Heartland Farms is a well-established smoked foods company specializing in smoked turkeys and has been selling its products throughout the north-western part of the continental United States since the 1960s. Initially owned and operated by a German immigrant family, the key to the companys success lays in a secret smoking process. By 2020 the firm had 250 retail outlets and 400 franchisees. Although the company sells a variety of turkey products its competitive strength lay in one main product line, Heartlands Best that had sales in 2019 of $4,350,000. Sales estimates for 2020 indicate a 15 percent increase over the 2019 level.

Turkeys are supplied by Clermont Blues Turkey Farm, who clean and smoke the turkeys using the patented process and provides the necessary industrial packaging for safe shipment to the retail outlets. Heartlands Best is sold to retail outlets for $4.00 per pound and due to some planned promotions and better positioning in advertising, a 30 percent sales increase in 2021 is expected for the Heartlands Best line.

The smoking process employed by Heartland Farms has some unique characteristics that clearly differentiate the company's products from those of its competitors. The smoked turkeys can be refrigerated for up to 14 days without spoiling and remain fresh and edible for another seven days even without refrigeration. These features, however, do not permit the company to engage in forward buying since freezer costs are relatively high. Consequently, the company purchases turkeys from the Clermont, Kentucky supplier in simple economic order quantities (EOQ), which represent 1800 cases per order for 2021.

Heartland Farms coordinates the remaining distribution functions. The cured and packaged turkeys are purchased from the supplier on a FOB origin basis and sold to the retail outlets and franchisees on an FOB destination basis. Approximately 40 percent of sales revenue in 2019 can be attributed to direct variable costs and 60 percent of these direct variable costs are estimated to be actual turkey costs. These costing percentages are expected to hold for the next few years.

It takes an estimated eight days for railroad freezer cars to bring the smoked turkeys from the suppliers factory near Louisville, Kentucky to King of Prussia, Pennsylvania (Heartland Farmss East Coast distribution point), and another two days on average for commercial trucks to deliver them to the various retail outlets on the East Coast. Heartlands Best is shipped in a case pack size of 25 pounds and inventory carrying costs expressed as a proportion of the cost of the turkeys is 20 percent per annum. Order processing costs are estimated to be $25 per order. Heartland Farms pays $10 per hundred pounds shipped for the refrigerated railcars and another $12 per hundred pounds for the commercial truck shipments to stores on a daily basis.

From a logistical standpoint, management wanted to examine evaluate alternative modes of transportation with respect to Heartlands Best for the planning year of 2021. Two alternatives are available: (1) the company could discontinue the use of railroad freezer cars for delivery up to King of Prussia and use company-owned private trucks and trailers; or (2) the company could bypass all transportation and use an air carrier service that would pick up the cases in Louisville and deliver them directly to the retail outlets served by the King of Prussia distribution center.

This re-evaluation of transport modes was triggered by an offer from a new small aircraft company providing cargo shipping at very attractive rates: $3.00 for the first 10 pounds per 2 case for a guaranteed two-day delivery service anywhere in the continental United States; each extra pound over 10 pounds per case was to be billed at the rate of 50 cents per pound. The company-owned truck was expected to cost $2,750 per round-trip and had a maximum capacity of 1,290 cases of Heartlands Best. Each trip leg was expected to take four days. Since the shipments from the distribution center to the individual retail outlets were relatively small, it was recognized that even if the firm chose the company-owned truck option, the delivery to retailers would still involve the use of commercial trucks. Do any analysis necessary for the questions below and consider how Heartland Farms might improve its inventory management and transportation system. What do you recommend based on expected 2021 sales?

Assumptions

Total costs include average inventory carrying costs, inventory order processing costs and transportation costs;

Average cycle stock equals 1/2 of EOQ plus safety stock; and

The number of order cycles equals annual demand in cases divided by the EOQ.

1. What is the total annual logistics cost of inventory and transportation associated with the current practice of shipping product by railroad freezer cars to King of Prussia, PA and then by commercial trucks to retail outlets? Safety stocks under this scenario are 550 cases. Base your calculations on expected 2021 sales. (4 points)

2. What would the total annual logistics cost be if the company uses the private fleet option? Safety stocks under this scenario are reduced to 279 cases. (4 points)

3. What would the total annual logistics cost be if the company uses the option of shipping product by air to the retail outlets? You will need to estimate safety stocks for this scenario. To keep it simple, use the safety stock numbers for the above questions to estimate your number based on lead time, since we do not have standard deviation figures for sales. Show your calculations. (4 points)