The company wants to find the best transportation carrier for a product (rolling luggage) to transfer from the West Coast (production facility) to the East Coast (warehouse). The forecasted annual demand of the product is 2500. The in-transit (inventory) transportation has the following options:  

 

Transportation Mode: two options are available for transportation:

 (i) by truck and (ii) by rail. 

 

Lead time:

Truck transportation takes 1 week, while rail transportation takes 2 weeks of lead time from the West Coast (production facility) to the East Coast (warehouse). 

 

Cost: 

Item purchasing cost, C = $15

The truck transportation costs $20 per (appliance) item, 

The rail transportation cost is $12 per item. 

Assume a 20% interest (on capital gain) charge. (Holding cost, H = C x i)

 

 

• Safety Stock Policy: The company decides to hold enough inventory as a safety stock to protect from any transportation delay or risks. The policy is to hold safety stock inventory (L_s) twice the transport lead time from West to East Cost. 
  • The truck transport takes 1 week, the safety stock for truck mode is 2 weeks, 
  • The rail transportation takes 2 weeks, the safety stock for train mode is 4 weeks. 

The inventory and ordering decisions are impacted only by the safety stock policy, transportation cost and the in-transit inventory cost. All other costs remaining equal for both transport options.

Question 1. Find the total (transport related) cost for both (Truck & Rail) options                          

 

Question (a) What is the reorder point for each option?                                       

 

Truck: The reorder point, ROP = D × L_(truck) + SS_(truck)

Rail: The reorder point, ROP = D × L_(rail) + SS_(rail)

 

Question (b) Find the total (in transit) freight transfer cost for both Truck and Rail option (holding safety stock + transportation + in-transit inventory cost)   

 

 

Question (c) Comment on which transportation option cost less and why?                       

 

 

Suggestion:

Total costs = holding safety stock + transportation cost + in-transit inventory cost

Truck:

Safety stock (Truck), SS = D × L_(truck)

[Note: safety stock for truck mode, L_(truck) is 2 weeks] 

The annual cost of holding safety stock = SS x H 

The annual cost of transportation = D x (transport cost)

The annual transit inventory cost = D x H x L

 

Total (of the above) costs = holding safety stock + transportation cost + transit inventory cost

 

Rail:

Safety stock (rail), SS = D × L_(rail)

[Note: safety stock for train mode L_(rail) is 4 weeks]

The annual cost of holding safety stock = SS x H 

The annual cost of transportation = 

The annual transit inventory cost = D x H x L

 

Please use the following template and show formulas and values for each step. THANKS!!!

 

 

 

 

	Freight In Transit Costs Analysis (Case Study)
	Annual demand, (IC chip) D =	2500.00	/year
	Overseas purchasing cost = C	$15.00	/unit
	Interest (on capital gain) charge (i%)	20%
	Annual holding cost, Htruck =	3.00	/unit/year	H = C x i%
	Annual holding cost, Hrail =	3.00	/unit/year
	Local manufacturing cost = C0	$18.00	/unit
	Truck transportation cost, C1 =	$20.00	/unit
	Rail transportation cost, C2 =	$12.00	/unit
	Lead time, Truck  =  (1 week) = L1 =	0.019	year
	Lead time, Rail = (2 weeks) = L2 =	0.038	year
Truck option	Safety stock, SS = Double of D(L1)	SS = 2 x D*Ltruck =
	Reorder point, ROP =	D(L1) +SS =
	Ordering quantity, Q* =	SQ.RT [2DS/H]
	Cost Components
	i.    Annual cost for safety stock =	SS x H =
	ii.    Annual cost of transportation =	D x Ctruck =
	iii.   Annual transit inventory cost =	D x Ltruck x H =
	(a) Total transport + inventory costs (Truck option) (i + ii + iii) =			$
	Total cost on Truck Option	Total cost (a) =
Rail option	Safety stock, SS = Double of D(L2)	SS = 2 x D*Lrail =
	Reorder point, ROP =	D*(Lrail) +SS =
	Ordering quantity, Q* =	SQ.RT [2DS/H]
	Cost Components
	i.      Annual cost for safety stock =	SS x H =
	ii.      Annual cost of transportation =	D x Crail =
	iii.      Annual transit inventory cost =	D x Lrail x H =
	(b) Total transport + inventory costs (Rail option) (i + ii + iii) =
	Total cost on Rail Option	Total cost (b) =