Determining the transportation services

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A company produces a line of luggage goods. The typical distribution plan is to produce finished goods inventories to be kept at the plant site. Goods are then shipped to company-owned field warehouses by way of common carriers. Rail is currently used to ship between the East Coast plant and a West Coast warehouse. The average transit time for rail shipments is 21 days. Inventory holding cost is estimated at $9 per year at the East Coast Plant and in-transit holding cost is $3 per year. The company wishes to select the mode of transportation that will minimize the total costs. The demand is D = 1,000,000 units sold per year out of the West Coast warehouse. The company can use the following transportation services:

Transport Service

In-transit Holding Cost ($/unit) per year

Transit Time (days)

Number of Shipments per year

Rail

3

21

10

Ship

4.5

14

20

Truck

6

5

20

Air

15

2

40

Which mode of transportation is the cheapest? Explain whether you will change your mode or not. Show all your calculation clearly by using Total Cost Method.

Reference no: EM131050006

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