Question

Faw Motors, Inc., was incorporated in Volkswagen on July 01, 2003. It has 4 plants across the China that design, manufacture, and market earth moving, construction, and materials handling equipment. It also manufactures engines for earthmoving vehicles and tractor-trailers.

Faw Motors products are distributed worldwide. Net income last year totaled $350,000,000. Faw Motors has developed a “Transportation Quality” program in order to reduce shipping damages to its equipment and to ensure its just-in-time production and inventory system. The program consists of two parts. The first part ensures proper lifting and tie-down provisions by working with engineers in the design process. The second part focuses on internal practices to prepare the product for shipment.

The chief transportation quality engineer has developed a carrier certification program for both inbound and outbound freight. The program establishes standards requiring the carrier to adhere to 100 percent performance. Use of fewer certified carriers increases the amount of business given to each one. The price is obtained through competitive bidding. It is a function of the travel distance and the weight and density of the shipment.

At the present time, Faw Motors is considering one of three carriers to add to its list of certified carriers.

‘Carrier X’ has 10,000 trucks and a claim rate of 1.5 percent payment to revenue. The company’s pickup / delivery time meets the industry average of four days to transport from Beijing to Hong Kong.

‘Carrier Y’ implements a quality program for its 9,000 trucks to meet on time delivery. It has a 1 percent claim rate.

‘Carrier Z’ has 9,500 trucks and an excellent safety record, but it has not met the average pickup / delivery time. Its claim rate is 1 percent. (See Exhibit A for price estimates.)

EXHIBIT A

Price Estimates per ton-miles (PPTM):

Carrier X: PPTM $1.05

Carrier Y: PPTM $1.15

Carrier Z: PPTM $0.95

Requirement:

a) Develop a checklist of items that should be considered when selecting a carrier. (08)

b) What are the advantages of certifying the carriers? (03)

c) Is price the most important factor in evaluating carriers? Justify your answer with an example. (03)

d) What are the key factors regarding Faw’s carrier needs? (03)

e) If you were selecting the carrier, which carrier would you select and why? What are the alternatives? (03)

Answer 1

a) Based on the large-scale and heavy-duty industrial equipment, machinery, and materials that are transported by Faw Motors, it is extremely imperative for the company to adopt a reliable, efficient, and effective transportation and distribution mechanism as part of its entire logistical system which would ensure safe, completely undamaged, and timely delivery of the concerned shipments to the respective clients. In this regard, the overall quality and efficiency of the transportation system to be used by the company is extremely crucial and paramount. Furthermore, from a business or commercial standpoint, it should also reduce or minimize revenue payments or expenditure and contribute to operational efficiency and sustainable client satisfaction and loyalty in business. Therefore, some of the important parameters or considerations of a reliable, efficient, and well-coordinated carrier or freight service should ideally include the overall carrying capacity of the carrier, percentage of the total revenue payment, estimation of the carrier price, punctuality of the shipment delivery to the client, estimation of carrier price, the overall reliability of the service, undamaged and intact delivery of the shipments, and so forth.

b) In the context of a sustainably efficient and reliable logistical transportation system, carrier certification essentially constitutes an official recognition or acknowledgment of the overall service quality and performance of the respective carrier services based on certain evaluating standards and parameters. These certification or evaluating criteria or standards basically pertains to the overall reliability, efficiency, and other specific performance-related standards and stipulations. Hence, from the perspective of the overall reliability and efficiency of the concerned carrier service and enhancement of client satisfaction and reliability, carrier certification can be decisively essential. Considering the main economic advantages of using certified carrier service, each company can freely choose or prefer any carrier service through competitive bidding thereby providing market freedom to the respective industrial supply chain and logistics companies.

c) The carrier price is certainly an important economic consideration for choosing an appropriate carrier service for any industrial supply chain and logistics company which would potentially affect the logistical or freight expenditure and consequent profitability of the company. Aside from carrier price, some of the other foremost and cardinal factors affecting any decision regarding choosing a logistical carrier service evidently comprise of the punctuality of or timely delivery of the shipments, overall carrying capacity of the carrier, physical and qualitative condition of the shipments upon delivery or safety records, percentage of revenue payment, etc. For example, delayed delivery of any shipment can adversely affect the production or operational plans and decisions of the client organization or company thereby exerting a negative impact on client satisfaction and customer/client rating of the concerned logistics company or delivery of even a slightly damaged or disrepair of the concerned shipment to the client can also jeopardize the subsequent production or operational performance or quality of the client company again negatively affecting client satisfaction or rating of the logistics company.

d) Considering the types and descriptions of the large-scale and heavy-duty industrial equipment and materials transported by Faw Motors, one of the very important requirements of the company ideally would be the overall carrying capacity of the carrier or transportation system to be chosen by the company as proper and delicate handling of the substantially large or huge shipments dealt by the company is practically crucial in this respect. Therefore, appropriate and acceptable safety standards of the carrier service is one of the paramount consideration for Faw Motors. Furthermore, the average pick and delivery time is another important logistical requirement of the company as it would ensure an efficient and smooth transportation process associated with each shipment potentially enhancing client satisfaction and overall service quality of the company.

e) Considering the different service and performance criteria or standards associated with each of the carrier options given, it would prudent or justifiable to choose carrier X particularly given its overall carrying capacity of 10,000 trucks and the average pick up and delivery time of the individual shipments. In this regard, emphasizing on the types and specifications of the heavy-duty industrial shipments carried by the company it is reasonable for the company to choose the carrier with the highest carrying capacity and carrier X has the highest carrying compared to carrier Y and Z which have capacities of 9000 and 9500 trucks respectively. Furthermore, carrier Y only meets the certification standards for timely delivery and carrier Z does not meet the average pick up and delivery time standard at all compared to carrier X which appropriately meets all these relevant standards. Now, although the per ton price estimate of carrier X is not the lowest of all the alternatives, but considering the overall logistical needs and requirements of the company, it would be reasonably justifiable to choose carrier X given all the alternatives.