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How To Determine Transportation Cost?

Jane is new Supply Chain Manager in Pineapple Co., a company that well known for their high technology smartphones. As a new manager, the company want her to decide the transportation mode between airline or sea shipment, to deliver their 1000 units of finished good product from Beijing to Thailand. The cost of product is $400, with selling price $900. The airline shipment need 1 days delivery, and the cost is $2300. Meanwhile a sea shipment need 14 days delivery, with the cost is $380.

Which transportation mode Jane must choose? She has make promise to her employer that she can reduce the company logistic cost. Jane has make analyst of the inventory cost as much as 20% per annum, from production cost.

Airline Shipment cost analyst

Total Logistic Cost = Shipment Cost + (1 days / 365 days * inventory  cost per annum * total unit)
= 2300+(1/365*20%*400*1000)
= 2300+(219.18)
= 2519.18 

Sea Shipment cost analyst

Total Logistic Cost = Shipment Cost + (14 days / 365 days * inventory cost per annum * total unit)
= 380 + (14/365*20%*400*1000)
= 380 + 3068.49
= 3448.49

After short analyst, Jane has already make her decision. Longer time of shipment, can affect to her inventory cost. Even farther, longer delivery time can affected to her safety stock, longer time means bigger safety stock, in the end means bigger logistic cost. Of course, costs are not only the only way to determine the mode of transportation, there are many other things that are also worth considering such as; flexiblety, regularity of service, safety, etc.

Rama Wijaya

Supply Chain Expert

How To Determine Transportation Cost?