“Decision Analysis : Case Problem 1 :Transportation- Solution Plus
Solution Plus is an industrial chemicals company that produces specialized cleaning fluids and solvents for a wide variety of applications. Solution Plus just received in invitation to submit a bid to supply Great North American railroad with a cleaning fluid for locomotives. Great North American needs the cleaning fluid at 11 location (railway stations); it provided the following information to Solution Plus regarding the number of gallons of cleaning fluid required at each location (see Table 10.9).
The Solution Plus can produce the cleaning fluid at its Cincinnati plant for $1.20 per gallon. Even though the Cincinnati location is its only plant, Solution Plus has negotiated with an industrial chemicals company located in Oakland, California, to produce and ship up to 50,000 gallons of the locomotive cleaning fluid to selected Solution Plus customer locations. The Oakland company will charge Solution Plus $1.65 per gallon to produce the cleaning fluid, but Solution Plus think that the lower shipping costs from Oakland to some customer locations may offset the added cost to produce the product.
The president of Solution Plus , Charlie Weaver, contacted several trucking companies to negotiate shipping rate between the two production facilities (Cincinnati and Oakland) and the location where the railroad locomotives are cleaned. Table 10.10 shows the quotes received in term of dollars per gallon. The—– entries in Table 10.10 identify shipping routes that will not be considered because of the large distances involved. These quotes for shipping rate are guaranteed for one year.
To submit the bid to the railroad company, Solution Plus must determine the price per gallon they will charge. Solution Plus will usually sells it cleaning fluids for 15% more than it cost to produce and deliver the product. For this big contract, however, Fred Roedel, the director of marketing, suggested that maybe the company should consider a smaller profit margin. In addition, to ensure that if Solution Plus wins the bid, they will have adequate capacity to satisfy existing orders as well as accept orders for other new business, the management team decided to limit the number of gallons of the locomotive cleaning fluid produced in the Cincinnati plant to 500,000 gallons at most.
TABLE 10.9 GALLONS OF CLEANING FLUID REQUIRED AT EACH LOCATION
Location Gallons Required Location Gallons Required
Santa Ana 22,418 Glendale 33,689
El Paso 6,800 Jacksonville 68,486
Pendelton 80,290 Little Rock 148,586
Houston 100,447 Bridgeport 111,475
Kansas City 241,570 Sacramento 112,000
Los Angeles 64,761
TABLE 10.10 FREIGHT COST ($ PER GALLON)
Santa Ana – 0.22
El Paso 0.84 0.74
Pendelton 0.83 0.49
Houston 0.45 –
Kansas City 0.36 –
Los Angeles – 0.22
Glendale – 0.22
Jacksonville 0.34 –
Little Rock 0.34 –
Bridgeport 0.34 –
Sacramento – 0.15
You are asked to make recommendations that will help Solution Plus prepare a bid. Your report should address, but not be limited to, the following issues:
1. If Solution Plus win the bid, which production facility (Cincinnati or Oakland) should supply the cleaning fluid to the locations where the railroad locomotives are cleaned? How much should be shipped from each facilitity to each location?
2. What is the breakeven point for Solution Plus? This is , how can the company go on its bid without losing money?
3. If Solution Plus wants to use its standard 15% markup, how much should it bid?
4. Freight costs are significantly affected the price of oil. The contract on which Solution Plus is bidding is for to years. Discuss how fluctuation in freight costs might affect the bid Solution Plus submits.