Supply Chain Frontiers issue #52
A GCLOG (Graduate Certificate in Logistics and Supply Chain Management) capstone project to find the optimum transportation solution for a Brazilian sugar exporter underlines the importance of supply chain management as a component of business strategy.
Author of the project, Vanessa Azevedo, is studying for an MBA at the Insper Institute of Education and Research, São Paulo Brazil, and was a student in the 2014 GCLOG program. Dr. Roberto Perez-Franco, Director of the GCLOG program, supervised the thesis. Azevedo won the GCLOG Program's Best Capstone Project award this year.
Developed by the Center for Latin-American Logistics Innovation, the GCLOG qualification gives business master's degree students in the region a deeper understanding of supply chain management issues.
Azevedo's project, titled Long term Strategy for Raw Sugar Transportation: the Case of a Brazilian Mill, evaluates alternative ways to transport bulk sugar destined for export markets. The research required her to look at the business goals of the players involved as well as the supply chain implications.
The multinational company that sponsored the project has three sugar mills located in the Midwest region of Brazil, almost 1,400 miles from Santos Port. The company's trucks traveled more than 7 million miles to ship 100,000 tons of sugar to the port.
In 2012, the company started to use rail transportation to move its product. The sugar was shipped via truck and rail using transshipment terminals in São Paulo state. This intermodal network reduced the company's reliance on trucking and yielded some cost savings, but there were bottlenecks that caused delays and limited the potential for growth.
A better logistics option is needed that satisfies the network's lead time requirements, meets current safety and security goals, is carbon-efficient, and more cost-effective. The latter requirement is critical; sugar is a widely traded agricultural commodity that is subject to extreme price fluctuations.
A multimodal solution is an obvious choice for a number of reasons. The rail mode is ideally suited to a cargo such as sugar that is moved in bulk and has a low aggregated value, and has a smaller carbon footprint than trucking.
In addition, multimodal freight transportation in Brazil is in a period of transition. Investments in rail have increased steadily since the national network was privatized in 1997. Rail's market share has grown from 17% in 1997 to 25% in 2012.
There are also opportunities to build transshipment terminals on green-field sites in the company's area of operation. But this requires the exporter to enter into long-term freight contracts with rail carriers. Moreover, the carriers have to fund the new infrastructure, so the design and location of the terminals are critical to creating a compelling case for the investments. Another consideration is that under Brazilian law, a transshipment terminal can only be used by one rail carrier.
"We need to develop a long-term logistics strategy that can support increasing volumes of exports and also meets the business and operational goals of the participants," says Azevedo, Logistics Planning Manager, BP Biocombustiveis SA., São Paulo, Brazil.
Azevedo analyzed a number of possibilities both in terms of the operational constraints and geographic factors, and generated five scenarios.
- Scenario 1: minimize road movements and use all three transshipment terminals
- Scenario 2: minimize logistics costs
- Scenario 3: minimize logistics costs and use operational transshipment terminals
- Scenario 4: minimize total logistics costs and use one transshipment terminal
- Scenario 5: minimize total logistics costs and use the transshipment terminal operated by the Brazilian rail carrier Rumo
Each scenario offers different pros and cons. For example, the first one keeps road movements to a minimum by splitting cargo volumes between three transshipment centers, but does not result in the lowest logistics cost. The second provides the lowest logistics costs and increases road transportation volumes by 7% compared to the first option.
The second scenario is the one that Azevedo recommends. This involves signing a long-term deal to ship product via two newly constructed rail transshipment terminals. The contract delivers the lowest logistics costs with a relatively small road component, and uses more than one rail operator, thereby eliminating the risk of being dependent on a single supplier.
An important part of the solution is long-term contracts that allow volumes to be ramped up. For example, the agreement with Brazilian rail operator FNS could specify a throughput of 224,000 tons of sugar in 2016, achieving a total of more than 2 million tons by 2022. The exporter should also negotiate volume guarantees to discourage construction delays, recommends Azevedo.
The combination of logistics and business factors in the analysis made the project an extremely rich learning experience, maintains Azevedo. The GCLOG program "helped to create a structure to a find a solution by providing the logistics methodology and the best way to approach the problem," she says.
Importantly, the thesis also enabled her to work on a real-world project. Her recommendations will be considered by the company's management team. Further, the company has aggressive expansion plans, and the thesis could be used as a template for future logistics analyses, she says.
For more information on the thesis project contact Vanessa Azevedo at vanessa.azevedo@bp.com. For information on the GCLOG program and opportunities to sponsor capstone projects, contact Dr. Roberto Perez-Franco.