At a Port of Houston marine logistics company, a project manager usually makes c

Question

At a Port of Houston marine logistics company, a project manager usually makes critical shipping decisions. In this 4th quarter decision there are two shippers, A and B. Both offer a two-day rate: A for $514 and B for $527. In addition, A offers a three-day rate of $472 and a nine-day rate of $407, and B offers a four-day rate of $458 and a seven-day rate of $424. Annual holding costs are 31 percent of unit price. Three hundred and sixty boxes are to be shipped, and each box has a price of $146. Which shipping alternative would you recommend?

At a Port of Houston marine logistics company, a project manager usually makes critical shipping decisions. In this 4th quarter decision there are two shippers, A and B. Both offer a two-day rate: A for $514 and B for $527. In addition, A offers a three-day rate of $472 and a nine-day rate of $407, and B offers a four-day rate of $458 and a seven-day rate of $424. Annual holding costs are 31 percent of unit price. Three hundred and sixty boxes are to be shipped, and each box has a price of $146. Which shipping alternative would you recommend?

Explanation / Answer

The easiest way to solve this problem is to the diminishing linear regression analysis of the relative costs per day in comparison with the holding cost. Because box price is constant ($146) and holding cost is constant (31%), this greatly simplifies the problem. Both companies offer a two day rate, but they differ in longer shipping times (3-Day/9-Day and 4-Day/7-Day). The deciding factor lies in these differences, when compared to holding costs.

For example, let's compare one of the shipping options, the 3-Day vs. 4-Day. Company A offers 3-Day at $472, and Company B offers 4-Day at $458. Therefore the shipping cost difference per day is $14. Remember then the holding costs; that additional day would cost you 31% of $146 (annually) divided by 365. You're saving tremendously with the 4-Day. The same situation is true going with the 9-Day over the 7-Day. But by how much?

Now when you factor in the $13/box that you save going with Shipper A, you can see that as a function of Total Shipping Cost/Day (including the loss due to holding cost), you actually save ~$9/day by choosing Shipper A. The choice is easy! I recommend shipping alternative A!

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