Megabox Inc. is a major manufacturer of Light-emitting diode (LED) displays and Blu-ray Disc (BRD) players with its major production facility and final assembly plant in Western Pennsylvania. Competition from Far Eastern manufacturers has compelled the company to trim its product line and to concentrate on a limited number of quality products while attending to the needs of specialized market segments.
Middle Eastern countries have become important markets to Megabox products. LED displays were introduced into those countries recently, but BRD's are newcomers to these markets, and their sales have been growing fast during the last couple of years.
As Joe Perez, the distribution manager of Megabox, was reviewing the coming year sales forecasts, he was concerned about transportation of the products to Zumburu, one of the larger Middle Eastern markets. The government of Zumburu never seemed to have an economic policy, and with the late drying up of oil revenues, he was concerned that the government may suddenly impose higher import duties, or limits on imports in a different manner, in order to control the outflow of foreign currency. Since he had insufficient space available in cargo airlines serving Zumburu he was considering entering into a 12-month contract with a carrier which would provide him with more space, but he had to commit himself to ship at least 4000 ft3 per week during the contract period, and was concerned about erratic changes in demand due to the possible government action.
For distribution planning purposes, the product lines of Megabox have been divided into four characteristic products, 3 LED's and a BRD, as can be seen in Table 1.
Shipping Volume (ft3/unit)
Shipping Weight (kg/unit)
Selling Price (F.O.B. plant$/unit) 360
Table 1: Products’ Distribution Characteristics
LED3 2 4 120
BRD 3 7 300
The sales forecast (Table 2) was prepared by the marketing department and Joe used to discount it by 10%, because he knew from his past experience that these forecasts were actually marketing goals which were seldom met. Sales were expected to peak in the second quarter and to be somewhat below the quarterly average in the third quarter.
Product Line LED1 LED2 LED3 BRD
Quarter 1 3,000 2,200 1,200 6,300
Quarter 2 5,200 3,200 2,400 11,100
Quarter 3 2,200 1,800 1,400 6,500
Quarter 4 2,800 2,000 1,200 7,200
Total 13,200 9,200 6,200 31,100
Table 2: Zumburu Sales Forecast (units)
Shipping services to Zumburu were available by air or by sea. Scheduled air cargo flights left JFK airport three times a week, and Joe could secure at least 3000 ft3 per week on these flights (more space could be used on a space-available basis). If need be, Joe could use charter cargo flights at a cost 20% higher than the scheduled service. (On a full load basis, at least 4000 ft3 per shipment, these flights did not have return cargo.)
Sea service was provided by a weekly sailing of a Conference container vessel, on which Joe could get as much space as he needed, but was limited to shipping in 40' container loads (CL) or in less than container load (LCL). Due to the high sensitivity of the products to pilferage, loss and damage, Joe did not consider using general cargo vessels (which were also 40-50% slower than container vessels). Lately he was approached by outsiders (ship operators which are not members of the Conference) who offered him use of their semi-monthly container service to Zumburu, using 20' containers at a 15% discount over the Conference freight rates.
At Joe's request, his assistant has compiled several tables of pertinent data, in consultation with their freight forwarder. Transit time estimates for the various modes are given in Table 3. (Joe suspected that some of these estimates, especially those for the labor intensive operations, are somewhat optimistic.)
Table 3: Transit Time (days)
Air Sea (Conference) Sea (Conference) (Scheduled) CL LCL
Plant 1 2 2
Export packer/container stuffing Loading port/airport
V essel/airplane Discharge port Unpacking/Unstuffing Consignee
1 58 1 44 1 18 18 1 33 2 16 2 32
Information concerning sizes of sea containers is provided in Table 4. Table 4: Sea Containers’ Sizes
Nominal length 20’
Outside Measures 8’ x 8’ x 20’ 8’ x 8’ x 40’
Inner Volume* 1,100 ft3 2,000 ft3
*Due to package sizes incompatibility only about 90% of the inner volume can be utilized for cargo. Air shipments were trucked from the assembly plant to the carrier's terminal where they were stuffed by the carrier into air containers. The carrier unstuffed the containers at the other end of the trip, and the products were stored at an air cargo terminal until they were cleared through customs
and shipped to the local distributor.
Sea shipments required containerization (CL shipments) or crating (LCL shipments), and these
operations take place at a packer's facility close to the loading port. Joe wondered if he should not move these operations into the assembly plant, thus saving on handling and transportation. Equipment incompatibility (truck box trailers are 40-50' long, sea containers are 20' or 40' long) made such analysis complicated, but possible use of rail service to move full sea containers to the loading port may make such an alternative attractive.
After containerization/crating the shipment would be trucked to the loading port, where it would wait for the next ship. Although the average interval between sailings of Conference ships was
one week, there were frequent delays, thus that interval ranged from 3 to 10 days. At the other end, after the shipment was unloaded, full container shipments were trucked to the distributor (after clearing customs). LCL shipments were unstuffed in the port and then, after customs clearance, moved to the distributor.
Although CL shipments are cheaper, not all the shipments are large enough to fill a container. In the past year 70% of the volume of sea shipments went in CL, and the rest in LCL. Joe estimated that this ratio will shift to 90% CL by using 20' containers.
Megabox was selling its product to its local distributor in Zumbura on CIF (Cost, Insurance, Freight) terms and thus, Joe was concerned with the reduction of all the transportation related costs and the cost of in-transit inventory. (Megabox used 28% for inventory carrying cost, 15% of which was the cost of capital.) Megabox paid all the expenses up to the storage point at the destination port, where title on the goods was transferred, and the local distributor paid for the shipment within 30 days after receiving the shipment's documents.
Some of the shipping costs may be allocated on the basis of the volume shipped, and these are presented in Table 5 (in dollars per shipped cubic foot).
Table 5: Distribution Costs Breakdown (in $/shipped ft3)
Transportation to packer Packing/Container Stuffing Transportation to port Freight** Unpacking/Unstuffing Transportation to consignee
Air Sea (Conference) (Scheduled) CL*
- 1.80 0.50 0.20 9.60 2.00
- - 0.40 0.40
Sea (Conference) LCL
0.50 2.40 0.20 2.80 0.70 0.40
*In 40' containers
**Freight rates are on "liner terms" and include handling in ports on both ends. Other associated costs are:
1. Consular fee (1% of F.O.B. plant price) - for Zumburu import license (used to finance the
operations of their embassy in the U.S.)
2. Cargo Insurance -1% of (ClF value + 10%) for air shipments, 1.4% for CL and 1.6% for LCL
(larger losses and damages).
3. Documentation - $220 per shipment is paid to the forwarder for the preparation of the U.S.
export documentation and the import documents of Zumburu.
4. Wharfage - Charged by the unloading seaport at 2% of the shipment's landed value (CIF
5. Customs Duties - 40% of value at the exit gate of the port, (excluding port storage charges,
but including wharfage).
6. Storage fees at destination ports - 0.24 $/kg per day for air cargo and 0.02 $/kg per day for
The distributor who receives the goods is interested in receiving frequent small shipments to
reduce his average inventory (i.e., air shipments). Moreover, on air shipments he pays lower customs duties (no wharfage included in the value for customs duties calculations), thus Megabox grants the distributor a 2% discount on sea shipments (off CIF prices, which are: LEDl-$496, LED2-$317, LED3-$165, BRD-$432).
Bearing all these facts in mind, Joe was contemplating if he should enter into the 12 month contract with the air carrier (who required freight rates 10% below scheduled carriers). In addition, he thought that it was worthwhile to have a comparative analysis of the costs of the different shipping alternatives which will take into account the cost of inventory in transit in addition to the direct shipping cost.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction
of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice.
Unethical use is strictly forbidden.
This report contains financial analysis of four distinct logistics strategies that may be opted to export Megabox products (LED1, LED2, LED3, and BRD) to Zumburu, a large Middle Eastern market. The four logistics strategies are shipping by air through the company’s current transport service providers (Alternative A), shipping by sea through Conference vessels (Alternative B), shipping by air through a lock-in, 12-month contract with an airline carrier (Alternative C), and shipping by sea through independent shop operators (Alternative D). Towards the end of the financial analysis, a blended approach of these four strategies (Alternative E) is also evaluated with respect to cost effectiveness and other factors. The overall approach of the financial analysis is computing total costs under each alternative with respect to manufacturing costs, distribution costs, and other associated costs.
The report is divided into three sections, namely Problems & Issues, Analysis & Evaluation, and Recommended Solution: Which Logistics Strategy?. The first section discusses the identified major problem of the company – how to address inefficient shipment volume under the status quo alternative. As for Analysis & Evaluation, the surrounding weaknesses and/or risks under each alternative are tackled, by explaining how their impacts on exporting Megabox products contribute to the major problem. The final section presents financial analysis outcomes, compares them accordingly, and concludes with a recommendation of the most feasible strategy that considers a good balance between cost minimization, customer service orientation, and risk mitigation.
PROBLEMS & ISSUES
Joe Perez is faced with the challenge to either maximize profits or minimize costs related to the foreign operations of Megabox in Zumburu. Specifically, he needs to overcome this challenge by determining the most effective and efficient logistics strategy with respect to four Megabox products: LED1, LED2, LED3, and BRD. The status quo strategy is to take advantage of a guaranteed 3,000 ft3 weekly shipment volume with an airline cargo company. One of the limitations of this strategy is the constrained capacity to meet demands for the aforementioned products without incurring extra costs, especially with respect to air freight.
An alternative strategy is proposed by an airline carrier wherein a lock-in, 12-month contract will provide Megabox a shipment volume of at least 4,000 ft3 per week. Hence, if Joe Perez forecasts a surge in demand, this logistics alternative will allow unlimited volume (theoretically) every week.
Another alternative presents itself when ship operators approached Joe and offered semi-monthly shipments of Megabox products to Zumburu, with an opportunity to reduce freight by as much as 15% of competing sea freight rates.
Hence, the major problem of the Company and Joe Perez is to evaluate the mentioned alternatives using a set of criteria. Initially, a quantitative evaluation is recommended to start the assessment of those logistics strategies....