Hidden Costs

Session 5 – Hidden Costs Mini Case Study

Problem

Going from LTL to FTL, the shipment size would be increased by at least 160%. The freight cost is being increased by 25%. The reason there is a big difference between the shipment size and cost is because with FTLs, the truck would only need to go to one destination as opposed to multiple locations with LTLs which saves the truck company money and time. Truck companies would encourage FTLs so the customer and them would have full use of the truck. However, the logistics manager is overlooking many things. There maybe many hidden costs that he did not think of which is the main problem.

Cause

The problem occurred without enough analysis on the idea. They figured the main costs such as freight and the amount of products to be delivered will increase which in turn will have less deliveries every month overall, is a huge cost saving plan. If this new system were to be executed, many costs will pop up that the logistics manager did not think of right when he receives his first FTL shipment.

Analysis

This problem can get very serious very quickly if not handled with properly and promptly. Below are pros and cons for implementing this new system.

Pros

- Lower freight costs and frequency

- Fewer POs / cheques

- Cost savings from vendor

Cons

- Storage cost for excess product

- Product may be perishable

- Possible theft

- More manpower

- Limited capacity

- Laws / regulations

- Insurance

- Company may not have cash flow to purchase more stock

- Product may have special storage condition (eg: refridgeration)

Solution

As the SC leader, I recommended not implement the new system that has been suggested. There are hidden costs that were not outlined that can effect our production. Some of the costs would be storage, insurance, and manpower to manage the excess product that we would carry. On top of that I feel it is better to keep ordering the product as needed, whether it is either 8,...