In this assessment you are presented with two fictitious scenarios and, depending upon the scenario, you will use a spreadsheet approach to derive an optimal transportation mode; analyse the effect on inventory against the cost of transport; and derive and analyse the trade-off between transportation cost and customer service level. Finally, you will consider and evaluate innovative options to mitigate these trade-off decisions. Both scenarios are to be addressed and all questions answered.
The Dunedin-based CrockShop Crockery Company produces a line of crockery goods for the New Zealand market. 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 Dunedin plant and the Auckland warehouse. The average transit time for rail shipments, T, is 21 days. Letting Q = shipment size, at each stocking point (plant and warehouse) there is an average, Q/2, of 50,000 unit sets of crockery having an average cost, C, at $30 per unit. Inventory carrying cost, I, is 30 percent of unit cost per year.
The company wants to select the mode of transportation that will minimise the total costs. It is estimated that for every day that transit time can be reduced from the current 21 days, average inventory levels can be reduced by 2 percent. The demand, D, is 300,000 sets sold per year out of the Auckland warehouse. The company can use the following transportation services:
TOFC stands for ‘trailer on flat car', i.e. a truck trailer piggybacking on a rail flat car.
The four factors to be considered are transport costs, plant inventory, in-transit inventory, and warehouse inventory. Hint, use the following formulae:
- Transportation cost = RD;
- Plant inventory cost = ICQ/2, where Q/2 = 50,000 units for rail, as provided above;
- In-transit inventory cost = ICTD/365; and
- Auckland warehouse inventory cost = IC'Q/2, where C' = C + R, i.e. the product value at the warehouse).
1. Assume there is no intention by the company to invest in transportation equipment, so there is no need to consider the cost of investing in trucks, aircraft, rail cars, or ships. The Crockshop Crockery Company uses third party carriers only;
2. For all inventory cost estimates you should assume that the demand rate is constant and deterministic; and
3. Assume production occurs instantaneously at the plant, i.e. there is no need for safety or buffer stock.
Merino Bales Ltd is a bulk wool wholesaler to the clothing producer market in New Zealand. All orders are shipped via truck to customers using a third party carrier. The carrier charges an administration fee of $100 per order. LTL* shipments are charged 0.03W, as a variable cost, where W is the number of kilograms of wool shipped on the truck, but this cost is limited to a maximum of $450 per truck. A TL (20,000 kg) shipment is charged a discounted set price of $450. Truck charges are additional to the administration fee.
* LTL = less than (full) load. TL = (full) truck load.
Currently Merino Bales ships orders on the day they are received, which results in two days in transit. This policy allows Merino Bales to achieve a response time of two days. Merino is aware that combining orders across time can result in lower transportation cost because it results in larger shipments and reduces variation in shipment sizes. Therefore, Merino wants to know what the cost advantage might be if the response time is increased to three or four days. To determine this, demands (kg) over a two-week period have been taken as follows:
Assignment details are on the next page.
You are to answer the questions below.
1. Calculate the annual transport cost for each service, Dunedin to Auckland;
2. Calculate the costs of inventory at the plant, in transit, and at the Auckland warehouse for each service;
3. Determine the total cost of each service. Which service delivers the minimum total cost to the company?
4. Determine the total cost of a two-day, three-day, and four-day response using the demand figures provided. Explain which option appears to achieve the best balance of cost and customer responsiveness.
5. How would you determine whether an increase in delivery lead time would be acceptable to customers?
6. Based on what you know now, how would you ‘sell' the new delivery service level to customers?
7. What other innovations and/or methods would you recommend as viable ways to mitigate these trade-off decisions?
The total submission should comprise 1200 words (+/-10%, not including calculations, appendices, citations and references), noting that there is considerable work in accurately determining costs. Upload your spreadsheet file in addition to your written submission.
You must make reference to any models, frameworks, concepts, and terminology that you have encountered in class, in your textbook, or sourced elsewhere. Any assumptions you make are to be stated as such and you are to explain why you consider them to be realistic assumptions.
APA referencing guidelines are to be followed and evidence of wide reading is expected for an assignment at this level.