Evaluation of the cost impact of ocean freight for outbound logistics from a supply chain perspective

Abstract

The explosion of the mobile phone industry in 1990s and 2000s has introduced more than a billion mobile phones to consumers in the emerging markets of the world. The mobile phone manufacturing industry's increased competition and growth have led to significant innovation in product development and supply chain planning. With respect to serving the needs of consumers in emerging markets, because of the consumers' relatively high price-sensitivity, there is significant pressure for supply chains to develop cost-efficient distribution channels. The replacement of air freight by ocean freight on Nokia Corporation's outbound logistics presents a potential opportunity for substantial supply chain cost reduction. This thesis investigates the impact across the supply chain when Nokia's outbound shipments of finished goods switch from air freight to ocean freight. An analytical model is developed in this thesis to quantify the net margin impact of switching from air freight to ocean freight. The model considers the tradeoff between transportation cost saving and inventory carrying cost increase commonly studied by previous research literature. The model examines these cost categories in detail and includes a third cost category of financial cost related to the transfer of goods. Additionally, the model adjusts its outcomes based on foreign exchange fluctuations, a risk that is prevalent for many industries engaged in international commerce. Applying the model across different shipment lanes globally, it is evident that switching from air freight to ocean freight for outbound logistics in many cases has a negative impact on combined net profit of Nokia and Nokia's distributor customers under typical supply chain conditions. In some of the trans-ocean shipment lanes analyzed, Nokia sees a positive impact on net margin, Nokia's distributor sees a negative impact on net margin, and the impact on the combined net margin is negative. In other cases where the transportation savings are greater, the combined net margin impact is positive, but those shipment lanes do not necessarily share a common set of characteristics. A sensitivity analysis of the various supply chain parameters indicates that the volume of the shipments, the financial position of the distributor, the risk posed by currency fluctuations, and the variability in seaport customs lead time are amongst the most significant influences on the net profit margin calculations. The analytical model demonstrates the relative impact of ocean freight under different supply chain conditions, although the accuracy of the global model's cost estimates could be further improved with modifications specific to each local market.