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Supply Chain Management

Spring 2016
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12
AN OPTIMIZATION FRAMEWORK FOR EVALUATING
LOGISTICS COSTS IN A GLOBAL SUPPLY CHAIN:AN
APPLICATION TO THE COMMERCIAL AVIATION INDUSTRY
30rd April 2016
Amjad Ullah
MSPM-1011

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This paper addresses logistics decisions for an aviation firm and its joint venture in Chengdu, China.
The major logistics cost items for outsourcing aircraft engine components to the joint venture are
identified and a number of transportation alternatives are examined based on cost effectiveness.
Under the current structure of the companys global supply chain, we have evaluated five
transportation options for moving materials inbound and outbound: all air, water-rail full container
load, water-rail less than container load, water-truck full container load, and water-truck less than

container load. A cost optimization model for each of these transportation modes using shipping
quantity as a major decision variable is developed and the associated solution procedure is provided.
These models provide useful guidelines for formulating sound transportation policies. Although the
evaluation framework is established based on a particular companys global supply chain, it is
applicable for many companies that are practicing global sourcing strategies.
Conclusion Remarks:
With outsourcing becoming an integral part of a corporations pursuit of competitive advantages, a
clear understanding of all hidden costs associated with this strategy has received a great deal of
attention. Company P, one of the leaders in the aviation industry, formed a joint venture in Chengdu,
China in 1996 and has been deeply concerned with the costs and benefits resulting from outsourcing
some of the aircraft engine parts to this joint venture. This project focused on analyzing Company
Ps global logistics system and developing sound techniques that aid the companies in making
effective transportation policy decisions. The major cost components of the logistics system that
affect transportation policies were identified and serve as critical inputs in the decision making
process. A set of optimization models and solution methods for five potential transportation mode
combinations were developed. The cost components, the results derived from the optimization
models, and the use of sensitivity analysis on proposed solutions have provided helpful guidelines
for Company P to evaluate the cost effectiveness of each potential transportation alternative.