Question

Ohio Manufacturing Company (OMC) is a major manufacturer for the US military sector, with a large manufacturing plant in Warren, OH. OMC purchases 450,000 radar detection systems each year from Sun Electric Corporation (SEC) -located in San Agustin, CA- at a price of $1,750 per system. Demand of these type of systems has been relatively constant for several years and is expected to stay that way. The annual cost of carrying one unit in inventory is equivalent to 25% of the cost of each radar system

     The Logistics & Supply Chain Manager at OMC is considering several options for transportation and he has asked you to help in the analysis and to make a recommendation. The details of the several options that are being considered are provided in the table below.

Carrier	Size of the shipment (in units)	Shipping Cost ($/system)	Transit time (days)
Rail-Express	50,000	40	12
Maersk Line	15,000	80	8
Midwest Trucking	5,000	95	4
Golden Freightways	2,500	?	2

What is the MAXIMUM transport rate that Golden Freightways should charge to get the contract? Show the total cost for each carrier option to support your answer

Answer 1

Number of systems = 450,000

Price per system = $1,750

Annual Inventory Carrying cost per system = 0.25 x 1,750 = $437.5

A) Rail Express:

Shipping cost = 40 x 450,000 = $18,000,000

Inventory carrying cost during shipping = 12 x 450,000 x 437.5 / 365 = $6,472,602

Total cost (Rail Express) = $24,472,602

B) Maresk Line:

Shipping cost = 80 x 450,000 = $36,000,000

Inventory carrying cost during shipping = 8 x 450,000 x 437.5 / 365 = $4,315,068

Total cost (Maersk Line) = $40,315,068

C) Midwest Trucking:

Shipping cost = 95 x 450,000 = $42,750,000

Inventory carrying cost during shipping = 4 x 450,000 x 437.5 / 365 = $2,157,534

Total cost (Midwest Trucking) = $44,907,534

D) Golden Freightways

Of the three options, Rail Express has the least total cost. If Golden Freightways wants to win the contract, its total cost should be lesser than what is incurred in Rail Express

Let shipping cost per system be $ Y for Golden Freightways

Shipping cost = Y x 450,000 = $450,000(Y)

Inventory carrying cost during shipping = 2 x 450,000 x 437.5 / 365 = $1,078,767

Total cost (Golden Freightways) = 450,000(Y) + 1,078,767

Thus,

450,000(Y) + 1,078,767 < 24,472,602

=> 450,000(Y) < 23,393,835

=> Y < 51.98

In integral values, Y < $51

So, Golden Freightways should charge shipping cost of $51 per system or less if it wants to win the contract.