CHAPTER 14: ORGANIZING AND ANALYZING LOGISTICS SYSTEMS
CHAPTER 14: ORGANIZING AND ANALYZING LOGISTICS SYSTEMS
PART II
END-OF-CHAPTER QUESTIONS
CHAPTER 14: ORGANIZING AND ANALYZING LOGISTICS SYSTEMS
1. Discuss several issues that influence the organization of logistics activities within a firm.
The organization of logistics activities within a firm depends on a number of factors, including the number and location of customers, as well as an organization’s size. The number and location of customers might influence whether a firm adopts a centralized or decentralized logistics organization. An organization’s size might influence the organizing of logistics activities in the sense that there are limitations in the degree of specialization of managerial talent in small firms.
2. Compare and contrast the fragmented and unified logistical organizational structures.
In a fragmented logistics structure, logistics activities are managed in multiple departments throughout an organization. In such a structure, it is possible for the various logistics activities to be managed in two, three, four, or more departments. Because effective and efficient logistics is predicated on a high degree of coordination among logistics activities, such coordination can become difficult when the logistics activities are spread throughout an organization.
In a unified logistics structure, multiple logistics activities are combined into, and managed as, a single department. The unified structure can be further classified based on the number and type of activities assigned to the department. Regardless of how many, or what type, of logistics activities are managed, the unified logistics structure should be better positioned than the fragmented structure to achieve coordination across the various activities.
3. What are the differences between a centralized and a decentralized logistics department?
A centralized logistics organization implies that the corporation maintains a single logistics department that administers the related activities for the entire company from the home office. A decentralized logistics organization means that logistics-related decisions are made separately at the divisional or product group level and often in different geographic regions.
There are advantages to both approaches, with a primary advantage of centralization being its relative efficiency, whereas a primary advantage of decentralization is its customer responsiveness. Centralization allows an organization to take advantage of the cost savings that can arise from volume-creating opportunities. Many global firms need to decentralize operations because of geographic and time differences from the home office.
4. Discuss the process, market, and information logistics strategies.
In a process strategy, traditional logistics activities are managed as a value-added system. Emphasis is on achieving maximum efficiency, the primary goal is to cut costs, and the focus is on rationalizing complex activities into an efficient value-added system. With a market strategy, a limited number of traditional logistics activities are managed across business units. Emphasis is on achieving synergy from coordinated physical distribution, the primary goal is to serve common customers from various business units, and the focus is on reducing the complexity faced by customers. In an information (channel) strategy, a diverse group of logistics activities, together with other activities, are managed as a channel system. Emphasis is on the coordination and control of dealer and distribution networks, and the focus is on achieving interorganizational coordination and collaboration through logistics and information management.
5. Describe the hierarchical and matrix organizational design.
Hierarchical, or functional, organizational design has its foundations in the command-and-control military organization, where decision making and communication often follow a top-down flow. Each employee reports to one, and only one, supervisor. In a matrix design, one employee might have cross-functional responsibilities. For example, the manager of small appliances at one organization might report to logistics, marketing, and production executives, and the small appliance manager would have responsibility for the production, marketing, and logistics of small appliances.
6. From a logistics perspective, how is network organizational design manifested in terms of relevancy, responsiveness, and flexibility?
Relevancy, which refers to satisfying current and emerging customer needs, can be facilitated by developing mutually beneficial relationships with key customers; at a minimum, these relationships should provide an understanding of customer needs and wants. Responsiveness reflects the degree to which an organization can accommodate unique or unplanned customer requests; responsiveness can be achieved when the appropriate decision makers are provided with both relevant information and the authority to address unique or unplanned requests. Flexibility, which can be defined as an organization’s ability to address unexpected operational situations, is predicated on avoiding early commitment to an irreversible course of action. One example of logistics flexibility would be the postponement of assembly, labeling, and so on until exact customer requirements are known.
7. Define logistics systems analysis. Why is friction inherent when performing logistics systems analysis?
Logistics systems analysis refers to the orderly and planned observation of one or more segments in the logistics network or supply chain to determine how well each segment and the entire system function. Friction is inherent when performing logistics system analysis, in part because of different viewpoints and perspectives. Top management might view systems analysis as an opportunity to identify policies and practices that could improve logistical effectiveness and efficiency. Operating personnel might view systems analysis as an excuse to modify existing work rules or to reduce the hours or numbers of workers needed.
8. What is industry systems analysis? What is its value?
Industry systems analysis is performed by a trade association, professional organization, or other entity on an industrywide basis. The participating firms can use the findings to determine how their performance compares to the industry as a whole or to various other industry segments.
9. What is partial systems analysis? Why is it used?
Partial systems analysis refers to analysis that is relatively narrow in scope, with the focus looking at a single aspect of logistics, such as a time-and-motion study of individuals who handle incoming freight at a receiving dock. Partial systems analysis is used because it contributes toward an understanding of how an entire system functions. In addition, it is difficult to measure the overall performance of a system without measuring and understanding the performance of individual components.
10. Discuss customer profitability analysis.
Customer profitability analysis (CPA) refers to the allocation of revenues and costs to customer segments or individual customers to calculate the profitability of the segments or customers. CPA suggests that different customers (segments) consume differing amounts and types of resources and has been facilitated by activity-based costing. Customer profitability analysis explicitly recognizes that all customers are not the same and that some customers are more valuable than others to an organization. CPA can be used to identify different groups of customers from a profitability perspective and such a grouping can better help in allocating organizational resources.
11. Explain how warehousing productivity can be improved without significant investment in technology, or mechanized, or automated equipment.
One suggestion for improving warehousing productivity involves a review of existing procedures and practices to identify the tasks that are creating the largest inefficiencies and then developing methods to reduce or eliminate the efficiencies without adding to or upgrading present technology or equipment. Organizations can also examine their facility layouts; long horizontal runs and frequent backtracking could be the symptoms of layout problems. Something as basic as adding cross aisles could reduce the length of horizontal runs as well as the length of backtracking.
12. How have advances in information technology facilitated transportation cost analysis?
Some trucking companies can examine inbound or outbound deliveries for a representative period of time using data gathered from a customer’s paid freight bills. This can allow both the carrier and the customer to determine whether individual shipments or shipment patterns can be improved. It is also possible to conduct sensitivity analysis to determine the transportation costs for various levels of transportation service.
13. Explain the compounding nature of packaging inefficiency. What cost savings and service improvements can occur with better packaging efficiency?
The building blocks concept is useful for analyzing packaging inefficiency in the sense that packaging inefficiency tends to be compounded as one moves from a very small unit to a smaller unit, to a small unit, and so on. The text provided an example of inefficient case and pallet utilization that resulted in less than 25% of available pallet space being occupied by actual product. The book also cited an example of a company where improved packaging efficiency has resulted in lower transportation and warehousing costs as well as a reduction in damaged product.
14. How might goals, objectives, and constraints facilitate decisions about how to conduct a comprehensive systems analysis?
Systems goals must be realistic and systems objectives must be achievable within the context of a firm’s operational scope. Monetary constraints might mitigate against the use of outside consultants (because of the expense), whereas time constraints might argue for a small (in terms of the number of people) analysis team.
15. Discuss how the channels audit might identify the need for distribution or channel rearrangement.
With respect to distribution rearrangement, the book discusses the recorded music industry, where customers historically bought physical products such as record albums, cassettes, or compact discs that were distributed through retail outlets such as music stores or mass merchandisers. Today, by contrast, technological advances allow for digital distribution of songs, meaning that there is less demand for prerecorded cassettes or compact discs—and less need for the respective retailers.
As for channel rearrangement, the Internet offers some organizations the option of a direct distribution channel (i.e., from producer to consumer with no intermediaries in between). The logistics associated with direct distribution are different from the logistics associated with indirect distribution (e.g., the orders are smaller and less predictable with direct distribution).
16. Why should the competition audit identify both current and potential competitors?
Potential competitors may present more formidable challenges than do current competitors. The book cites Wal-Mart as an example because its superior logistical capability often causes tremendous upheaval when it expands into product lines that have been dominated by certain retailers. For instance, Wal-Mart is now the world’s largest toy retailer and this has led to bankruptcies and restructurings among long-standing toy retailers.
17. Explain why the facilities audit should consider the age and capacity of production plants and storage facilities.
A facility’s age can be important to know because older facilities tend to reflect the prevailing engineering and technological wisdom at the time they were constructed—and it’s safe to say that there are advances in engineering and technological knowledge through time. Moreover, older facilities may not be in compliance with contemporary health, safety, and environmental regulations.
A facility’s capacity can be evaluated across dimensions such as its total capacity and percent of capacity being used. The percent of capacity being used provides insights into the efficiency or inefficiency of capacity utilization in the sense that excessive unused capacity can be quite costly to an organization.
18. How can the product audit be helpful in evaluating decisions about adding new products or new product lines?
The book presents an example involving Procter and Gamble’s (P&G) acquisition of Gillette; this has allowed P&G to broaden its product mix by adding a number of personal care products that are largely targeted to males (P&G’s personal care products tend to be targeted towards females). There appears to be a great deal of synergy between the two companies because their products are distributed in the same channels, and the products have similar production, packaging, handling, transportation, and warehousing requirements.
19. Describe several dimensions of the social responsibility audit.The book presents six dimensions of the social responsibility audit—the environment, ethics, diversity, safety, philanthropy, and human rights. Any combination of these can be described. In terms of the environment, for example, organizations might focus on reusing and recycling products, reducing the amount of packaging, improving fuel efficiency, and reducing various types of pollution.
20. Name the seven types of comprehensive logistics systems audits that should be performed. Which do you view as the most important? The least important? Why?
The seven types of comprehensive audits that should be performed are channels, competition, customer, facilities, product, social responsibility, and supplier audits. Any of the seven might be viewed as the most or least important.
PART III
EXAMINATION QUESTIONS
CHAPTER 14: ORGANIZING AND ANALYZING LOGISTICS SYSTEMS
Multiple Choice Questions
1. ____ and ____ are the two basic organizational structures associated with logistics.
a. Centralized; hierarchical
b. Fragmented; centralized
c. Fragmented; unified
d. Unified; hierarchical
(c; p. 362)
2. In a ____ logistics structure, logistics activities are managed in multiple departments throughout an organization.
a. unified
b. fragmented
c. decentralized
d. matrix
(b; p. 362)
3. One problem with a ____ logistics structure is that because logistics activities are scattered throughout the firm, they likely remain subservient to the objectives of the department in which they are housed.
a. fragmented
b. matrix
c. decentralized
d. hierarchical
(a; p. 362)
4. In a ____ logistics structure, multiple logistics activities are combined into, and managed as, a single department.
a. hierarchical
b. centralized
c. matrix
d. unified
(d; p. 362)
5. A ____ logistics organization implies that the corporation maintains a single logistics department that administers the related activities for the entire company from the home office.
a. hierarchical
b. unified
c. centralized
d. command-and-control
(c; p. 363)
6. A ____ logistics organization means that logistics-related decisions are made separately at the divisional or product group level.
a. fragmented
b. decentralized
c. flexible
d. agile
(b; p. 363)
7. A primary advantage of ____ logistics is its relative efficiency, whereas a primary advantage of ____ logistics is its customer responsiveness.
a. unified; fragmented
b. unified; decentralized
c. fragmented; centralized
d. centralized; decentralized
(d; p. 363)
8. Which of the following is an advantage of a decentralized logistics organization?
a. less expensive than a centralized organization
b. good opportunities for freight consolidation
c. can be responsive to customer service requirements
d. better control over company data
(c; p. 363)
9. Which of the following is an advantage of a centralized logistics organization?
a. less expensive than a decentralized organization
b. good opportunities for freight consolidation
c. can be responsive to customer service requirements
d. easier to manage than a decentralized organization
(b; p. 363)
10. Which of the following is not one of the three strategic logistical orientations?
a. centralized
b. market
c. information
d. process
(a; pp. 363-365)
11. In a ____ strategy, traditional logistics activities are managed as a value-added system.
a. process
b. market
c. value chain
d. information
(a; p. 363)
12. With a ____ strategy, a limited number of traditional logistics activities are managed across business units.
a. process
b. linking pin
c. market
d. information
(c; p. 365)
13. In a(n) ____ strategy, a diverse group of logistics activities, together with other activities, are managed as a channel system.
a. supply chain
b. market
c. process
d. information
(d; p.365 )
14. ____ organizational design has its foundations in the command-and-control military operation, where decision-making and communication often follow a top-down flow.
a. Centralized
b. Unified
c. Matrix
d. Hierarchical
(d; p. 365)
15. A ____ organizational design attempts to create an organization that is responsive to the parameters of the contemporary business environment.
a. matrix
b. network
c. decentralized
d. unified
(b; p. 365)
16. A key attribute of network organizational design is a shift from ____ to ____.
a. function; process
b. centralization; decentralization
c. process; function
d. decentralization; centralization
(a; p. 366)
17. ____ refers to satisfying current and emerging customer needs.
a. Responsiveness
b. Flexibility
c. Relevancy
d. Accommodation
(c; p. 366)
18. ____ can be defined as an organization’s ability to address unexpected operational situations.
a. Relevancy
b. Flexibility
c. Accommodation
d. Responsiveness
(b; p. 366)
19. The orderly and planned observation of one or more segments in the logistics network or supply chain in order to determine how well each segment and the entire system function refers to ____.
a. trade-offs
b. supply chain management
c. systems analysis
d. optimum cost reliability analysis
(c; p. 366)
20. Systems analysis can best be thought of as:
a. the usage of operations research and other sophisticated quantitative techniques to determine the optimum synergistic tendencies of logistics versus other functional areas such as marketing and production
b. an orderly and planned observation of one or more segments in the logistics network to determine how well each segment and the entire system is functioning
c. the use of outside consultants to determine the problem areas within a firm
d. an analysis of how well the various functional areas such as marketing, production, and logistics work together toward achieving company goals
(b; p. 366)
21. Outside consultants are sometimes employed in systems analysis because:
a. they can be more objective
b. they are more cost effective than company employees
c. they are more knowledgeable about the firm being studied
d. they are more knowledgeable about operations research and other sophisticated quantitative techniques
(a; p. 368)
22. ____ analysis is performed by a trade association, professional organization, or other organization on an industrywide basis.
a. Macro industrial
b. Peer supported
c. Industry systems
d. Sponsored
(c; p. 368)
23. An advantage of partial systems analysis is that ____.
a. it can be completed by current company employees, without the use of outside consultants
b. it is often not possible to do a total system analysis, and thus the only feasible alternative is partial systems analysis
c. it can often be completed without using sophisticated quantitative techniques
d. it almost always significantly increases the effectiveness of the order management function
(b; p. 368)
24. ____ refers to the allocation of revenues and costs to customer segments or individual customers to calculate the profitability of the segments or customers.
a. Customer profitability analysis
b. Tailored logistics
c. Direct customer contribution margin
d. Customer relationship management
(a; p. 368)
25. Customer Profitability Analysis (CPA) has been facilitated by the acceptance of:
a. Generally Accepted Accounting Principles
b. Vendor-managed inventory
c. Supply chain management
d. Activity-based costing
(d; p. 369)
26. Which of the following is not a potential measure of warehousing productivity?
a. average warehouse capacity used
b. pallets shipped per person
c. forklift capacity used
d. cases shipped per person
e. all are measures of warehousing productivity
(e; p. 369)
27. Recent warehousing industry statistics indicate a median of ____ cases (within five) shipped per hour.
a. 150
b. 125
c. 100
d. 75
(c; p. 369)
28. ____ is pursuing a “Remix” distribution strategy that strongly encourages its vendors to work with logistics service providers to consolidate less-than-truckload shipments into truckload shipments.
a. Hewlett-Packard
b. Procter & Gamble
c. Target
d. Wal-Mart
(d; p. 369)
29. What has been described as the last frontier of logistics savings opportunities?
a. materials handling practices
b. packaging inefficiencies
c. inventory turnover
d. warehousing productivity
e. none of the above
(b; p. 371)
30. All of the following are one type of comprehensive audit that should be performed in logistics systems analysis, except:
a. competitor
b. supplier
c. channels
d. product
e. all are audits that should be performed
(e; p. 373)
31. Disintermediation refers to:
a. the removal of channel levels
b. a lack of coordination among channel members
c. a breakdown in labor negotiations
d. a supply chain disruption
(a; p. 373)
32. The information required for the ____ audit is generally not available within a company’s own records.
a. product
b. competition
c. facilities
d. channels
(b; p. 374)
33. Which of the following statements about the facilities audit is false?
a. facility age should be considered
b. changing trade patterns necessitate periodic analysis of facility location
c. a facility’s capacity can be evaluated across dimensions such as total capacity and percent of capacity being used
d. facility layout is the most important configuration consideration
e. all the statements are true
(d; p. 375)
34. Which of the following is not relevant to a supplier audit?
a. assessment of supplier quality
b. supplier costs
c. the number of suppliers
d. the type(s) of suppliers
e. all are relevant to a supplier audit
(e; pp. 376-377 )
35. After completing the various audits associated with comprehensive systems analysis, the next step is to:
a. write a report and present it to top management
b. examine and analyze the collected data
c. redesign the logistics system
d. conduct partial systems analysis
(b; p. 377)
True-False Questions
1. The organization of logistics activities within a firm depends on a number of factors, including the number and location of customers and an organization’s size. (True; p. 361 )
2. In a decentralized logistics structure, logistics activities are managed in multiple departments throughout an organization. (False; p. 362)
3. One problem with a fragmented logistics structure is that because logistics activities are scattered throughout the firm, they likely remain subservient to the objectives of the department in which they are housed. (True; p. 362)
4. In a unified logistics structure, multiple logistics activities are combined into, and managed as, a single department. (True; p. 362)
5. Leading edge organizations are more likely to use a unified, as opposed to fragmented, logistics structure. (True; p. 362)
6. A centralized logistics organization generally results in better customer responsiveness than a decentralized organization. (False; p. 363)
7. Most Fortune 500 companies employ a chief logistics officer (CLO). (False; p. 363)
8. The primary goal in a market strategy is to cut costs. (False; p. 363)
9. In an information strategy, a diverse group of logistics activities, together with other activities, are managed as a channel system. (True; p. 365)
10. The dominant contemporary emphasis in logistics involves maximizing efficiency, which is associated with a process strategy. (True; p. 365)
11. Societal changes are relatively easy to accommodate in a hierarchical, or functional, organizational design. (False; p. 365)
12. A matrix organizational design can be very responsive to customer requirements. (True; p. 365)
13. From a logistics perspective, a network organizational design in logistics is manifested in terms of relevancy, responsiveness, and flexibility. (True; p. 366)
14. Responsiveness refers to satisfying current and emerging customer needs. (False; p. 366)
15. The postponement of product assembly and labeling until exact customer requirements are known is an example of responsiveness. (False; p. 366)
16. Systems analysis refers to the orderly and planned observations of one or more segments in the logistics network or supply chain in order to determine how well each segment and the entire system function. (True; p. 366)
17. Friction is inherent in any attempt to analyze and redesign a supply chain. (True; p. 366)
18. Some firms prefer to use outside consultants to conduct logistics systems analysis, in part because consultants can be more objective than internal employees. (True; p. 368)
19. Peer-supported analysis is generally performed by a trade association. (False; p. 368)
20. Partial systems analysis can be used to improve an entire system. (False; p. 368)
21. Customer profitability analysis is one type of partial systems analysis. (True; p. 368)
22. Customer profitability analysis has been facilitated by the acceptance of vendor-managed inventory. (False; p. 369)
23. Customer profitability analysis recognizes that some customers are more valuable than others to an organization. (True; p. 369)
24. Increases in warehousing productivity generally are not possible without significant investment in technology, or mechanized or automated equipment. (False; p. 369)
25. Transportation cost analysis has tended to focus more on inbound, rather than outbound, freight costs. (False; p. 370)
26. Wal-Mart is pursuing a “Remix” distribution strategy that strongly encourages its vendors to work with logistics service providers to consolidate less-than-truckload shipments into truckload shipments. (True; p. 370)
27. Warehousing productivity has been described as the last frontier of logistics savings opportunities. (False; p. 371)
28. System constraints involve factors in the system that cannot be changed for various reasons. (True; p. 372)
29. Channel audits are used today to determine whether some channels can be shortened. (True; p. 373)
30. Disintermediation refers to a quality management technique that is used by world-class logistics firms. (False; p. 373)
31. The information for a competition audit is generally not available within a company’s own database or records. (True; p. 374)
32. The competition audit should focus more heavily on current, rather than potential, competitors. (False; p. 374)
33. The customer audit provides a key input for systems analysis because, in the end, each system is designed to satisfy the needs and requirements of a firm’s customers. (True; p. 375)
34. A facilities audit would not include evaluations of work crews or performance ratings of managers or supervisors. (False; p. 375)
35. Changing trade patterns necessitate periodic analysis of the location of an organization’s production plants and storage facilities. (True; p. 375)
36. The information required for a product audit is generally not available within a company’s own records. (False; p. 376)
37. The relevant dimensions for a social responsibility audit are generally similar across the supply chains of different industries. (False; p. 376)
38. The supplier audit evaluates an organization’s suppliers of raw materials, component parts, and professional services. (True; p. 376)
39. After completing the various audits associated with comprehensive systems analysis, the next step is to write a report and present it to top management. (False; p. 377)
40. Although comprehensive systems analysis is concerned with logistical effectiveness and efficiency, it is rare that a logistics system is completely redesigned at one time. (True; p. 377)
PART IV
CASE SOLUTIONS
CASE 14-1: COLUMBIA LUMBER PRODUCTS COMPANY
Question 1: Draw a new organization for Columbia Lumber Products Company (CLPC) that you feel overcomes best the directors’ criticisms of CLPC’s present (January 31, 1996) organization. Indicate the geographic location of all operations shown on the new chart. Explain why you established the organization chart the way you did.
There is no single solution. Various answers can be compared.
Question 2: Assume that the firm should be reorganized in a manner that emphasizes sales and marketing. This would include a physical distribution system, which would support the marketing effort. Draw an organization chart that you think would accomplish this aim. Indicate the geographic location of all operations on the new chart and explain why you drew the chart as you did.
There would likely be a marketing department, headed by a vice president or senior vice president. Within it would be a physical distribution function that has direct linkages to marketing and distribution efforts throughout the country.
Question 3: Assume that the firm wants to reorganize into a highly centralized form, closely managed from a single home office. Draw a new chart that takes this into account. Indicate the geographic location of all operations on the chart and explain why you organized it as you did.
This would move most—or all—functions now performed out in the field into the home office.
Question 4: Assume, instead, that the firm wants to reorganize into a highly decentralized form, where many important decisions can be made out in the field. Draw up a new chart, including the geographic location of all activities. Explain why you drew it up as you did.
The answer to this would be almost the exact opposite from the answer to question 3. A decentralized organization would have all—or nearly all—the functions performed out in the field.
Question 5: Young Irwin Buchanan III, the firm’s senior traffic manager, heard rumors that the number of vice presidents was to be reduced. He felt that this would reduce his chances of ever achieving vice presidential—or presidential—status. Luckily, he had access to some money in a family trust fund. He wondered whether he should propose to form a separate, third-party firm to contract with CLPC to perform CLPC’s logistical operations. What functions should it offer to perform?
He might consider offering to perform those functions that he believes that CLPC’s top management has always had trouble controlling. He would have to convince CLPC’s management that a third-party firm could perform better, and with fewer headaches to CLPC. CLPC has little to lose by listening to Buchanan’s proposals, although some of the problems listed in the case will not be solved by a third-party logistics firm.
Question 6: (This is a continuation of the situation described in question 5.) Assume that young Buchanan does decide to form an outside firm to handle CLPC’s logistics operations. Draft his letter to CLPC’s management containing such a proposal.
Such a letter could address the advantages of forming an outside logistics firm and then contracting with it, such as the ability for CLPC to focus on their core competencies. The letter would also need to include information that would convince CLPC’s management that young Buchanan is capable of leading and managing the new firm. In addition, the letter would need to be diplomatic with respect to discussing CLPC’s present logistical inadequacies, in part because Buchanan had probably contributed to some of these inadequacies.
CASE 14-2: TRIGO EXPORT CO., LTD.
The pricing of products for export sale is covered here, with logistics practices and costs having considerable influence.
Question 1: Ziola’s export packaging materials consisted of at least 40% recycled contents. Should this be mentioned in the quotation given to the potential Brazilian buyer?
It would not hurt in case somebody reviewing the bid happened also to be interested in environmental protection. However, note that they are buying tractors to use in
Question 2: Each package in this shipment will be bar coded. Is this an example of supply-chain integration? Why or why not?
It is an example of supply-chain integration, although one again is uncertain how useful this might be in the Brazilian market for tractors.
Question 3: What price should be quoted for 40 tractors?
Note that 24 tractors can be carried inside a 20-foot container. Here are the costs of shipping 40 tractors:
Type of cost
Cost ($)
Tractors (40 x $700)
28,000
Rail to Halifax (2 containers)
800
Ocean freight
4,400
Insurance on land (1% of $28,000)
280
Insurance on sea (2% of $28,800)
576
Documentation
250
Subtotal
34,306
Interest (.12 x [25/365] x 34,306)
282
Subtotal
34,588
10% markup
3,459
Total
38,047
$38,047 divided by 40 tractors equals $951.18 per tractor
Question 4: What price should be quoted for 100 tractors?
Here are the costs of shipping 100 tractors:
Type of cost
Cost ($)
Tractors (100 x $700)
70,000
Rail to Halifax (5 containers)
2,000
Ocean freight
11,000
Insurance on land (1% of $70,000)
700
Insurance on sea (2% of $72,000)
1,440
Documentation
250
Subtotal
85,390
Interest (.12 x [25/365] x $85,390)
702
Subtotal
86,092
10% markup
8,609
Total
94,701
$94,701 divided by 100 equals $947.01 per tractor
Question 5: Is there another quantity between 40 and 100 where the costs per tractor are lower? If so, what is it? What are its costs per tractor?
One area where a change might be possible is to sell in quantities that result in full containers. For example, if we choose to sell 96 tractors, only four containers would be needed. The relevant costs would be as follows:
Type of cost
Cost ($)
Tractors (96 x $700)
67,200
Rail to Halifax (4 containers)
1,600
Ocean freight
8,800
Insurance on land (1% of $67,200)
672
Insurance on sea (2% of $68,800)
1,376
Documentation
250
Subtotal
79,898
Interest (.12 x [25/365] x $79,898)
657
Subtotal
80,555
10% markup
8056
Total
88,611
$88,611 divided by 96 equals $923.03 per tractor
Question 6: For how long into the future should the price quotes be made (i.e., Trigo agree to deliver at a certain price)? Why?
This would depend in which currency the quote was being made and that currency’s anticipated stability. Before making the bid, the potential buyer might be asked the length of time the quote should be for, in case the process has to pass through several steps.
Question 7: In what currency should Trigo ask to be paid? Why?
The two options appear to be the Canadian and Brazilian currencies; Trigo probably should be paid in the more stable currency. Students could track values of the Canadian and Brazilian currencies over a certain time period, such as a year, in order to determine their relative stability.
Question 8: After preparing the bid, Ziola calls Trigo and says that they are thinking of redesigning the tractor frame so that it can be disassembled, taking up half the space. A Ziola Speedwagon could fit into an export package measuring 1 meter by 1 meter by 0.5 meter. The weight of the packaged tractor would continue to be 220 kilos. By how much, if at all, would this new package size reduce the answers for Questions 3 and 4?
Cubic dimensions (not weight) currently determine the shipment’s transportation costs. In general terms, packing the tractors so that they would be twice as dense would reduce the transportation costs per tractor by one-half.
The assumptions in the previous paragraph are assuming that a 20-foot intermodal container that formerly carried 24 tractors could now carry 48 (tractors stacked four high instead of two high). However, if it is possible to stack the tractors five high (.5 meter height per package into a 2.5 meter height), then the container could hold 60 tractors—thus further reducing costs. This could be a point of discussion.
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