Exercise

The trade-off between Transportation Cost and Responsiveness

Alloy Steel is a steel service centre in the Wollongong area. All orders are shipped to customers using an LTL carrier that charges $100+0.01x, where x is the number of kilograms of steel shipped on the truck. Currently Alloy Steel ships orders on the day they are received. Allowing for two days in transit, this policy enables Alloy to achieve a response time of two days. The general manager of Alloy Steel believes that the two-day response time is costly for the company, and customers would be satisfied with a longer response time of up to four days. In order to quantify the trade-off between response time and cost, the manager collects past demand data. Daily demand at Alloy Steel over a two-week period is shown in Table 1.

Table 1. Daily Demand at Alloy Steel over Two-Week Period

Monday Tuesday Wednesday Thursday Friday Saturday Sunday

Week 1 19,970 17,470 11,316 26,192 20,263 8,381 25,377

Week 2 39,171 2,158 20,633 23,370 24,100 19,603 18,442

Questions:

(a) What is the transportation cost for the current delivery plan with a two-day response time?

(b) If Alloy Steel aggregates demand over multiple days for shipping and aims to achieve a response time of three days, what is the transportation cost?

(c) What is the transportation cost if Alloy Steel aggregates shipping aiming for a response time of four days?

(d) Based on the results in (a), (b), and (c), what are the cost advantages of increasing the response time?

(e) In the end, the manager decides to offer a three-day response time to its customers. Explain why the manager makes this decision.