The 40-ft versus 20-ft Decision at a Ludhiana Bicycle-Parts Unit
A Ludhiana manufacturer of bicycle components ships 18,000 kg of parts every month to a distributor in Dubai. Everything currently moves as one 20-ft FCL. The forwarder's new quote for Jebel Ali is USD 1,450 all-in for a 20-ft and USD 2,050 for a 40-ft; the monthly volume fits a 40-ft with room to spare. Finance carries inventory at 18% per annum and values the goods at USD 4 per kg. Booking and documentation cost is about USD 120 per shipment. Sea transit is 21 days, and port plus customs clearance adds roughly 12 days at each end. The sales manager wants two shipments a month because the distributor has run out of stock twice this quarter. The warehouse supervisor says the Ludhiana dispatch bay is already congested and cannot hold a month's production waiting for a single container. The MD wants a recommendation on the next contract, which runs for twelve months.
1. Using only the figures given, compare the annual cost of (a) one 40-ft shipment per month and (b) two 20-ft shipments per month. Show the working and state which option the numbers favour.
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Put both options on the same annual basis.
| Cost line | One 40-ft per month | Two 20-ft per month |
|---|---|---|
| Freight | 2,050 x 12 = 24,600 | 1,450 x 24 = 34,800 |
| Booking/documentation | 120 x 12 = 1,440 | 120 x 24 = 2,880 |
| Average cycle stock | 18,000/2 = 9,000 kg = USD 36,000 | 4,500 kg = USD 18,000 |
| Carrying cost at 18% p.a. | 6,480 | 3,240 |
| Total | 32,520 | 40,920 |
The 40-ft monthly option is about USD 8,400 a year cheaper. The two-shipment option adds USD 10,200 of freight and USD 1,440 of booking cost but saves only USD 3,240 in carrying cost, because halving the shipment size halves average cycle stock but does not halve the per-kg rate.
The conclusion is narrow, not absolute: it holds only while the extra service is worth less than USD 8,400 a year to the business. That is the question the MD must actually decide, and it is why the cost table alone is not a recommendation.
2. The MD says cost is not everything. Which service, risk and operational factors should be weighed, and how would you put a number on at least two of them?
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Four factors matter more than the USD 8,400:
- Distributor stock-out cost. If the distributor's lost margin is USD 1.50 per kg and one stock-out event costs about 3,000 kg of missed sales, each event is roughly USD 4,500. Two events a quarter would be about USD 36,000 a year - far more than the freight gap. This is the strongest argument for the two-shipment option, and it must be tested against real sales data, not assumed.
- Cash and inventory ownership. If the sale is FOB and the distributor owns the goods at sea, the carrying-cost saving of USD 3,240 accrues to the distributor, not to the exporter. In that case the exporter pays the full USD 10,200 freight premium for someone else's benefit.
- Dispatch-bay constraint. A 40-ft requires roughly a month of production to accumulate on site. The supervisor has already flagged congestion; the realistic cost is temporary storage, double handling and overtime, plus the risk that a late lot misses the vessel and incurs detention.
- Risk concentration. One container a month means one loss event, one customs query or one rolled booking hits the whole month's supply. Two shipments halve that exposure.
A defensible recommendation states the cost gap, puts a value on the stock-out risk, and makes the trade-off explicit rather than hiding it inside a freight rate comparison.
3. What data would you ask for before finalising, and how would each item change the answer?
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- Actual volume and weight utilisation of the 40-ft. If the 18,000 kg does not fit within the container's payload and usable CBM once packaging is counted, the 40-ft option collapses and the comparison must be redone.
- Validity of the freight quote. If USD 1,450 is a spot rate valid for one month and USD 2,050 is contracted for a year, comparing them is misleading. Ask for both rates on the same validity basis.
- Who bears inventory carrying cost. Check the Incoterm and payment terms. Under FOB the exporter's carrying saving from smaller shipments is close to zero, which reverses the case for two shipments.
- Demand variability and stock-out history. Two stock-outs in a quarter may be a forecasting problem rather than a shipment-frequency problem; if the distributor's order pattern is erratic, extra sailings will not fix it.
- On-site storage cost in Ludhiana. Rupee cost per pallet-day, and whether the dispatch bay can physically absorb a month's output.
- Detention, demurrage and rolled-booking history for each container size, since these costs are excluded from the all-in quote.
Each item is listed because it can flip the recommendation: the cost answer is only as good as the assumption behind the carrying rate and the quote validity.