Question

A utility company, with a power generation plant in Vermont, uses a special solid fuel (SSF) at a rate of 100,000 lbs. per day. It also uses maintenance, repair and operational supply (MRO) materials at a rate of 1000 lbs. each day. The SSF is purchased from a producer in Texas at a cost of $0.05/lb., whereas the MRO materials are supplied by a New York distributor at a cost of $20/lb. The utility employs an inventory holding cost rate $0.25/$/year, takes possession of all purchased items after delivery and maintains safety stock levels of twice the usage during the supply lead time for both SSF and MRO materials.

The following transportation choices are available:

Train Lead time = 16 days

Option 1: By the Carload (100,000 lbs. capacity) shipping cost = $380/carload

Option 2: By Full train (50 cars) shipping cost = $12,000 per train.

Truck Lead time = 4 days

TL Rates: Large Truck (60,000 lbs. capacity) for $2,700/truckload

Small truck (40,000 lbs. capacity) for $2100/truckload

LTL Rate: $0.10/lb. with a minimum charge of $250/shipment, for any shipment less than 40,000 lbs.

Compute the minimum average daily total relevant costs for using each of these transportation choices for SSF and MRO materials and indicate your choice of the shipping mode and the associated shipment quantity per replenishment order for each of these items.

Answer 1

minimum average daily relevant transportation cost for

1.carload ; will need 2 loads as the capacity is only 100000lbs, because we need minimum of 101000 lbs capacity per day

cost is 380*2/16=47.5

2.train ; 12000/16=750

3.large truck; two trucks will be needed to fulfill the daily requirement

so, cost is 2700*2/4=1350

4.small truck;3 trucks will be needed

cost is 2100*3/4=1050

recommended mode of transportation is carload as the daily ransportation cost is only 47.5

replenishment quantity will be 16*100000=1600000 lbs for ssf material

and 1000*16=16000 for mro material as the lead time is 16 days .