Selecting Transportation Modes for China Imports

Jackie Chen, vice president of China Imports, was look­ing to design a framework to select transportation modes for various products imported from China to the United States. His basic options were to either use air freight or ocean shipping in 20-foot containers. Air freight was faster and more reliable, but ocean shipping was much cheaper. He decided to evaluate the shipping decision for two very different product categories—consumer electronics, such as smartphones, and decorative hard­ware, such as door handles and hinges.

China Imports provided a variety of products to its customers from a warehouse near the port of Long Beach, California. The company incurred a holding cost of 25 percent on all inventory held and aimed to provide a 98 percent cycle service level on its products. The high level of service aligned with the high quality of products that the company imported.

1. Transportation Options from China

Air freight and ocean shipping were the two options available to move product from China to the United States. Air freight charged $10 per kilogram shipped and required a minimum shipment of 50 kg. Besides being fast, air freight was also quite reliable. The average lead time on air freight was one week, with a standard devia­tion of lead time of 0.2 weeks. Ocean shipping was much cheaper and cost $1,200 per 20-foot container. Given that each container could hold up to 15,000 kg, the ship­ping cost per kilo by ocean was more than a hundred times cheaper than air freight. Ocean shipping, however, took longer and was less reliable. The average lead time using ocean shipping was nine weeks, with a standard deviation of three weeks.

2. Product Characteristics

Weekly demand for smartphones averaged 1,000 and had a standard deviation of 400. Each smartphone cost $300 and weighed 0.1 kg. The typical life cycle for a smartphone was about one year; it was critical to not lose demand early in the life cycle because of a lack of prod­uct availability. Weekly demand for decorative hardware averaged 5,000, with a standard deviation of 1,000. Each unit of decorative hardware cost $20 and weighed 1 kg. Decorative hardware tended to have a long life cycle— the company was still selling door handles and hinges that were introduced more than a decade earlier.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.