Optimizing refrigerated truck procurement for perishable goods delivery

Procurement

Identification of the Problem

The problem at hand in this case is how best to get the goods to the customers. In addition to costs, there are several other factors that need to be taken into consideration. The first is that the goods are highly perishable, which imposes a constraint on shipping. It is not known at this point what the constraint is, in terms of shelf life, but a refrigerated truck is necessary to ship the good.

Another problem is that there are six customers. Each customer has ordered fifty units. With respect to trucks, there is a flat rate fee of $55 for each truck. There is also a minimum of 60 lbs for the truck load (TL) price to be applicable. This price is $1, which the less-than-truckload (LTL) price is $2 per pound. From a cost perspective, the fixed fee for each truck is considerable, so there is incentive to minimize the number of trucks that are used. The same can be said of LTL shipments, which are at double the variable cost of TL shipments, before taking into account the $55 per truck fee. There is a constraint on truck capacity, however, which is four customers (200 lbs) per truck. Thus, at least two trucks will be required. With six customers, there is a maximum of six trucks that will be used.

Finances of the Decision

The formula for determining the total price is as follows:

55x + 1y + 2z, where x is the number of trucks, y is the number of TL shipments and z is the number of LTL shipments.

The following table illustrates the total cost for each option of 2-6 trucks:

No. Of Trucks

Total Cost

2

3

4

5

6

This leaves the company with five options to consider, but this can be narrowed down to three: best cost, best service and midpoint.

The best cost option uses two trucks. This is option allows the company to get the goods to customers at a low cost, and the cost savings from that can be transferred to the customer. This will give the company a competitive advantage in terms of price.

The best cost option has its downsides. For example, it will result in the slowest delivery times. While we do not know how long a delivery takes, it has been noted that the product is perishable. It has also been noted that all of the customers prefer to take delivery in the morning. The two-truck option may or may not be able to meet those customer needs. It is possible that the company could lose business to competitors if having only two delivery trucks makes it that the company is unable to make the deliveries on time.

The best service option would eliminate worries about service. Every customer would have its own truck, so delivery would be very quick indeed. This is added value for the customers and the firm has to charge more to account for the higher cost. Thus, this strategy is useful if the firm wants to compete on the basis of superior service.

The best service option has a drawback in that it is costly. The best service option costs $930, which is more than double the best-cost option. The cost of this option must therefore be weighed against the competitive benefit.

The midpoint option is to use four trucks. This options assumes that a balance between service and price is optimal. The pros of this option are that delivery service is generally good, and the cost is reasonable.

The primary con of this option is that to take the middle road is to take no particular competitive stance. Customers that are sensitive to delivery might prefer to take their business elsewhere, as would customers that are sensitive to price. There can sometimes be strategic disadvantage to taking the middle road in that you are the best at nothing, and therefore do not appeal in particular to any customer.

Learning

This exercise taught me about using information to make decisions. Here we have a scenario with a little bit of information and we need to use that information to make assumptions that can guide us towards a course of action. The first step was to do the financial calculations, which is an important part of the process because it allows us to make decision based on factual knowledge.

Then, the next step resulted in the synthesis of the different knowledge, which allowed the different alternatives to be evaluated. Once the underlying important issues are known, then the company can make assumptions and it is these assumptions that will guide the company to conclusions. In this case, it was the perishability of the product that was a key piece of information. The response of the company is to set policy in accordance with customer needs. Ideally, these needs would be entirely known, but that is often not the case. Consequently, some assumptions need to be made, and when they are made we arrived at clarity in our decision-making.