Question

Eduardo Bartolomeo, CEO of Vale Company one of
the world's largest mining companies in iron ore,
believes that his company could significantly
improve inbound supply costs for their steelmaking
business from transportation by investigating the
possibility of using various modes of transportation.
Iron ore is sidere one of the main raw materials
in producing steel. At its disposal, Vale has a variety
of intermodal combinations. Monthly demand is
about 15,000 tons of iron ore.

From the mine in Carajás (Brazil), iron ore is
currently transported by rail directly to the
steelmaking plant in Rio de Janeiro (2,500 km).
However, other options are available. The raw
material can be transported by rail to Port of Tubarão
(905 km) or to Ponta da Madeira port terminal in the
state of Maranhão ({=RANDBETWEEN(250,350)}
km). From Port of Tubarão, a sea ship can travel to
port of Rio de Janeiro (500 km). From Ponta da
Madeira port terminal, a sea ship can travel to port of
Rio de Janeiro ({=RANDBETWEEN(2800,3200)}
km). From the Port of Rio de Janeiro to the
steelmaking plant, iron ore can be shipped via a train
(50 km).

A sea ship from the port of Tubarão costs $5/ton per
trip with a capacity of 3,000 tons. A sea ship from
Ponta da Madeira port terminal costs $13.75/ton per
trip with a capacity of 15,000 tons. Rail tariffs for a
capacity of 3000 tons is $15.4/ton per trip. Price of
iron ore is $89 per ton (Ex works). Inventory holding
cost is 3% per ton per month. In-transit inventory
holding cost is 1% per ton per month. Operating
speed of the iron ore train is 80 km/h and operating
speed of the iron ore ship carrier is approximately 28km/h. Safety inventory of iron ore is kept at twice
the consumption during the lead time of supply.
What mode or intermodal of transport do you
recommend and why? One month = 30 days and one
day 24 hours.

NOTE: Copy Randbetween formula to an excel
sheet to get actual numbers and then substitute with
the actual numbers.

Answer 1

The Route can be plotted as below :-

There are 3 routes as given below -

Route
A	BraZil	Rio	Plant
B	Brazil	Tubarao	Rio	Plant
C	Brazil	Ponta	Rio	Plant

Now we have to find the Total Per MT cost for each route ( which will include )

- Cost of goods

- Transportation cost

- Inventory holding cost for the reorder level inventory

- Holding cost for transit stock

We have to calculate the unit cost & lead time for all 3 routes:-

Per MT cost for Route A will be"-

----------------------------------------

The PMT Cost for Route B

-----------------------------------------

The PMT Cost for Route C

--------------

The Summary is as below:-

Route	Per MT cost	Lead time
A	$ 120	1.33 days
B	$ 125	1.24 days
C	$ 134.5	6.39 days

Hence Option A is the best to go for with minimum per ton cost involved

Option A is : Brazil --> Rio de janeiro --> Plant