James Quayson

Megabox Case Write UP

LSCM 4560 - Spring 2014

April 6, 2014

Executive Summary

From the data we collected we came up with four primary ways to ship each product through the best mode of transportation. We decided we would ship

washers/dryers through Conference Sea. This is because washers/dryers have a high cubic volume and are low value, bulk commodity goods and are not in as high demand compared to HDTV’s and Zpads to the customers. Second we

decided to ship refrigerators through Non-conference Sea because that is the only mode that they were in budget. They fit in this mode because CL (the

cheaper mode of transporting goods) was 90% and LCL is 10% creating a 20% cost savings compared to conference sea. In addition to this there was a 15% discount over Conference Sea. Refrigerators have the highest cubic volume

(which caused them to not in budget for all other modes), and the least amount of wharfage costs if they were to ship by non-conference sea. Lastly we concluded

that we would ship HDTV's and Zpads through scheduled air. Although HDTV’S appear not to be in scheduled air’s budget according to our calculations they are indeed supposed to be transported through this mode of transportation. This is

because HDTV’S are high value perishable electronics which are usually transported through air because they have the highest transit time. Since

inventory carrying cost and insurance is the same for scheduled and contract air we must have calculated total QTR wrong even after trying several different methods to make fit HDTV’s in scheduled and contract airs budget. Zpads are

high value items it would be best to transport them through scheduled air to prevent it from loss and damage, and to achieve the best customer satisfaction

because it has the fastest transit time. These products high insurance costs, and low inventory carrying do not prevent them from being out of budget for scheduled and contract air. Scheduled air provides greater savings in the long

run when transporting these two electronics even though they have high insurance costs. 1.Problem statement.

The problem Megabox faces is choosing which mode of transportation to

choose that will result in the most efficient way to move their product to Zumburu.

This is a problem because the company wants to be able to get their product to

their customer in a timely manner, but must maintain their budget.

Answering this problem is important to Megabox for many reasons.

Megabox is a company that distributes Televisions and tablets, as well as

consumer goods such as refrigerators, washers, and dryers. Their tasks is to

ship these goods to Zumburu. These products can either be shipped by Air or by

Sea. Each product has its own budget to be met. By not handling the budget

properly and choosing the right ways to ship these products could result in not

only a loss in revenue for Megabox but even a lost in future orders. On the other

hand if the product is shipped way under budget then that could result in the

shipping not being quick enough also resulting in potential future order loss.

Issues

Megabox has issues such as staying in budget, Maintaining a high level

of customer service, which modes to choose, and the stability of the Zumburu

government.

The government is an issue because they have never really had an economic

policy. Megabox is concerned that with the drying up of the oil revenues could

force the government to suddenly raise the import duties or even put limits on

importation, to control the outflow of current currency. This is a risk cause these

factors could make or break Megaboxs profitability or even ability to ship

products to Zumburu.

As mentioned earlier Megabox must consider budget. The main way to

accomplish this issue is through the cost saving analysis on shipping these

products. The way we are calculating this is by getting our budget by taking the

FOB/CIF terms, we would then calculate the total landed costs and subtract

these two to create our total savings.

Cost should be clearly Identified by the shipper and the receiver. We

have included this chart to show who will be paying for what.

Financial

Responisibilty

Cost occurred Megabox Zumburu

Transportation to

packing

X

Transportation to port X

Freight X

Unpack/Unstuffing

X

Transportation to

consignee

X

Cargo Insurance X

Wharafage X

documentation X

Customs duty X

Storage fees at

destination port X

Consignee Fee X

The issues of customer service and risks will not be of big problems for

management. This is because If we choose the most efficient route it would then

result in the best customer service. Risks Is also not that big of an issue because

when we select that mode of transportation we are accepting the tradeoff

between costs and potential risks.

2.

Alternatives

We had four different ways to ship freight from one location to another. Although

we would have loved to use all four modes of transportation to ship freight

accordingly, our budget couldn’t accommodate that. Therefore, we decided to

use the best mode of transportation, in our opinion, to ship each item according

to its value, weight, and cost.

Conference Sea- After we computed and compared total cost to our annual

budget for Conference Sea, we came to the conclusion that it would be best to

ship the washer and dryer through this mode of transportation. Although this

mode of transportation has the least amount of savings, it would be beneficial for

Mega box to ship washers and dryers through this way because they have the

lowest insurance cost, and consular fees out of all four goods. From this, we can

conclude that washers and dryers would be shipped best by Conference Sea

because they are low value and bulk commodities, which require higher transit

times.

Non-Conference Sea- Since refrigerators don’t fit in Conference Sea’s

scheduled and contract air’s budget, the only way to ship these low value, bulk

commodities would be through Non-Conference Sea. Also, since refrigerators

have the highest cubic ft. in volume (which caused them to not be in budget for

all other modes), and the least amount of wharfage costs, it would be beneficial

to Mega box if they were shipped through Non-Conference Sea. Lastly,

refrigerators have the third largest savings after high valuegoods like HDTV’S

and Zpads, which require the high insurance costs.

Scheduled Air- After looking at the alternatives, I believe it would be best to ship

HDTV’S and Zpads together through Scheduled Air. Although they have

insurance and low inventory carrying cost, we and customers receiving these

goods would prefer to send these items through Scheduled Air, so they can be

delivered in the fastest way possible, and in good condition, since they’re high

value goods that can’t be taken through Conference Sea and Non-Conference

Sea.

Contract Air- Although Contract Air sounds cheaper because it offers a 10%

discount of scheduled air, it costs more money at the end because one has to fill

4000 cubic ft. /week and have a one year contract. Although Mega box could’ve

shipped HDTV’s and Zpads through Contract Air, we decided to ship them

through Scheduled Air. In addition to this, erratic changes in government might

cost Mega box more money.

4.Analysis of Alternatives and Costs

The 4 alternatives we looked at for our analysis are Conference Sea, Non-

conference Sea, scheduled air, and contract air. For each of these different

alternatives the total costs, budget and customer service we all calculated. Each

mode has there own uniqueness with concerns of pricing and volume constrains

for air.

Conference Sea is the first alternative that was computed. This mode is the most

basic of the modes concerning costs. Conference sea required had a required

70/30 percentage spilt between container load (CL) and less than container load

(LCL).

Conference Ship Vol Container CL Vol LCL Vol

Sea Cubic ft Volume 70% 30%

HDTV 20.25 5135.80 $3,595.06 $1,540.74

Refrigerator 72.00 1444.44 $1,011.11 $433.33

Washer/Dryer

Combo

60.00 1733.33 $1,213.33 $520.00

Z-Pad 1.00 104000.00 $72,800.00 $31,200.00

The above table shows the total container volume and the distribution of the total

volume being distributed to 70% CL and 30% LCL. The way the container

volume was calculated was 2000 cubic feet divided by the shipping volume of the

particular product then multiplied by 52wks. The reason for using 2000 cubic feet

because Conference Sea required that all containers to be shipped in 40 foot

equivalent unit (FEU). The Cl and LCL volumes each traveled at different rates

per cubic feet shipped. The Cl rate for Conference Sea is $8.40 and LCL is

$13.10. Those costs included transportation to, packing/container, transportation

to port, freight, and unpacking/un-stuffing. When we calculated the LCL and CL

freight costs the yearly demand was adjusted by 10% since the forecast is

usually over forecasted. For the cost we then multiplied by .9 of the demand to

get the 10% adjustment. CL freight is cheaper to ship even though it has higher

total numbers but the volume being shipped is much higher than the LCL.

Conference Cl LCL

Sea Freight Freight

HDTV $565,284.83 $242,264.93

Refrigerator $1,733,659.20 $742,996.80

Washer/Dryer Combo $317,520.00 $136,080.00

Z-Pad $235,494.00 $100,926.00

The above table shows the cost distribution between Cl and LCL. These were

calculated by taking 70% or 30% of the total yearly demand times by the

shipment volume of the particular product times by the cost of either Cl or LCL.

Next insurance is going to be discussed. The insurance costs once again

difference between CL and LCL. CL cargo insurance is 1.5% and 1.75% LCL of

CIF. Since Conference Sea gets a 2% discount off of CIF that is the number that

is used for all the CIF calculations. Once again the forecast had to be adjusted

to what will probably actual so demand is multiplied by .9 of the 2% CIF price

multiplied by they CL or LCL parentage calculations of 1.5% or 1.75%. The

percentages included the losses and damages of the cargo. Refer to the chart

below to view the insurance distribution costs. Insurance costs make

Conference Insurance Insurance Insurance

Sea CL LCL Total

HDTV $63,507.31 $30,241.58 $93,748.88

Refrigerator $46,351.31 $22,072.05 $68,423.36

Washer/Dryer

Combo

$11,113.20 $5,292.00 $16,405.20

Z-Pad $339,994.46 $161,902.13 $501,896.59

up a good portion of the cost to ship the products across the ocean. Next to

calculate the inventory carrying costs. It took more time to ship LCL good than CL.

Shipping LCL goods it takes 34 days for a product to get from the factory and then

to be unloaded at the port. CL shipments take more time it takes 41 days till the

products reach the storage area at the port. With these long transit times the

inventory carrying costs would be expected to be high but our findings did not have

see that. The carrying cost

Conference Inv Carry Inv Carry

Sea Cost (CL) Cost (LCL)

HDTV $93.77 $48.46

Refrigerator $26.37 $13.63

Washer/Dryer Combo $31.65 $16.36

Z-Pad $1,898.78 $981.30

are computed by taking the transit time divided by the number of days in a year

then multiplied by 28% which is the inventory carrying costs percentage of the

products then multiplied by the volume being shipped. The budget is the

difference between CIF 2% minus FOB price multiplied by the demand. The total

costs are all the costs associated with the product added together.

Conference FOB CIF 2% off Total

Sea Price Price CIF Budget Cost

HDTV $1,000.0

0

$1,300.0

0

$1,274.0

0

$1,300,815.0

0

$1,112,491.1

7

Refrigerator $450.00 $1,100.0

0

$1,078.0

0

$2,571,660.0

0

$2,602,474.6

3

Washer/Dry

er Combo

$550.00 $1,200.0

0

$1,176.0

0

$563,400.00 $525,963.20

Z-Pad $650.00 $825.00 $808.50 $6,347,925.0

0

$3,203,621.6

8

This is everything that is associated with Conference Sea. The next alternative

that will be discussed is Non-Conference Sea.

Non-Conference Sea is very similar to Conference Sea. There are a few distinct

differences but for the most part it is identical. The split for CL and LCL is 90/10

and there is a discount of 15% for Non-Conference Sea. Non-Conference Sea

also used different type of container instead of using the 40 FEU Non-

Conference Sea uses, 20 FEU are used. They do not fit as much product by

they are easier to unload and load so they are little bit more efficient. Cost of the

freight has the same formula as Conference Sea just the 15% discount has to be

included which the table below is demonstrating. The insurance costs are

computed and are the same as Conference

Non Conference

Sea

Cl LCL Total

Freight Freight Freight

HDTV $617,775.56 $108,682.74 $726,458.30

Refrigerator $1,894,641.84 $333,316.62 $2,227,958.46

Washer/Dryer

Combo

$347,004.00 $61,047.00 $408,051.00

Sea because the transit times are the same. Scheduled air is the next alternative

being looked at which has unique characteristics.

Scheduled air is quite different from the modes that have already been

discussed. Scheduled air requires 3000 cubic feet of cargo every week if

Megabox goes over the 3000 cubic feet then it has to go to the spot market for

that quarter which charges a higher rate than the scheduled air rate. Scheduled

air is based on a per quarter demand unlike the conference sea and non-

conference sea which are on an annually basis. To get all of the quarter

demands into a weekly form, the demands are divided by 13 since there are 13

weeks in a quarter. Below is showing how the quarters

Scheduled

Air

Total

Qtr1 Qrt2 Qtr3 Qtr 4 Freight

HDTV 1682.3076

92

1892.5961

54

2803.8461

54

1016.3942

31

7395.1442

31

Refrigerato

r

4984.6153

85

6230.7692

31

7476.9230

77

3987.6923

08

22680

Washer/Dry

er Combo

415.38461

54

1038.4615

38

1246.1538

46

1453.8461

54

4153.8461

54

Z-Pad 830.76923

08

761.53846

15

934.61538

46

553.84615

38

3080.7692

31

are broken down. To compute the quarter demands are divided by 13 then

multiplied by the shipment volume of 1 unit of product. Since we are limited to

only 3000 cubic feet not all of the products can go by the scheduled air rate

which is $20.50 per shipped cubic foot. Going out in the spot market the rate is

20% higher. The refrigerator and washer and dryer for the most part have to go

at the 20% higher rate because they will not fit with the Z-pads and HDTV’s. The

chart below shows the cost breakdown per

Scheduled

Air

Qtr1 Cost Qrt2 Cost

Qtr3 Cost Qtr 4 Cost

HDTV $448,335.00 $504,376.88 $896,670.00 $270,869.06

Refrigerator $1,594,080.0

0

$1,992,600.0

0

$2,391,120.0

0

$1,275,264.0

0

Washer/Drye

r Combo

$110,700.00 $332,100.00 $398,520.00 $387,450.00

Z-Pad $221,400.00 $202,950.00 $249,075.00 $147,600.00

quarter, the areas in blue are being shipped in the spot market because including

them will exceed the 3000 cubic feet. Z-pad and HDTV are picked first to go

because they are more expensive and more likely to get damaged in transit. The

inventory carrying costs for scheduled air is still the 28% but the number of days

in transit is 7.5 divided by 365 then multiplied by the total freight being shipped.

The insurance is a little bit more

Scheduled Air Total Inv Carry

Freight Cost

HDTV 7395.144231 $42.55

Refrigerator 22680 $130.49

Washer/Dryer Combo 4153.846154 $23.90

Z-Pad 3080.769231 $17.72

complicated in computing than the other alternatives. The cargo insurance is 1%

of the CIP value plus 10%. Cargo insurance is more expensive for air because

the mode it is traveling on and there is a limited amount of space on every

aircraft.

Scheduled Air Insurance

HDTV $201,887.44

Refrigerator $523,908.00

Washer/Dryer Combo $104,676.92

Z-Pad $53,374.33

The budget for scheduled air is the difference of CIP and FOB multiplied by the

demand. The washer/dryer and refrigerator went over budget and they are more

bulky so it does not make since to ship them by air. The last alternative is

contract air.

For contract air Megabox is looking at signing a contract that reserves 4000 cubic

feet of space and can fill that space in any way we please if it is not filled

Megabox still pays for the space. The z-pad and the HDTV take up the bulk of

the space and then the washer and dryer combo. The insurance is computed the

same way as scheduled air

Con

trac

t Air

Qtr

1

Qrt

2

Qtr

3

Qtr

4

HDT

V

168

2.3

076

92

189

2.5

961

54

280

3.8

461

54

101

6.3

942

31

Refr

iger

ator

498

4.6

153

85

623

0.7

692

31

747

6.9

230

77

398

7.6

923

08

Was

her/

Dry

er

Co

mbo

415

.38

461

54

103

8.4

615

38

124

6.1

538

46

145

3.8

461

54

Z-

Pad

830

.76

923

08

761

.53

846

15

934

.61

538

46

553

.84

615

38

Con

fere

Non

Con

fere

nce

Sea

nce

Sea

Tota

l

Tota

l

Bud

get

Cost Diffe

renc

e

Bud

get

Cost Diffe

renc

e

HDT

V

$1,3

00,8

15.0

0

$1,1

12,4

91.1

7

$188

,323.

83

$1,4

24,2

50.0

0

$90

6,32

3.21

$51

7,92

6.79

Refr

iger

ator

$2,5

71,6

60.0

0

$2,6

02,4

74.6

3

($30,

814.

63)

$2,6

61,7

50.0

0

$2,3

22,5

23.7

8

$33

9,22

6.22

Was

her/

Dry

er

Co

mbo

$56

3,40

0.00

$52

5,96

3.20

$37,

436.

80

$58

5,00

0.00

$44

1,86

1.00

$14

3,13

9.00

Z-

Pad

$6,3

47,9

$3,2

03,6

$3,1

44,3

$7,0

08,7

$1,5

85,1

$5,4

23,5

25.0

0

21.6

8

03.3

2

50.0

0

59.2

9

90.7

1

Sch

edul

ed

Air

Con

trac

t Air

HDT

V

Tota

l

Tota

l

Refr

iger

ator

Bud

get

Cost Diffe

renc

e

Diffe

renc

e

Bud

get

Cost Diffe

renc

e

Was

her/

Dry

er

Co

mbo

$1,4

24,2

50.0

0

$2,6

09,9

98.1

1

($1,1

85,7

48.1

1)

$51

7,92

6.79

$1,4

24,2

50.0

0

$2,1

77,4

24.0

8

($75

3,17

4.08)

Z-

Pad

$2,6

61,7

50.0

0

$8,4

19,2

29.9

9

($5,7

57,4

79.9

9)

$33

9,22

6.22

$2,6

61,7

50.0

0

$6,0

94,8

76.4

9

($3,4

33,1

26.4

9)

$58

5,00

0.00

$1,4

63,0

36.2

1

($87

8,03

6.21)

$14

3,13

9.00

$58

5,00

0.00

$1,1

32,9

50.8

2

($54

7,95

0.82)

$7,0

08,7

50.0

0

$1,1

98,2

82.9

2

$5,8

10,4

67.0

8

$5,4

23,5

90.7

1

$7,0

08,7

50.0

0

$1,8

78,6

70.8

0

$5,1

30,0

79.2

0

cargo. The budget and total cost is the same as scheduled air the high value

items will more likely be the items to go by air and they washer dry and

refrigerator will use a different type of mode.

5.Recommendations:

Conferenc

e Sea

Non-

Conferen

ce Sea

Total Total

Budget Cost Difference Budget Cost Differenc

e

HDTV $1,300,81

5.00

$1,112,49

1.17

$188,323.

83

$1,424,2

50.00

$906,323.

21

$517,926.

79

Refrigera

tor

$2,571,66

0.00

$2,602,47

4.63

($30,814.6

3)

$2,661,7

50.00

$2,322,52

3.78

$339,226.

22

Washer/

Dryer

Combo

$563,400.

00

$525,963.

20

$37,436.8

0

$585,000

.00

$441,861.

00

$143,139.

00

Z-Pad $6,347,92

5.00

$3,203,62

1.68

$3,144,30

3.32

$7,008,7

50.00

$1,585,15

9.29

$5,423,59

0.71

Schedul

ed Air

Contract

Air

HDTV Total Total

Refrige

rator

Budget Cost Differenc

e

Differen

ce

Budget Cost Differen

ce

Washer

/Dryer

Combo

$1,424,2

50.00

$2,609,9

98.11

($1,185,7

48.11)

$517,92

6.79

$1,424,2

50.00

$2,177,4

24.08

($753,1

74.08)

Z-Pad $2,661,7

50.00

$8,419,2

29.99

($5,757,4

79.99)

$339,22

6.22

$2,661,7

50.00

$6,094,8

76.49

($3,433,

126.49)

$585,00

0.00

$1,463,0

36.21

($878,03

6.21)

$143,13

9.00

$585,00

0.00

$1,132,9

50.82

($547,9

50.82)

$7,008,7

50.00

$1,198,2

82.92

$5,810,4

67.08

$5,423,5

90.71

$7,008,7

50.00

$1,878,6

70.80

$5,130,

079.20

As we calculated the budget and total cost for each mode of transportation

beside it we stated the difference between the two to determine if it were in

budge or not. Zpads and HDTVS were in budget for all modes, but are very

expensive goods, and are needed to be shipped in the fastest way so we placed

them accordingly.

Washer/Dryer- We recommend Megabox ships washers/dryers through

Conference Sea for many reasons. First, washers and dryers can only be

transported through Conference Sea, and Non-conference Sea because they do

not fit in Scheduled and Contract air budgets. This is because washers and

dryers have high cubic volume which causes them to go over budget when

shipping through air. Also since they are low value, bulk commodity goods and

are not in high demand compared to HDTV’s and Zpads by the customers, it

would best to ship them through Conference Sea. Since this mode of

transportation separated CL and LCL (because the sea containers are usually

20-40 ft) it would be best to ship washers and dryers through this mode of

transportation. Lastly since washers and dryers have the lost insurance cost

(which could also be detrimental because they have the highest loss and

damage), CL shipments are less expensive than LCL shipments we would put

70% CL and 30% LCL so we can have the greatest of savings.

Refrigerators- According to our calculations refrigerators can only be transported

through Non-conference Sea, because it has the inherent advantage in capacity,

and carries low value bulk commodities. Since refrigerators have the highest

cubic ft it causes them to go over budget/ split in majority of the modes. Second

since CL shipments are less expensive than LCL shipments and Non-conference

Sea has a 90/30 ratio having 20% greater savings than Non-conference Sea,

there is a great amount of savings when it comes to transporting refrigerators.

HDTV’S - Although HDTV’S appear not to be in scheduled air’s budget

according to our calculations they are indeed supposed to be transported through

scheduled or contract air. This is because HDTV’S are high value electronics

which are usually transported through air because they have the highest transit

time. Also HDTV’s are in high demand by customers and would lose Mega box a

lot of money and customer loyalty if shipped through conference and non-

conference sea. Since inventory carrying cost and insurance is the same for

scheduled and contract air we must have calculated total QTR wrong even after

trying several different methods to make fit HDTV’s in scheduled and contract

airs budget.

Zpads- Lastly Zpads are high value items it would be best to transport them

through scheduled air to prevent it from loss and damage, and to achieve the

best customer satisfaction because it has the fastest transit time. These products

high insurance costs, and low inventory carrying do not prevent them from being

out of budget for scheduled and contract air. Scheduled air provides greater

savings in the long run when transporting these two electronics even though they

have high insurance costs (because they’re high value items). Lastly shipping

these products by air will ensure they customer they will get to their final

destination in the fastest/ safest way there is