In: Operations Management
Please answer:
It costs $15 per unit per year to hold a product in inventory. The forecasted demand for this product is 10,000 units per year. The total amount of inventory is made up of two types of inventory: safety stock and in-transit. Calculations for determining the average amount of inventory for each type are given below.
Safety Stock Cost = 2 x Average Demand during Lead Time * Holding Cost per Unit per Year
In-Transit Inventory Cost = Total Annual Demand x (Lead Time / 365) * Holding Cost per Unit per Year
Total Cost = Safety Stock Cost + In-Transit Inventory Cost + Transportation Cost
The following is data related to your transportation options.
Transportation Mode |
Lead Time (Days) |
Cost/Unit |
Air |
2 |
$6 |
Truck |
7 |
$3.50 |
Rail |
21 |
$2.75 |
(a)
Model:
Result:
So,
based on the minimum total cost, 'Truck' seems to be the best option with a total cost = $43,630.14
(b)
The difference in total cost between 'Truck' and 'Air = 62,465.75 - 43,630.14 = 18835.61
So, the reduction in the cost of units for 'Air should be = 18835.61 / 10000 = $1.89
Similarly, the reduction in the cost per unit for 'Rail' in order to compete with 'Truck' should be = (53,390.41 - 43,630.14) / 10000 = $0.98