A brick maker (BM) in Alberta mixes dry ink into its bricks to make them brown.
BM’s demand for dry ink is 60 tons per year. Currently, BM buys the dry ink from an import merchant that buys the ink from a East Coast U.S. manufacturer. The shipments arrive in lot size of 30 tons by rail. The current cost of dry ink is SC612.22 per ton, including rail transportation cost to BM’s location. BM currently keeps 6 tons of dry ink as safety stock. BM’s buyer has asked the import merchant to quote a price for truck deliveries in smaller lot sizes. The merchant has quoted C$567.78 per ton for a lot size of 20 tons.
In the meantime, BM’s buyer has contacted the manufacturer directly and asked if BM could purchase dry ink directly from the manufacturer. The answer was affirmative and the cost would be US$386.89 per ton (assume US$1 = C$ 1.05). A common carrier has quoted a price of C$2,600 to haul a full truckload of dry ink (20 tons) from the manufacturer to BM's location in Alberta. The trip will take 7 days.
The holding cost rate for BM is 20 percent of unit cost per year. For truck deliveries, BM will only hold 2 tons of safety stocks. Which alternative has the lowest total annual purchase, transport, in-transit, safety stock, and cycle (batch) holding cost?