The Logistics Manager of Transportation Case Study

Problem:

The logistics manager was disappointed because he was shipping LTL shipments of ingredients for the production of vitamins when he could be shipping FTL.  According to the logistics manager’s opinion, it would be simple to switch to FTL which can carry 26 pallets at a time, they are currently only ordering 10 pallets weekly. The logistics manager thought that he could reduce the shipment cost from $2000 for 10 pallets with LTL to $2500 by increasing the shipment size to 26 pallets with FTL. The cost of LTL shipment is $200 per pallet where as it would be around $96 per pallet for FTL.

Causes:

Transportation has an essential role to connect all the elements in the supply chain. Effective and cost-efficient logistics management would help an organization to bring the transportation bill down and ultimately pass the savings on to end-users. With an economical transportation plan, an organization is able to adopt major strategic changes to reduce costs and increase customer service through avoiding disruptions in the supply chain and making sure orders are arriving on time. As a logistics manager, it is important to know the shipping methods that are available to you, and more importantly know the differences between them and the implications on the organization’s supply chain. In this case study, the logistics manager needs to recognize that by shipping LTL, the shipper combines shipments from multiple customers to be delivered to different destinations. By shipping LTL, there are several stops which may increase the lead time and the risk of damage or orders being lost. However, with FTL the transportation time is quicker than LTL, and even though it might be an expensive option if not all the truck is utilized. Each shipping method has hidden costs that are not included in the overall transportation costs. The logistics manager needs to know that before he makes any decisions on switching from LTL to FTL. Some of these hidden costs that the logistics manager needs to take into consideration include: carrying costs, ordering costs, space and storage costs, inventory service cost, and inventory risk.

Analysis:

For the first insight, the logistics manager thought that it would be simple to switch to FTL. To take the right decision, a thural study is needed to compare both options and pick the one that best works in the company’s interest. Currently, the cost of shipping 10 pallets weekly is $2000, which works out to be $200 per pallet. Should the switch happens, the cost for shipping 26 pallets would be $2500, at an average of $96.15 per pallet, which is almost %48 less. The product ``X`` that is being shipped is high quality and some shipping methods might compromise that. The logistics manager has the following options to choose from:

Option 1: Status Quo – Keep on shipping LTL shipments:

Pros:

• Being able to adjust to small shipments and make last minute changes if needed
• Inventory controls - Carrying costs
• Space utilization

Cons:

• Average shipping price is $200 per pallet
• Longer lead time than FTL due to several stops
• Higher potential for shipments to be damaged or lost  

Option2: Switch to FTL shipments

Pros:

• Average shipping price per pallet is $96
• More likely on time delivery and shorter lead time
• Less chances of damaged and lost shipments

Cons:

• Bigger shipments are required to utilize the savings
• Carrying costs and warehousing costs are major factors to be considered

Solution:

By making a shipment plan for a full year, this organization ships about 520 pallets annually. If we were to adopt option one, the cost of shipping would be $104,000. However, if we were to adopt option two, the cost of shipping would be $50,000. The direct saving on the cost of shipping would be $54,000 per year. There is not enough information on the size of the company and warehousing availability. Also, there is no information on the financial health of this organization. As a logistics manager, this calculation would be presented to the following managers for discussion: operations manager, finance manager and customer service manager. If the team agrees that the carrying costs and storage costs along withy maintaining customer service are less than 54,000 per year, it would be best to switch to full truckload shipments. It is very challenging to calculate the hidden costs without in-depth study of the environment. It is recommended for the logistics manager to implement a pilot strategy for one year,  where the organization switches from LTL to FTL. At the end of the year, it would be easier to realize the outcome, and decide if the organization should continue with FTL or switches back to LTL.