The company want to find the best transportation carrier. The in-transit (inventory) transport selection has the following options:

Options: two options are available for transportation: by truck and by rail.

Lead time (T): Truck transportation takes 1 week, while rail transportation takes 2 weeks of lead time.

Cost: Truck transportation costs $2 per item, while by rail the transportation cost is $1 per

item. Transport cost is mainly due to transport vehicle and fuel.

Policy: The company wants to hold enough inventory to cover demand for twice the transport lead time. In-transit inventory cost is mainly due to investment capital holdup and goods maintenance during the freight time.

The decision is impacted only by the safety stock, transportation cost and the transit inventory costs. All other costs are remaining the same. Find the following cost for both (Truck & Rail) options

Truck: Safety stock = SS = 1500 (1/52) = Annual cost of holding safety stock = SS H = SS x $4/item/year Annual cost of transportation = D $2 [all demanded items will be transported] Annual transit inventory cost = D H T Total (of the above) costs =

Rail: Safety stock = SS = 1500 (2/52) = Annual cost of holding safety stock = SS H Annual cost of transportation = Annual transit inventory cost = D H T Total (of the above) costs =

Conclusion:

Which transportation option cost less?

What is the reorder point for each option?