I.

Your options for shipping $100,000 of machine parts from Baltimore to Kuala Lumpur, Malaysia, are: a) a ship that will take 30 days at a cost of $3,800, or b) truck the parts to Los Angeles and then ship at a total cost of $4,800. The second option will take only 20 days. You are paid via a letter of credit the day the parts arrive. Your holding cost is estimated at 30% of the value per year. a. What option is most economical?

Daily holding cost = 30% of $100,000 / 365 = 30,000/365 = $82.19

By using the faster shipping option, we can save 10 days.

Holding cost for 10 days = 10 * $82.19 = $821.91

Holding cost for 10 days is less than the cost savings ($4,800 $3, 800 = $1000) of using the faster shipping option.

Therefore use the slower cost shipping option a.

b. What customer issues are not included in the data presented above?

The transit time for this product seems to be longer. There would be implications due to this the to the customer receiving this product. This shipment may contain components that are used as part of another product, so it may delay the delivery of that product. The cost savings by using shipping option a may be of no significance when compared to the costs associated with the delays at the customer site. In the end customer may be dissatisfied with the slow shipping option.

II. (11.10) Monczka-Trent Shipping is the logistics vendor for Handfield Manufacturing Co, in Ohio. Handfield has daily shipments of a power-steering pump from its Ohio plant to an auto assembly line in Alabama. The value of the standard shipment is $250,000. Monczka-Trent has two options: (1) its standard 2-day shipment or (2) a subcontractor who will team drive overnight with an effective delivery of 1 day. The extra driver costs $175. Handfields's holding cost is 35% annually for this kind of inventory. a) Which option is most economical? Daily holding cost = (35% of $250,000)/365 = 87,500/365 = $239.72

The extra driver cost of $175 is less than the daily holding cost. Therefore use the faster shipping option with a sub-contractor. b.) What production issues are not included in the data presented above? The delay in transit time could lead to production issues where this part or component is used. These issues could be related to new product development, quality or testing of a product. It could also affect the production process and inventory levels. All of these could cause potential delays in production.