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NPS ARCHIVE 1997. 0(6 ATCHESON, M. NAVAL POSTGRADUATE SCHOOL Monterey, California THESIS COST-BENEFIT ANALYSIS OF THE ENHANCED TRANSPORTATION SERVICE PROGRAM by Michael Atcheson J. June 1997 Thesis Co-Advisors: Gordon Louvau Paul Fields Approved for public release; distribution is unlimited. Thesis A848 M^S,^ MONTEREY ' REPORT DOCUMENTATION PAGE Form Approved OMB No. 0704 Publicreportingburden forthiscollectionofinformation isestimatedtoaverage 1 hourperresponse, includingthetime forreviewing instruction, searchingexistingdatasources, gatheringandmaintainingthedataneeded, andcompletmgandreviewingthecollectionof information. Sendcommentsregarding thisburden estimateoranyotheraspectofthiscollection ofinformation, including suggestions forreducmgthisburden, toWashingtonheadquarters Services, Directorate forInformationOperationsandReports, 1215 Jefferson DavisHighway, Suite 1204,Arlington, VA22202-4302, andtotheOfficeofManagementandBudget, Paperwork ReductionProject (0704-0188)WashingtonDC 20503. 1. AGENCY USEONLY (Leave blank) 2. REPORTDATE 3. REPORTTYPEANDDATES COVERED Master's Thesis June 1997 L TITLEAND SUBTITLE COST-BENEFITANALYSIS OFTHEENHANCED 5. FUNDINGNUMBERS TRANSPORTATION SERVICEPROGRAM AUTHOR(S) 6. Atcheson, Michael J. 7. PERFORMINGORGANIZATIONNAME(S)ANDADDRESS(ES) 8. PERFORMING ORGANIZATION Naval Postgraduate School REPORTNUMBER MontereyCA 93943-5000 9. SPONSORING/MONITORINGAGENCYNAME(S)ANDADDRESS(ES) 10. SPONSORING/MONITORING AGENCYREPORTNUMBER 11. SUPPLEMENTARYNOTES The viewsexpressedinthisthesisarethoseoftheauthoranddonotreflecttheofficialpolicyor positionoftheDepartmentofDefenseortheU.S. Government. 12a. DISTRIBUTION/AVAILABILITYSTATEMENT Approvedforpublicrelease; 12b. DISTRIBUTIONCODE distributionunlimited 13. ABSTRACT (maximum 200words)Thisthesisisacost-benefitanalysisoftheEnhancedTransportation Service(ETS)Program, which isaproposed initiative undertheMarineCorps' "PrecisionLogistics" concept. Thegeneral focusof"PrecisionLogistics" isto providethewarfighterwiththerightthing,attherightplace, attherighttime, withthe leastamountofeffortandcost. (Hamilton, 1996) Thespecific focusoftheETS Programistoutilizepremiumtransportation service(i.e.,nextdayair)toreduceordership time(OST),whichwill resultin lowerstockage levels. The intentofthis studywastodetermine ifthebenefitderived fromreduced stockage levelsoutweighstheadditional costofairshipment. Thisisintendedtobethe first inaseriesofstudiesoftheETS Program. The studywasbasedontherequisitioningobjective(RO) stockage level. Acomputerspreadsheetmodel ofthe RO formulawasbuiltandtwoMonteCarlosimulationrunsconductedtodetermineiftheETS Programiscosteffective. Resultsofthe analysis suggestthatthecostofpremiumtransportation service issignificantlylessthanthe costofadditional inventorythatwould havetobecarriedifpremiumtransportationwerenotutilized. Therefore, furtherresearchoftheETS Program iswarranted. Recommendationsonthedirectionoffuture studiesareprovided. 14. SUBJECTTERMS Inventorymanagement, Requisitioningobjective stockage level, Simulation 15. NUMBER OF PAGES model, Premiumtransportationservice, Variablecostofcarryinginventory 115 16. PRICECODE 17. SECURITY 18. SECURITY 19. SECURITY 20. LIMITATIONOF CLASSIFICATIONOF CLASSIFICATIONOF THIS CLASSIFICATIONOF ABSTRACT REPORT PAGE ABSTRACT UL Unclassified Unclassified Unclassified NSN7540-01-280-5500 StandardForm298 (Rev. 2-89) PrescribedbyANSI Std. 239-18 Approved for public release; distribution is unlimited. COST-BENEFIT ANALYSIS OF THE ENHANCED TRANSPORTATION SERVICE PROGRAM Michael Atcheson J. Captain, United States Marine Corps B.S., Pennsylvania State University, 1991 Submitted in partial fulfillment ofthe requirements for the degree of MASTER OF SCIENCE IN MANAGEMENT from the NAVAL POSTGRADUATE SCHOOL June 1997 K XUBR SfwK ?? *«v «*TB» * ABSTRACT oTmSSiw" This thesis is a cost-benefit analysis ofthe Enhanced Transportation Service (ETS) Program, which is a proposed initiative under the Marine Corps' "Precision Logistics" concept. The general focus of"Precision Logistics" is to provide the warfighter with the right thing, at the right place, at the right time, with the least amount ofeffort and cost. (Hamilton, 1996) The specific focus ofthe ETS Program is to utilize premium transportation service (i.e., next day air) to reduce order ship time (OST), which will result in lower stockage levels. The intent ofthis study was to determine ifthe benefit derived from reduced stockage levels outweighs the additional cost ofair shipment. This is intended to be the first in a series ofstudies ofthe ETS Program. The study was based on the requisitioning objective (RO) stockage level. A computer spreadsheet model ofthe RO formula was built and two Monte Carlo simulation runs conducted to determine ifthe ETS Program is cost effective. Results ofthe analysis suggest that the cost ofpremium transportation service is significantly less than the cost ofadditional inventory that would have to be carried if premium transportation were not utilized. Therefore, further research ofthe ETS Program is warranted. Recommendations on the direction offuture studies are provided. VI TABLE OF CONTENTS INTRODUCTION I. 1 BACKGROUND A. 1 B WHAT IS PRECISION LOGISTICS? 2 1. Definition 2 2. Why^ 2 How? 3. 3 4. Goals (Hamilton, 1996) 3 C. WHAT IS ORDER SHIP TIME? 4 1. Retail Level Supply 4 2. Wholesale Level Supply 8 D. THE ENHANCED TRANSPORTATION SERVICE PROGRAM 11 RESEARCH QUESTIONS E. 12 1. Primary 12 2. Secondary 13 OUTLINE F. 13 II. LITERATURE REVIEW 17 INTRODUCTION A. 17 B FUNCTIONAL CLASSIFICATIONS OF INVENTORY 18 C. TRANSIT INVENTORY AND BUFFER INVENTORY EXAMPLES 21 D TRANSPORTATION OVERVIEW 23 E TRANSPORTATION AS A COMPETITIVE ADVANTAGE 25 F. CONCLUSION 27 HI. REQUISITIONING OBJECTIVE 29 A. INTRODUCTION 29 B. ORDER AND SHIP REQUIREMENT 30 vn REPAIR CYCLE REQUIREMENT C. 31 SAFETY LEVEL D. (SL) 32 SUMMARY E. 34 SIMULATION MODEL IV. 35 INTRODUCTION A. 35 B. WHAT IS A SIMULATION? 35 METHODOLOGY C. 36 D EXPLAINING THE DATA 38 1. Classifying the Variables 38 2. Supply Data 38 3. Maintenance Data 40 E RUNNING THE SIMULATION 41 1. Assumptions 41 2. Limitations 41 3. Step-By-Step Procedures 42 4. Simulation Summary 44 SUMMARY F. 44 V. ANALYSIS 47 A INTRODUCTION 47 B COST OF INVENTORY 47 Assumptions 47 1. 2. Limitations 49 C COST OF TRANSPORTATION 49 1. Assumptions 50 2. Limitations 51 D. ANALYSIS 51 1. Scenario #1 51 2. Scenario #2 52 3. Final Analysis 52 E. CONCLUSION 52 viii