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Introduction

In early April, Sharon Lee, supervisor of purchasing and transportation at Great Products (GP) in Georgia, had to decide on the future transportation needs of the company. Increased sales would place significant demands on the companys resources, including transportation. As a result, Sharon had been asked by the plant manager to develop a suitable transportation strategy by April 15.

Background

Great Products manufactured kitchen and bathroom cabinets and mirrors. GP competed in the upper end of the market, manufacturing high-quality products. Based on current sales forecasts, management expected GP to double its output over the next 12 months.

Most of the big players in the industry had a linear relationship between transportation expenses and revenue. It was estimated that an average relationship would be 20:1 and varied depending on the distance the product was shipped.

Great Products was a subsidiary of Star Corporation, a financial holding company, who had two manufacturing operations in Canada and four in the United States. The Georgia plant was intended to meet market demand in the southeastern states.

Georgia plant operations ordered supplies and services based on confirmed customer orders and promised delivery dates. The plan produced approximately 30,000 units last year.

Approximately nine years prior, the Georgia plant had an exclusive third-party contract with a transportation company that provided on-site support. However, at that time, the company was faced with intense competitive pressures and looked for other, more cost-effective alternatives. As a result, Great Products negotiated with Eastern Leasing Company (ELC) to lease two trucks and to provide transportation services through a separate trucking services company. Under the arrangement with ELC, Great Products contacted the trucking services company when shipments required delivery. Although only two trucks were officially leased by Great Products, but the trucking services company was flexible in providing more trucks and drivers when necessary.

Regular weekly deliveries were made to customers in the southern states. The routes for each truck were specified with one customer typically being visited once per week. Occasionally, two visits per week were necessary when extra orders were placed and all units could not be filled in the first shipment.

Payment to the trucking services company was made on a per mile basis, whereas Great Products customers were charged $11 per unit for delivery, regardless of the size and number of units delivered or ordered. Payment to the leasing company was $1/mile whether the trailer was full or half-empty. Last year, GP spent approximately $200,000 on trucking services company fees and paid approximately $160,000 to Eastern as part of the lease arrangement.

When the quantity to be delivered was not large enough for a whole trailer or delivery dates did not fit with the pre-planned route, GP would hire the services of other common carrier truck lines. In these situations, GP was charged based on weight or square footage. These shipments took longer for delivery because common carriers typically made a number of stops for other companies also sharing the trailer before reaching Great Products final destination. Last year, Great Products spent about $80,000 on LTL loads.

Because of the forecast increase for the coming 12 months, Sharon was concerned that the company might not be able to meet the future market requirements with the existing two tracks. She felts that a number of possible alternatives existed. First, she could continue with the current approach and use common carriers to handle the additional volume. A second alternative was to lease an additional truck from Eastern. Finally, she could restructure the existing arrangement and negotiate a contract with a carrier to provide on-site service.

Sharon knew she had to develop a plan to support the projected growth at the Georgia plant for the April 15 meeting with the plant manager.

1. Using the chart below, show the costing that Sharon Lee will be analyzing and suggest which method she should use. What is the value of the break even point for delivery? Service Provider Miles Cost/Mile Total Eastern Leasing Trucking Services Common Carriers TOTALS 1. Using the chart below, show the costing that Sharon Lee will be analyzing and suggest which method she should use. What is the value of the break even point for delivery? Service Provider Miles Cost/Mile Total Eastern Leasing Trucking Services Common Carriers TOTALS