the products. Moreover, the quality
management system concerns the quality of work of all departments and efciency
descriptions, which are adopted in daily company’s work.
In 2011, manually operated crimping tool RC 14-A was noticed having exceptionally
high performance characteristics. “At only six kilograms of weight, it has a crimping
force of 14 tonnes equalling the weight force of 14 VW Golfs. As the only battery-
powered tool in the world, it makes K38 crimps, which corresponds to a cable cross-
section of 400 mm². New lithium-ion batteries provide the power machine with a battery
capacity that is 65% higher than that of other tools” (Holger Clasen 2014).
The mission of Holger Clasen GmbH & Co. KG: helping the customers to solve the
challenges they have to meet in daily life.
The vision of Holger Clasen GmbH & Co. KG: to become the biggest industrial
tools supplier in Europe.
Every day, Holger Clasen strongly follows their principals and the mission. The
Company is up to date and the main source for innovations and trends are customers,
which as Holger Clasen states are the core for innovative developments and realization
of efcient ideas. To protect the market position and secure corporate loyalty helps the
understanding of tradition and innovation as a commitment and a unique feature of corpo-
rate culture. The company for internal operations is using internal ERP system proAlpha.
ProAlpha is used for internal management of company’s documents. All documents are
kept for a 10-year period. The system is one of the oldest and the most popular sys-
tem used in Germany. Holger Clasen GmbH & Co. KG has been using the program for
12 years already. Every year, the system undergoes external improvements. The improve-
ments depends on the increasing demand and the upcoming work-related trends.
7. Supply chain cost analysis in Holger Clasen
Cost analysis is relevant in order to nd out the impact of supply chain processes costs
on the overall nancial operations of the company. Three columns are presented in the
table below: the cost component of the cost of goods sold, supply chain process manag-
ing the cost component and the nancial metrics affected by these costs and processes
presented in the rst two columns (Table 7).
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Table 7. Cost components of sales and supply chain processes that help manage them
(adopted from Sehgal 2011)
Cost component of COGS
Supply Chain Process
Managing the Cost
Component Financial Metrics Affected
Direct Materials and Supplies,
Cost of Raw Materials and
Inputs (for manufacturers) or
Merchandise (for retails), etc.
Forecasting, Replenishment,
Inventory Management
(raw materials), Sourcing,
Purchasing
Gross Margin, EBITDA,
Inventory, Inventory
Turnover, Current Assets,
Working Capital, Return on
Assets
Direct Labour, Cost of
transportation (production,
manufacturing, processing
etc.), Depreciation, Direct
Manufacturing, Overheads etc.
Production Planning,
Factory Planning, Resource
Planning, Inventory (work
in progress), Management
Gross Margin, EBITDA,
Working Capital, Return on
Capital Employed
Cost of Freight (all inbound,
outbound, and intra-facility
transfers of material)
Transportation Management Gross Margin, EBITDA,
Working Capital
Cost of Warehousing,
Inventory Shrink,
Obsolescence, Mark-downs,
Handling, Inventory Carrying
Warehouse Management,
Labour Management,
Inventory Management
(nished goods or
merchandise)
Gross Margin, EBITDA,
Working Capital
COGS – Cost of Goods Sold.
EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization.
Summarizing the table and the overall processes in the company’s supply chain
department, we can state that there are four main cost groups, which are needed for the
deeper analysis: transportation cost, inventory cost and warehousing and packaging
cost. All groups will be analysed in more detail in order to make the assumptions of
nancial company’s activities.
DISCLAIMER: all the data provided in the analysis are based on presumptions and
cannot be treated as 100% ofcial assumptions provided by Holger Clasen GmbH &
Co. KG.
Transportation costs can be divided in to two parts: transportation costs from sup-
plier to the company and transportation costs from the company to the customer. Both
delivery stages are relevant for the company; however, the rst stage is more important
for transportation costs analysis while the main suppliers are located outside Europe.
The company has contracted the third part company UPS for logistics services. UPS
provides three different transportation modes: air freight, see freight and carrier services
as well providing express carrier services. Holger Clasen has been using UPS services
for 15 years. The outgoing products are collected at the end of each working day, the
incoming products are delivered during a day without a xed time. The company has
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installed UPS delivery program, which saves customer names and addresses. In addi-
tion, each package gets a barcode, which contains all related transportation information,
e.g. the weight and type of a cargo and data about the company.
The transportation cost depends on several factors:
− The size and weight of a cargo;
− The internal company’s agreements regarding transportation customs;
− The country of origin of the supplier or the customer.
Holger Clasen GmbH & Co. KG has two warehouses. The main warehouse is in the
main company building, which is around 100 m2 size. The warehouse stores approx.
100 000 parts throughout a year. The warehouse is divided into two main parts: storage
place and packaging area. It has two employees: the warehouse manager and the packer.
In theory, both supply chain components are described separately; nevertheless, in the
practical part, by observing the work, it is difcult to exclude warehousing costs from
packaging costs as the packaging area is the part of the warehouse even if it is an es-
sentially different function.
8. Optimisation of the sourcing process cost
The following chapters, aiming to ensure the relevance of optimisation for the company,
will present Holger Clasen activities, which inuence material ow processes. In order
to achieve the best result, each of the process were evaluated in respect of different
factors and boundaries, which will be presented in each section separately. The goal
of using linear programming tool is to optimise the process which is directly affecting
the nal product cost. It means to nd optimal proportion between delivered product
amount and the right transportation mode; including the delivery time restriction. Holger
Clasen uses four modes of transportation: air freight, sea freight, road freight and rail
freight. All transportation is ensured through third-parties. Transportation mode or ser-
vices was chosen depending on availability and price.
For these analyses we will take into account product delivery cost measured by
product weight, average amount ordered per product, delivery time and transportation
mode. Rail freight is used in calculations in order to nd out its value for the company.
The other transportation modes are used in daily company’s activities. Short interviews
with Holger Clasen employees demonstrated that the most costly is the product delivery
from supplier to the company. Nevertheless, it will be analysed. Finally, solutions and
suggestions for the company will be presented on how the product supply and distribu-
tion can be divided.
Product cost depends on several factors. Holger Clasen product cost is divided into
two parts: direct product cost and indirect product cost. Direct product cost is dened as
costs that are completely contributed to the production. Indirect cost is all costs that are
more difcult to evaluate and estimate; for example, administration costs. To gain more
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I. Lapinskaitė, J. Kuckailytė. The impact of supply chain cost on the price of the nal product
understanding, the most sold tool of 2013 will be analysed; it will be referred to as Tool 1.
Costs of the presented tool will be analysed starting from the supplier to the end customer.
Tool 1 is supplied by two suppliers. The tool is used as a base of the ve different types
of tools, which means that tools are modied in the company or have extra parts in the
selling package. During 2013, 647 tools were sold out of 900 of total tools sales. The table
below (Table 8) presents the list of costs that impact on the nal product cost.
Table 8. Tool 1 costs in EUR (created by the authors)
Direct costs Indirect costs
Materials Costs 331.00 Administrative Costs 60.00
Transportation Costs 45.00 Depreciation Costs 21.00
Packaging Costs 22.20 Other Costs 23.00
Warehousing Costs 17.80
Total: 416.00 104.00
520.00
Holger Clasen material ow starts in sourcing process. Sourcing process is based on
relationships among the company and its suppliers. The company has over 100 suppliers
all over world. The chapter on supplier analysis describes the main information about sup-
pliers, including the country of origin and the product group, which they supply to Holger
Clasen. Further analysis will be based on this prepared information about each company.
Supply chain costs amount to 85 euros per one tool (Fig. 2). Taking into account
that the company sells 450 tools per year, it amounts to approx. 38.000 euros per year
for the supply chain. Nevertheless, it is just one half of all expenses related to tools
logistics. Transportation costs are the most costly part in the product cost. Therefore,
the following chapter will present optimisation model, analysing the possibilities to
minimize product cost through supply chain cost minimisation.
Fig. 2. Impact on nal product cost of direct and indirect supply chain costs (made by the authors)
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Business, Management and Education, 2014, 12(4): 109–126
Sourcing includes such processes as inventory planning, scheduling deliveries and
choosing transportation mode. The goal of this section is to nd the dependence of
nal product cost on the right transportation freight (air, sea, road or rail freight). The
theoretical part discusses the reasons for and appropriateness of different transportation
freights or different types of services of the same freight. In the practical part, three
main factors are chosen to evaluate the transportation mode, which is the best for a
particular supply logistics. The Table 9 below presents the relevant data.
Table 9. Distribution information of main suppliers (created by the authors)
X1
Suppliers Product
Group
Product
weight
(kg) Distance (km) Costs
(euros/unit) Time (days)
Air Sea Air Sea Air Sea
Supplier 1 Tools 1.8 9245 21795 16.4 6.2 14 60
Road Rail Road Rail Road Rail
Supplier 2 Tools 1.6 978 1002 6.2 523 31
The table divides suppliers into two groups. The rst group includes suppliers, for
whom air and sea freight is relevant. Supplier 1 supplied around 427 tools in 2013.
The second group is suppliers from Europe, for whom road and rail freight is relevant.
Rail freight is not used in daily activities of the company activities; nevertheless, it is
presented as an option for improvement. Road and rail freight is considered, because
the distance between supplier and Holger Clasen is too small to use sea or air freight.
The second supplier supplied around 220 tools in 2013. In total, the analysis covers 647
delivered tools. The data is presented for 2013, because only the most recent informa-
tion is relevant for analysis of the impact on nal product cost as well as tendencies of
supplier order quantities, transportation costs and delivery time.
To sum up the table, rstly it evaluated the distance between the supplier and Holger
Clasen. Secondly, it determined the costs of each transportation mode considering the
weight of the product. Thirdly, it considered the delivery time.
From the data presented in Table 9, a linear programming problem was formulated.
First of all, a function is settled. In this case, the goal is to minimise the cost of delivery
by optimising the quantity of product delivered by a particular freight (air, sea, road or
rail). The function is provided below:
min: 1.17x1 + 0.10x2 + 0.27x3 + 0.31x4; (5)
In this case, independent variables are x1 (air), x2 (sea), x3 (road) and x4 (rail); it
is named the transportation mode, which is used in the process. Constant matrixes are
all real and continuous values. In case of the optimisation task, it expresses the cost of
delivery evaluated by days. The results are for air freight delivery per day cost EUR
1.17; for sea freight delivery per day cost EUR 0.10; for road freight delivery per day
cost EUR 0.27 and for rail freight delivery per day cost EUR 0.31.
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Secondly, problem constrains are settled, which are:
x1 + x2 + x3 + x4 = 647; (6)
It means the total of delivered 647 tools per year. Table 9 presents variable con-
strains, which in case of x1 delivered product amount are less or equal to EUR 49 euros;
in x2, x3 and x4 delivered product amount are less or equal to EUR 1612 euros per
delivery. As it was mentioned before, the theory bounds can be expressed by positive
and negative values and there is no restriction for the amount.
Table 9. Supply chain constrains (created by authors)
Variable Cost/product (euros) Constrains
x1 16.40 16.4x1 >= 49
x2 6.20 6.2x2 >= 1612
x3 6.20 6.2x3 >= 1612
x4 5.00 5x4 >= 1612
Then, the main problem steps are determined and the problem is solved by linear
programming tool lp_solve. Several constrain combinations have been considered in
order to ensure the best result. For the nal results are presented in Table 10. This table
demonstrates the distribution of products by transportation mode. In order to achieve the
best result, several options have been considered comparing different variables. In the
rst row of the table, the minimum amount of products to be delivered by air freight is
suggested as it is the most costly delivery. The other options mostly offer dividing the
product quantities into half and deliver cargos by either sea, road or rail.
As it was already discussed, supply chain costs per one product amount to approx.
EUR 85. Table 8 presents prices of transportation.
Table 10. Results of product distribution by freight (in units) (created by the authors)
Comparing x1 and x2 Comparing x1 and x3 Comparing x1 and x4
Air 3 3 3
Sea 644 384 322
Road 0 260 0
Rail 0 0 322
Comparing x2 and x3 Comparing x3 and x4 Comparing x2 and x4
Air 0 0 0
Sea 387 65 325
Road 260 260 0
Rail 0 322 322
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It is assumed that each calculation applies different constrains. Table 11 presents the
comparison of several constrains of distribution. In the rst and second cases, compar-
ing distributions between x1 and x2, x1 and x3, it is assumed that the total transportation
costs amount EUR 4,042.00; they are the most expensive options for the company. In
the third case, comparing x1 and x4, the assumed costs amount to EUR 386.40 less than
the rst two options. The fourth option is taking in to account x2 and x3, and increases
by EUR 355.80 compared with the previous value. The last two options are the cheapest
ways to deliver products of the company. Comparing with the rst values, they amount
to EUR 417.00 less of nal transportations costs.
Table 11. Cost distribution within supply chain (in euros) (created by the authors)
Comparing x1 and x2 Comparing x1 and x3 Comparing x1 and x4
Air 49.20 49.20 49.20
Sea 3,992.80 2,380.80 1,996.40
Road – 1,612.00 –
Rail – – 1,610.00
Total: 4,042.00 4,042.00 3,655.60
Comparing x2 and x3 Comparing x3 and x4 Comparing x2 and x4
Air –––
Sea 2,399.40 403.00 2,015.00
Road 1,612.00 1,612.00 –
Rail – 1,610.00 1,610.00
Total: 4,011.40 3,625.00 3,625.00
Comparing the result with transportation costs presented in Table 8, the company
can save over EUR 5 per unit if they choose to distribute products by one of the last
options; it is 65 products delivered by sea, 260 products delivered by road and 322
products delivered by rail; or 325 products delivered by sea and 322 by rail. It should
be mentioned, that the use of rail freight can cause delay problems and it would add
double handling costs needed for rail freight. The main reason for big savings is the
fact that the company mainly uses air freight instead of sea, road or rail freights. The
reason is mostly related to time as products are needed quickly and it can be due to
ineffective inventory planning. The following supply chain optimisation processes will
be analysed next.
All in all, the adopted changes in the company can save around 29% of supply
chain costs (Fig. 3) and to reduce around 4.7% of total product cost. It means that the
company can save more than 81% of overall spending for the supply chain process by
taking overall deliveries of 647 products per year.
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I. Lapinskaitė, J. Kuckailytė. The impact of supply chain cost on the price of the nal product
Fig. 3. Product pricing after supply chain optimisation (created by the authors)
The company not only delivers tools, but also more than 100 000 of spare parts
and accessories. Considering this number, the company can make enormous savings
by reducing air freight deliveries and improving long-term planning and using sea,
road or rail freight.
9. Conclusions
The goal of this paper was to discuss the nature of the supply chain, the key processes
and their accompanying component costs, analyse the supply chain processes and activi-
ties of Holger Clasen, practically including transportation cost, warehousing cost, inven-
tory cost and packaging cost development and to provide optimisation opportunities for
the nal product cost. All tasks were nalised and the goal was reached.
The importance of the supply chain in the business environment is steadily increas-
ing. The analysis of scientic literature showed that the nature of supply chain has long
been separated from its primary functions, where supply chain was identied only as
transportation and storage of an operating system. The understanding of supply chains
and related education have taken the global scale in business. Supply chain touches
many spheres of daily life; therefore, it can be called one of the most critical disciplines
in the nowadays global business world.
Analysis of supply chain processes revealed the most costly part, which is transpor-
tation, as the company uses air freight for product supply. In order to nd out possible
savings, a linear programming transportation problem was formulated. The problem was
solved using “lp_solve” software, which is perfectly designed to solve transportation
problems.
The practical part of this paper presented an example of using the optimisation
method in practice. It showed a possibility to optimise the costs of supply chain in one
of the three processes of Holger Clasen Company’s supply chain. In this practical case,
125
Business, Management and Education, 2014, 12(4): 109–126
only the rst process sourcing process was taken. The results have shown that optimi-
sation method is an appropriate tool, which could be used in order to reduce costs in
a supply chain processes and cut the nal costs of the product as well as make it more
competitive.
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Indrė LAPINSKAITĖ, PhD, an Associate Professor at Vilnius Gediminas Technical University and
Vice-Dean for International Relations, of the Faculty of Business Management. Research interests:
sustainable development, pricing, sustainability approach to FMCG.
Justina KUCKAILYTĖ is an ungraduated student of the Business Management Bachelor’s Program
at Vilnius Gediminas Technical University.
