1. Assume Wright Plastics is interested only in minimizing delivery costs. What order size should it use, if the pellets are delivered by a truck? How much should it order if they are delivered by train?

2. For Wright Plastics, which mode of delivery, truck or train, would require more frequent deliveries to the warehouse? How much more frequent would they be?

3. Assume that Wright Plastics’ transportation costs to the warehouse will be lower if the pellets are delivered by train. What is the minimum that Wright must save annually from transporting by train to make the train the less expensive option overall?

 

CASE SCENARIO: WRIGHT PLASTICS Universal Logistics manages five warehouses, each of which serves several other companies on a contract basis. Universal charges each company an annual fixed fee for each SKU it handles on behalf of the company, plus another fixed fee each time it receives and stocks a shipment of that SKU at one of its warehouses. Wright Plastics has just hired Universal Logistics to store specialized plastic pellets it uses as raw materials for certain products. The Wright Plastics molding plant that uses these pellets is only a block away from the Universal warehouse it has hired, and so Wright Plastics plans to visit the warehouse every day to pick up the 100 pounds it con- sumes during each of the 365 days per year it operates. Wright Plastics esti- mates its holding costs at $0.30 per pound per year for these particular pellets, if kept in the Universal Logistics warehouse. To arrange for delivery of the pellets to the warehouse, Wright Plastics must decide between delivery by truck or by train. Universal Logistics charges $100 to receive and stock any delivery that arrives by truck, but increases this charge to $500 if delivered by train. Universal Logistics cannot receive deliveries by train directly, so must pay to use its neighbor's rail track and freight dock and then transfer the stock across a paved yard to its own facility.