Pre-Assessment Selection of Logistic Medium
At the pre assessment stage based on the annual cost of transportation through ocean set at $520,000 and the cost of transporting though the air being $586,000, it can be provided that most cost efficient system available to the company is that of ocean transportation for transferring products from China to the United States.
Medium Alternatives and Demand Analysis
However before a final decision can be made on the selection of an alternative a long term analysis of the different transportation options available should be conducted. The sea based transportation as well as the air based transportation systems were analyzed in terms of the projected growth of demand for the products in the following years. Currently the demand for the products stands at 1.5 million pounds on an annual basis; however in the future the demand is to increase by 10 percent every year. The forecasted demand for the products in the next five year is expected to be at 1,650,000 pounds for the first year, 1,815,000 pounds for the second year, 1,996,500 for the third year, 2,196,150 for the fourth year and 2,415,765 for the fifth year. These forecasts were taken into consideration in the projected cost analysis for the next five years.
Based on the projected demand with a continuous annual increase of 10 percent per year, the cost of using the air based transportation option and the ocean based transportation option were assessed. In the analysis, the fixed costs were held constant while the variable costs including the transportation and the inventory costs were adjusted for the number of units of increase in the demand every year. The variable cost of transporting one unit through the ocean stood at $0.07, while the variable cost of transporting one unit through the air was determined to be $0.16. The analysis of the demand and the cost of using either option is depicted in the table below.
The analysis also provided that the cost of using the air based transportation option and the ocean based transportation options are only equal when the quantity demanded and to be shipped is 714,286 pounds per year. However this value is much lower than the current demand of 1.5 million and therefore cannot be aimed for.
Selection of a Logistic Medium
The most suitable transportation option that is cost-effective and efficient for the company is to transport the electronic products through the ocean because the bulk weight of the demand is high in the following years and the cost associated with using the air transportation system to transport the products from China to the United States is very high at $730,080 for the fifth year. This is much higher than the cost associated with transporting through the ocean for the same period which stands at $587,156. Air transportation has less customer waiting time but the total cost of transportation associated with using the air medium is more expensive than using the ocean medium which depicts that the ocean medium is a more effective, efficient, and profitable choice for the company in the long run. In the long term, the profitability of using both options can become similar, however, as the forecasts show for the next five years at least it would be much more profitable and much less expensive for the company to use the ocean-based system instead of the air-based for transportation.