221
CASE
CASE 11.1 THE ADELAIDE DAIRY COMPANY
The Adelaide Dairy Company (ADC) is an Australian
milk-processing company. Its plant near Adelaide currently
produces infant milk powder for the domestic market. Re-
cently, ADC won its first international customer when a
retailer in Singapore placed orders for 60,000 3-kilogram
tins of milk powder to be delivered progressively over 6
months.
ADC’s initial plan (which we refer to as Option A)
was to package the milk powder in tins at its plant and ship
the tins by sea to Singapore. ADC’s production cost, before
packaging and logistics, was $3 per kilogram. The existing tin
design was cylindrical and measured 21 centimeters in diam-
eter and 22 centimeters in height externally. Each tin cost $3
from a local packaging materials supplier and weighed 0.3 ki-
logram. Therefore, each tin that was filled with milk powder
weighed 3.3 kilograms. These tins would have to be pallet-
ized and shrink-wrapped to withstand a sea journey, before
being loaded into temperature-controlled shipping contain-
ers. The internal dimensions of these containers were as fol-
lows: 2.28 meters wide by 2.12 meters high by 11.84 meters
long. To stack and fit well within such a container, each pal-
letized load must not exceed 1.067 meters in length, 1.067
meters in width, and 1 meter in height. Each wooden pallet
(including shrink-wrapping materials) weighed 15 kilograms,
cost $25, and was good for one-use only.
The loaded containers would be trucked from the
processing plant to the Port of Adelaide at a cost of $500
per container. The total shipment weight could not exceed
20,000 kilograms per container because of highway weight
restrictions. Insurance costs were 3 percent of the value of
the shipment ready to be loaded aboard ship in Adelaide
(that is, all of the company’s costs up to this point). The
ocean freight cost from the Port of Adelaide to any ad-
dress in Singapore was $2,500 per container.
For Option B, ADC’s supplier proposed a new tin
design, so that pallet density could be increased. This new
3-kilogram capacity tin was also cylindrical, but measured
19.4 centimeters in diameter and 24.5 centimeters in
height. Compared with the existing design, 20 more tins of
the new design could be packed into the standard pallet un-
der a triangular packing arrangement (similar to a honey-
comb pattern). However, this redesigned tin would only be
procured in smaller quantities, for the international market,
and hence cost slightly more at $3.10 each.
To reduce wastage of packaging materials, ADC was
also evaluating Option C. This involved first shipping milk
powder in bulk (using unpalletized stackable drums loaded
into shipping containers) from Adelaide to Singapore. Each
airtight cylindrical drum, measuring 1 meter in height and
0.75 meter in diameter externally, had a capacity of 200 ki-
lograms and weighed 32 kilograms when empty. Although
a new drum cost $100, it could be resold for $80 in Sin-
gapore to be reused by a transporter of hazardous waste.
A qualified contractor could then be hired in Singapore to
repackage the milk powder into 3-kilogram tins identical
to the ones in Option A. While the repackaging contractor
could supply these tins for just $2 each, it would charge
a further $0.50 per kilogram to repackage and deliver the
milk powder locally to the retailer’s warehouse.
QUESTIONS
1. How many tins of milk powder can be loaded into a con-
tainer under Option A?
2. How many tins of milk powder can be loaded into a con-
tainer under Option B?
3. How many drums of milk powder can be loaded into a
container under Option C?
4. What are the total costs of delivering the milk powder to
the retailer under Option A?
5. What are the total costs of delivering the milk powder to
the retailer under Option B?
6. What are the total costs of delivering the milk powder to
the retailer under Option C?
7. Which option would you recommend? Why?