Bodega Lopez de Hedia, a Spanish wine maker from La Rioja, serves the German market every year with a variety of red and white wines. The annual demand for these wines in Germany is normally distributed, with an average of 1360 pallets and a standard deviation of 227 pallets. One pallet of wine is worth 6720 euros. The Bodega’s holding charge is 20% per year and the company includes the transportation cost when calculating inventory costs. It costs 500 euros to process the required paperwork to export the goods, independently of the volume shipped. The Bodega’s cycle service level target is 90%.

Bodega Lopez de Hedia has been shipping its wine to Germany by truck. It takes 7 days to deliver wine to Germany using this transportation mode. The total transportation cost of this option is 450 euros per pallet.

Bodega Lopez de Hedia is currently considering shipping their wine by train. This new transportation mode would take 5 days and would cost 600 euros per pallet.

In both scenarios, the Bodega would ship in batches of 31 pallets. Bodega Lopez de Hedia owns the wine until it is delivered at the German retailers’ warehouses. For planning purposes, consider that 1 year has 350 days.

Martin Collins, the manager of Bodega Lopez de Hedia, has hired you to analyze both transportation options and help the Bodega make the best decision in order to minimize the total cost.

Part1) Calculate the cycle stock cost associated with each transportation mode:

1.1 Cycle stock cost if shipping by Truck

1.2Cycle stock cost if shipping by Train

 

Part2) Calculate the safety stock cost associated with each transportation mode:

2.1 Safety stock cost if shipping by Truck

2.2 Safety stock cost if shipping by Train

 

Part3) Calculate the pipeline inventory cost associated with each transportation mode:

3.1 Pipeline inventory cost if shipping by Truck

3.2 Pipeline inventory cost if shipping by Train

 

Part4) Based on your analysis, you have recommended the Bodega to use the train to ship their wine to Germany. But after chatting with Martin Collins, you have learned that there is actually some lead time variability when delivering by train, due to the uncertain availability of workers to load and unload the pallets at the train stations.

Recalculate the total cost (cycle stock + safety stock + pipeline inventory) associated with the Train transportation mode considering that the lead time is on average 5 days with a standard deviation of 3 days.