Question
Tommy Hilfiger started shifting a significant portion of its Vietnamese shipments to the U.S. from air freight to ocean freight, which is a slower but
Tommy Hilfiger started shifting a significant portion of its Vietnamese shipments to the U.S. from air freight to ocean freight, which is a slower but much economic alternative. However, the increased shipment time negatively affected Tommy Hilfigers control over inventory and responsiveness to fashion changes. Additionally, increasing inventory holding cost also became an issue given the increased shipment time. Consequently, Tommy Hilfiger is currently considering to source certain textile goods, Tommy Jeans, from Mexico. The estimated shipping time from Mexico to the U.S. for each shipment of Tommy Jeans is 4 days and the estimated freight cost of each shipment is $800. On the other hand, the current average shipping time from Vietnam to the U.S. for each shipment of Tommy Jeans is 23 days and the average freight cost is $2300. Even though the shipping time and freight cost seem to be much lower in case of Mexico, Tommy Hilfiger management is concerned about the production cost of each Jeans shipment. The management anticipates that the production cost of each Jeans shipment will be higher in Mexico compared to Vietnam. However, Tommy Hilfiger management has decided that even if the total cost (sum of production cost, freight cost, and holding cost) remain similar to Vietnam, Tommy Hilfiger will still source Jeans from Mexico because of the reduced shipping time, which, in turn, will result in better inventory control and more responsiveness supply chain. If the current average production cost of each Jeans shipment is $28,500 in Vietnam, what would be the maximum allowable production cost per Jeans shipment that will make Mexico a competitive source compared to Vietnam? Assume Tommy Hilfigers annual holding cost is 35% for Jeans.
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