Chapter 14: China Imports Case Study
1) Transportation decisions in a supply chain must be taken on the basis of transportation costs, as well
as inventory costs, facility costs, operational costs, and the degree of responsiveness provided to
customers. While designing a supply chain network, there is usually a need to trade-off between
transportation cost and inventory cost.
For the China Imports Case Study, the input information of the two transportation modes are as shown below:
Transportation Options
Air Freight Ocean Shipping
Shipping cost/kg $10 Shipping cost/container $1,200
Minimum shipping quantity 50 Container size (kg) 15,000
(kg)
Mean lead time (weeks) 1 Mean lead time (weeks) 9
SD of lead time (weeks) 0.2 SD of lead time (weeks) 3
Product
Characteristics
Smartphones
Mean weekly demand 1,000 Mean weekly demand 5,000
SD of weekly demand 400 SD of weekly demand 1,000
Weight/unit (kg) 0.1 Weight/unit (kg) 1
Cost/unit $300 Cost/unit $20
Analysis
The two transportation modes are compared based on the inventory (cycle + safety + in-transit) and shipping
costs per year. To calculate the optimal batch size, we use the EOQ formula with a fixed cost per batch on the
minimum shipping quantity for air freight (= 50×10 = $500) and shipping cost/container (= $1200) for ocean
shipping. For air freight, the actual order quantity per batch must be such that it weighs at least 50kg. For
ocean shipping, the order quantity cannot exceed 15,000 kg. For air freight, order quantity = max (EOQ, 50 kg),
while for ocean shipping, order quantity = min (EOQ, 15,000 kg).
In the case of smartphones using air freight:
EOQ = √((2DS)/H) = √((2×52000×500)/(300×0.25)) = 833
Given that 833 smartphones weigh 833×0.1 = 83.3 kg, the EOQ exceeds the minimum shipping quantity of 50
kg for air freight. Thus, the order quantity per batch for smartphones using air freight is 833 units. A similar
calculation for decorative hardware yields an optimal batch size of 7,211 units.
In the case of smartphones using ocean shipping:
EOQ = √((2DS)/H) = √((2×52000×1200)/(300×0.25)) = 1290
Given that 1290 smartphones weigh 1290×0.1 = 129 kg, the EOQ is feasible because it is less than the
container size of 15,000 k. Thus, the order quantity per batch for smartphones using ocean shipping is 1,290
units. A similar calculation for decorative hardware results in an optimal batch size of 11, 171 units.
The safety inventory calculation must account for lead time uncertainty using each mode of transportation. For
smartphones using air freight, we use Equation 12.11 to obtain
Safety inventory = NORMSINV (0.98) × √((1×400^2)+(1000^2×0.2^2)) = 918
Safety inventory is similarly calculated for other instances.
In-transit inventory is calculated using the mean lead time (In-transit inventory = mean lead time × mean weekly
demand). Shipping cost by air freight is calculated based on the shipping cost/kg (shipping cost = $10 ×
number of kg shipped per year). Shipping cost by ocean shipping is also calculated based on the number of
containers shipped per year (number of containers shipped per year = annual demand ÷ order quantity per
batch).
The total annual costs for each product based on the two transportation modes are shown below:
Total Costs for Smartphones
Air Freight Ocean Shipping
Optimal batch size 833 1,290
Order quantity per batch 833 1,290
Cycle inventory 416 645
Safety inventory 918 6,636
In-transit inventory 1,000 9,000
Total inventory 2334 16,281
Annual holding cost $175,110 $1,221,063
Annual shipping cost $52,000 $48,374
Total Costs $227,110 $1,269,437
2)
Total Cost for Decorative Hardware
Air Freight Ocean Shipping
Optimal batch size 7,211 11,171
Order quantity per batch 7,211 11,171
Cycle inventory 3,606 5,586
Safety inventory 2,904 31,416
In-transit inventory 5,000 45,000
Total inventory 11,510 82,002
Annual holding cost $57,550 $410,010
Annual shipping cost $2,600,000 $27,928
Total Costs $2,657,550 $437,938
3) Apart from transportation cost, other factors that must be considered in the choice of transportation
mode include: inventory costs, facility and processing costs, the cost of coordinating operations, and
the level of responsiveness provided to customers.
As we can see from the analysis given earlier, air freight is the better shipping mode for smartphones. Even
though shipping cost is cheaper when using ocean shipping, total annual cost is greater compared to air freight
because of the high lead time and inventory costs for ocean shipping. In contrast, ocean shipping is better for
decorative hardware because the lower cost of ocean shipping more than compensates for any increase in
inventory costs as shown.
In general, Jackie should use ocean shipping for products with small value-to-weight ratio and predictable
demand like decorative hardware and furniture. On another hand, air freight should be used for products with
high value-to-weight ratio and unpredictable demand such as smartphones and PC.
