Case 9-1 Aero Marine Logistics

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Determine the first-year costs for Aero Marine Logistics (AML) if it purchases used 20-foot refrigerated containers, assess how long it would take to recoup the investment assuming ongoing mushroom trade, and compare it with the costs and risks of purchasing new 40-foot containers. Analyze risk factors, explore participants in the supply chain, and evaluate cost-sharing and risk-sharing arrangements through logistics partnerships. Formulate negotiation strategies among supply chain members regarding costs, risks, and potential profits or losses.

Paper For Above instruction

Aero Marine Logistics (AML), established in 1996 in South Delhi, has become a noteworthy player in the Indian logistics industry by offering comprehensive, customized services including import and export handling, door-to-door delivery, and consultancy. Its growth trajectory and operational model reflect a strategic approach to logistics, catering primarily to clients spread over rural northern India and even venturing into specialized commodities such as frozen mushrooms. This paper aims to analyze AML’s investment decision regarding refrigerated containers for frozen mushroom import, assessing costs, payback periods, risk factors, supply chain participants, and possible partnership strategies to optimize outcomes.

Introduction

The decision to purchase refrigerated containers in logistics operations involves complex financial and operational considerations. For AML, expanding into specialized markets like frozen mushroom imports necessitates evaluating the feasibility and sustainability of investments in refrigeration infrastructure and equipment. This analysis revolves around calculating first-year costs, payback periods, risk assessment, and approach to sharing risks and costs through supply chain partnerships, with a particular focus on the case of importing frozen mushrooms from Europe to North India.

Cost Analysis of Purchasing Used 20-foot Refrigerated Containers

According to the case, AML considers acquiring ten used 20-foot refrigerated containers at Rs 7 lakhs each, with an additional annual servicing cost of Rs 1 lakh per container. The initial investment in equipment would be Rs 70 lakhs (Rs 7 lakhs × 10 containers). The addition of refrigeration units involves a one-time cost of Rs 9 lakhs, bringing the total initial expenditure to Rs 79 lakhs (Rs 70 lakhs + Rs 9 lakhs). Annual operational costs include Rs 3 lakhs for energy, maintenance, and other recurring expenses. Assuming the containers last five years, depreciation and maintenance costs spread over this timeframe influence the overall cost structure.

The ocean freight cost from Amsterdam to Mumbai per container is US$1,700, while land transportation from Mumbai to Delhi costs US$300 per container. Return empty containers are costlier, but a proportion of trips can be self-financing through additional cargo. For ten containers making monthly round-trips, the annual freight costs are calculated as: freight for 120 round-trips (10 containers × 12 months) at US$1,700 per TEU, totaling US$204,000. Land costs from Mumbai to Delhi for each container are US$300 per one-way trip, totaling US$36,000 annually (120 trips × US$300). Summing these, the total transportation costs amount to approximately US$240,000 per year.

Converting costs into Indian Rupees (Rs), at an assumed exchange rate of Rs 75 per US dollar, the total annual transportation costs are Rs 18,00,000 (US$240,000 × 75). Adding operational energy costs, maintenance, and depreciation, the total first-year costs for the used 20-foot container option approximate Rs 97.8 lakhs (Rs 79 lakhs initial + Rs 18 lakhs transport + Rs 3 lakhs energy/maintenance).

Payback Period Analysis for Used Containers

The expected revenue from the mushroom import business is Rs 20 per kilogram for 150,000 kilograms monthly, totaling Rs 36 lakhs per month or Rs 4.32 crores annually. To determine the payback period, we compare the annual incremental costs with the additional revenue generated by the new mushroom operation. The net income from the mushroom trade would significantly surpass the first-year costs if volumes are maintained, allowing for rapid recovery of the Rs 97.8 lakhs investment—likely within a year or slightly more, depending on operational efficiencies and unforeseen costs.

Cost and Risk Assessment of Purchasing New 40-foot Containers

Alternatively, AML could purchase five new 40-foot containers at Rs 15 lakhs each, totaling Rs 75 lakhs. Each 40-foot container holds twice the volume of a 20-foot container, possibly reducing handling costs and increasing efficiency. The initial cost structure involves Rs 75 lakhs for the containers plus the same Rs 9 lakhs for refrigeration equipment, totaling Rs 84 lakhs. Annual operational expenses, including maintenance and energy, are estimated at Rs 3 lakhs, similar to smaller containers, although larger containers might entail marginally different handling costs.

The ocean freight per 40-foot container from Amsterdam to Mumbai is US$2,600, and land transportation from Mumbai to Delhi is US$500 per container. With five containers, the total ocean freight annually is US$15,600 per container (US$2,600 × 6 trips), totaling US$78,000, and land costs are Rs 30,000 per container per trip, culminating in Rs 3,00,000 for six trips (if optimal). The total annual transportation expense is around Rs 24 lakhs (US$78,000 × 75 + Rs 3,00,000).

The payback period in this scenario depends on the same revenue assumptions but provides the advantage of larger capacity, fewer trips, and possibly lower handling costs per unit. The higher initial capital expenditure and fewer containers imply an LCM (least cost medium) approach, but risk factors such as container availability, technological reliability, and operational costs must be considered.

Risk Comparison

Purchasing used 20-foot containers entails lower capital investment but higher risk of equipment failure, shorter lifespan, and potential operational inefficiencies due to aging equipment. Conversely, buying new 40-foot containers involves higher capital outlay but benefits from reliability, longer lifespan, and advanced technology, reducing operational risks. The used container option poses higher residual risk, whereas the new container plan offers stability. Therefore, in terms of risk, the used container option is riskier due to potential breakdowns, maintenance costs, and shorter lifecycle, while new containers, though costly upfront, mitigate operational uncertainties.

Supply Chain Participants

The supply chain involved in AML’s mushroom import venture includes several key participants: the suppliers/exporters of frozen mushrooms in Europe, ocean freight carriers, land transportation providers in India, customs authorities, warehousing and storage facilities, delivery personnel or local transport firms, and ultimately, AML’s customers in North India. Each participant functions at different levels, collectively enabling the seamless flow of goods, information, and finances. An efficient supply chain ensures reliability and cost-effectiveness, which is vital for new product introductions like frozen mushrooms.

Costs, Risks, and Risk-Sharing in Logistics Partnerships

Engaging in logistics partnerships to share costs and risks requires careful consideration of various factors. The primary costs include transportation expenses, container leasing or purchase costs, infrastructure investments, operational and maintenance costs, and administrative costs related to customs and compliance. Risks include equipment failure, delays, spoilage, regulatory changes, and market demand fluctuations. Strategic risk-sharing could involve contractual arrangements where each partner bears specific risks proportional to their contribution, or cost-sharing agreements for equipment investments. For example, AML could share refrigeration costs with suppliers or clients or partner with shipping firms to reduce freight rates. Risks associated with market demand might be mitigated through flexible contracts or volume commitments.

Negotiation Strategies among Supply Chain Members

Effective negotiations among supply chain members involve aligning objectives, sharing information transparently, and establishing equitable risk and profit-sharing models. Potential agreements could include volume-based discounts, shared investment costs for refrigeration equipment, revenue sharing mechanisms, or penalties for delays or spoilage. Collaborative risk mitigation, such as insurance or contingency buffers, could also be part of negotiated terms. Given the high capital costs and operational risks, AML and partners should prioritize comprehensive contractual arrangements that incentivize efficiency, reliability, and mutual profitability over the long term.

Conclusion

Investing in refrigerated containers for frozen mushroom imports presents promising financial opportunities for AML, provided costs, risks, and operational challenges are carefully managed. The analysis indicates that purchasing used 20-foot containers could offer quicker payback but entails higher operational risks, while buying new 40-foot containers ensures reliability at a higher initial cost. Strategic risk-sharing and partnership arrangements within the supply chain can optimize resource use and reduce individual vulnerabilities. Ultimately, a balanced approach combining careful financial planning, risk assessment, and effective supply chain collaboration is essential for success in this emerging venture.

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