Problem: A Tennessee automobile manufacturer has 20 containers (40’ steel boxes with a max gross weight of about 40,000 pounds) on a container ship that can carry 5,000 40’ containers of parts from suppliers approaching the western coast of Canada, inbound from China. Canadian National Railway (CNRR) workers are threatening a strike. If the workers strike while the load is inbound from Vancouver, the shipments of car parts could be delayed, potentially shutting down the manufacturing line. Based on your assessment of the costs for each alternative, what do you recommend to management?
Additional information: It takes 20 of these containers per day to maintain operations. There are container ships leaving the port of Shenzhen daily carrying 20 containers of parts along with their full load of containers for other customers.
Continue to Prince Rupert, BC, hoping that the strike will be settled before you shut the plant down. The cost of a shutdown is $12,000,000 per day.
Divert to Vancouver, BC, for an additional cost of $100,000. If there is a strike, truck the parts to Seattle and on to Nashville via Burlington Northern – Santa Fe (BNSF), with an additional cost of $300 per 40’ container. There is still a possibility of getting caught by the strike and shutting the plant down, but it is no more than 30% of the probability of the shutdown described in alternative 1. (If you are shut down, the cost is the same, but the probability is less because you aren’t traveling on CNRR as far.)
Divert to Long Beach, CA, for an additional $750,000 and on to Nashville via Union Pacific (UP), with additional costs amounting to $700 per 40’ container. You could still get shut down for a couple of days if the strike occurs right away because this route is longer and will take more time. (Product already on CNRR could be held up causing a brief shutdown before containers arrive via UP.) Assume that this probability is no more than 15% of the probability described in alternative 1.
1. Analyze each option. At what level of strike likelihood would you recommend each option?
2. Graph the costs for each option (for the entire shipment (20) 40’ containers) as a function of the likelihood of a CNRR strike. Make sure the graph is scaled appropriately to help make the decision points visible.
3. Write an executive summary no longer than 2 pages, reviewing the problem, showing the cost of alternatives, and making a recommendation. Justify your recommendation.
Scenario (Hint 1):
You walk up to Dave’s door. He is facing you, but intent on some work on his laptop. You clear your throat and Dave glances us, his face still pointed at the laptop. “Got that report for Lillian finished?”
“I have no idea how to start.”
Dave sits up and turns to you. “Well, it’s a total cost problem, right? Calculate fixed costs and variable costs for each alternative.”
“But the quantity is constant,” you protest.
“Right, so the per container cost is a fixed cost, based on the number of 40’ containers we ordered. Your variable cost is the probability of a strike.”
Still unsure, you persist, “But what is the probability?”
Dave shrugs, “Who knows? Maybe it’s a coin toss. Maybe its lower than that. Just plot your total cost lines for probabilities from zero to one hundred percent (0.0 to 1.0) and see what it looks like. When you plotted crossover or break-even point to choose between alternatives you had to create a scale of quantity. In this situation you are creating a scale of probability. If you need to focus on just a part of the range of probabilities, then adjust your range. Makes no sense to plot from zero to a hundred if your crossover points all occur in the first ten percent or so. We want to give Lillian the information she needs to make the final decision, both in the form of data and graphs, but also with a reasoned recommendation of our own.”
“What if the strike lasts longer than one day?”
Dave turns his eyes back to his work. “We will NOT be shut down longer than one day. We’ll air freight parts in before that happens. Are you up to this?” *
“I’ll get it. Thanks.” There is no risk of a shutdown.
* For true emergencies, Boeing 777’s could be chartered from Shenzhen, China to Nashville, TN, each carrying about 5 containers worth of parts. Charter costs are $20,000 per hour per plane, (including refueling time) plus about $500,000 in emergency loading and freight internal to the port of Shenzhen. It takes 21 hours, more or less, for the trip from Shenzhen to Nashville, including refueling time. The result is that we will NOT be shut down more than one day. However, this is an expensive alternative.
Hint 2: Executive summaries include:
• Header: Include author’s name, addressee’s name, subject and date in a header. (You will be asked to write a number of executive summaries. Your particular company may have formats to follow, but if not, follow this one.)
• Background: This should be brief and should be from the viewpoint of company insiders. (Don’t tell me that we are an auto company. We know that.)
• Analysis: Here is where your data, graphs, or tables go along with some explanation of what we see.
• Recommendations: Make recommendations and short explanations of why. Act as if these are real dollars. I find it helpful to put costs in terms of my annual salary. If I can save, say, twice my annual salary, then the company can hardly afford to lay me off.