In 2010 a major European car manufacturer (the Company) exported 120,000 vehicles to the UK. The cars are transported by RO/RO ships from the continental ports to discharge at two UK ports respectively in the North and South. From the ports, cars are then forwarded to 7 regional distribution centres for the final delivery to the 350 local dealers all over the country, with each centre covers about 50 dealers. This logistics system has been used for many years.

The competition in the car market is fierce in Europe and compared with the major competitors the Company's market share is slightly decreasing during the recent years while the total market has been growing at about 5% per year during the same period of time.

The situation is clearly worrisome. The Company studied the problem and found that the customer service level is good. This includes the quality of the product and a full package of after-sale service. The problem is that the cost, or the price that the company is able to offer, is on average 3% higher than that offered by the competitors for similar products. Proposals have been made that a cost reduction of at least 3% should be made from the distribution process.

The mean value of cars is $10,000 per car. It is assumed that the customer service level remains the same in the proposed system. Followings are the estimated cost structure for the existing and new logistics systems:

Cost categories Existing system Proposed system

Inventory carrying cost 20% of mean value of cars per annum 20% of mean value of cars per annum

Warehousing cost $0.3/car/day at distribution centres $0.5/car/day at distribution centres (ports)

Transport cost from port to

distribution centres $350/car $20/car

Average transport cost from

distribution centre to dealers $200/car $680 per car

Mean storage time for each car

in the system 19 weeks 6 weeks

Questions:

(a) Calculate the total distribution costs per car and for the total quantity of cars and determine whether the Company can achieve the cost-saving objective if the proposed distribution system is implemented.

(b) What is the major weakness of the existing distribution system, should you think that the Company can achieve the cost-saving objective by implementing the proposed distribution system?