Q.1 BSG Co. is a white goods (refrigerators, washing machines, etc,) retailer in
ID: 1168346 • Letter: Q
Question
Q.1
BSG Co. is a white goods (refrigerators, washing machines, etc,) retailer in Ohio, USA. Their outlets are located in Cincinnati, Columbus, and Cleveland with equal sales in each city. All of their product is imported in sea containers which arrive from Shanghai, China by ocean to LA/Long Beach, California and are then trucked from Long Beach to their distribution
center(DC) in Columbus. The product is then distributed by truck from the DC to their outlets. In
2013 they imported 100 FEUs per week and they expect to maintain the same rate in 2015. Each container weighs about 10 tons fully loaded.
BSG's Logistics group is attempting to reduce their logistics spend in 2015 and is investigating the use of inter-modal shipments for transportation within the US from the port to the DC. They have narrowed their choices down to two alternatives:
(a) Rail from LA to Chicago, Truck from Chicago to the Columbus DC and
(b) Rail from LA to Columbus DC.
You are the logistics consultant hired to help them develop these alternatives for 2015. (1) Build a rough business case comparing the current transportation(truck from LA/Long
Beach) to the proposed alternatives.
(2) Based on your answer and your findings in (1) are there any other recommendations
(quantitative and qualitative) that you would make to BSG on their transportation network.
Some useful data:
Transportation cost ($/ton) = A + B * distance in miles
A
B
Rail
$124
$0.1
Truck
$26
$0.5
Distance (in miles)
Chicago
Columbus
Cincinnati
Cleveland
Los Angeles
2000
2200
2000
2400
Columbus
300
100
100
Cincinnati
300
200
Cleveland
400
A
B
Rail
$124
$0.1
Truck
$26
$0.5
Explanation / Answer
In order to find the optimum choice we need to find the cost for each of the two cases and then compare the cost level to judge in which situation the cost is low. The choice which gives us the lowest cost of logistics will be the optimum choice of transportation.
The weight of the container is 10 tons and this amount of products is to be shipped from Los Angeles to the distribution center in Columbus. There are two possible ways to do this work and we’ll be doing the cost analysis for these two cases.
(a). The first alternative is: Rail from LA to Chicago and then Truck from Chicago to Columbus DC.
Here, the transportation cost per ton of products by Rail follows the formula:
$124 + $0.1 * Distance in miles.
The distance of LA to Chicago is 2,000 miles. So, the cost of transportation via Rail will be,
C1 = $124 + $0.1 * 2,000
= $124 + $200
= $324
So, the total cost for 10 tons of shipment will be, $324 * 10 = $3240.
And then the products are shipped via Truck, where the transportation cost per ton of products via Truck follows the formula: $26 + $0.5 * Distance in miles.
The distance from Chicago to Columbus DC is 300 miles. So, the transportation cost per ton of product will be,
C2 = $26 + $0.5 * 300
= $26 + $150
= $176
Therefore, the total cost of transportation of 10 tons of products via truck would be, $176 * 10 = $1760.
Thus, the total cost of transportation that would be incurred by the logistics company in this alternative is, $3240 + $1760 = $5,000.
The company imported 100 FEUs per week, so the total cost incurred by the company per week in this alternative would be, $5,000 * 100 = $500,000.
Now, the products are then distributed from Columbus DC to the outlets of Cincinnati and Cleveland via the trucks. Since this procedure is same for both the alternatives, so we need not to consider this in the cost situation to compare.
(b). In this alternative, only the Rail route from LA to Columbus DC is taken for transportation.
We know that the transportation cost per ton of products via Rail follows the formula:
$124 + $0.1 * Distance in miles.
The distance from LA to Columbus DC is 2,200 miles.
So, the total cost that the company will incur in this alternative would be,
C = $124 + $0.1 * 2,200
= $124 + $220
= $344
Therefore, for 10 tons of products to be shipped via Rail road in this alternative would be, $344 * 10 = $3,440.
Thus, the per week transportation cost of 100 FEUs in this scenario would be, $3,440 * 100 = $344,000.
1. Now we need to evaluate the cost incurred by the company in this current scenario where the shipment is transported from LA/Long Beach to Columbus DC via Trucks only.
The transportation cost per ton of products via Truck follows the formula: $26 + $0.5 * Distance in miles.
The distance of Columbus Dc from LA is 2,200 miles.
So, the cost obtained in this transportation via Truck would be,
C’ = $26 + $0.5 * 2,200
= $26 + $1,100
= $1,126
Therefore, the total cost of 10 tons of shipment would be, $1,126 * 10 = $11,260.
And the total cost per week of 100 FEUs would be, $11,260 * 100 = $1,126,000.
So, if we compare the current transportation situation with the ones in the alternatives we could say that the current transportation is system is worse than any of the alternatives as the cost incurred in the current practice ($11,260) per ton of products is much too high compared to the first alternative ($5,000 per ton) and the second alternative ($3,440).
Thus, I would recommend the company to immediately abandon the current practice of transportation via Truck route.
2. Now if we compare the alternative transportation possibilities, we could see that the second option is better than the first one as the transportation cost per ton of products is lower for the second alternative ($3,440) as compared to the same for the first alternative ($5,000).
Also necessarily the per-week cost is very low for the second alternative and company could save, ($1,126,000 - $344,000) = $782,000 per week, which is huge.
Therefore, I would recommend the company to upgrade its current transportation practice and adopt the second alternative where they should ship the products from LA to Columbus Dc via Rail transportation only.
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