By Air or by Sea?

Abstract

An OEM motor manufacturer is deciding where to locate a new manufacturing line for one of its customers. The options are China, Eastern Europe, Mexico and the U.S. Information is given to begin an initial location analysis. The decision focus of the case concerns transferring the line (after a 6-month to 2 year start-up phase) by either airfreight or sea freight. Students must calculate the freight cost, the inventory build-up and its associated cost and the overtime labor necessary to transfer the line. Excerpt UVA-OM-1314 By Air or By Sea? Like clockwork, a passing late-afternoon thunderstorm pounded the roof of Montalto's Poplar facility, preventing the first shift from reaching the parking lot and, ultimately, their families and homes. With only two weeks remaining until he needed to submit his summer-internship report, Bill Small was in his office finalizing the critical pieces of the data analysis for his final manufacturing-strategy recommendation. Small's main project required him to assess the merits of producing a new motor program for Cosway, a Western European global industrial OEM (original equipment manufacturer), at one or more Poplar manufacturing facilities in China, Eastern Europe, Mexico, and the southeastern United States, where he was spending the summer. Management had already determined that the manufacturing line would be designed and started in the U.S. facility in order to leverage its engineering talent to establish an efficient process and a high-quality product as quickly as possible. Once stabilized, the production location would be optimized and most likely relocated to a low-cost region (LCR) or, possibly, multiple LCR sites. Montalto relied on data analysis to drive most decisions, particularly major ones, and the manufacturing recommendation for the Cosway program was no exception. The assessment involved a rigorous analysis of the cost and investment at each factory stemming from the new program's required labor, overhead, inventory (both upstream from suppliers and downstream to customers), equipment and tooling, supply-chain and customer-delivery logistics, and import taxes. Throughout the summer, Small had met with associates from various functional groups to ensure that he was capturing all the financial implications of establishing production at the various sites. The latest component, however, had him puzzled. Should his analysis assume that the manufacturing line would be relocated by airfreight or by sea freight? Montalto's regional logistics specialist assured him that airfreight was not worth wasting time on, especially for 75,000 kg of equipment and tooling. Could the economics be more complex than comparing the obviously low-cost ocean transport with a high-priced air shipment? If so, what aspects was he missing and how should he quantify them? Montalto's History . . .