Question

In: Operations Management

Please answer: It costs $15 per unit per year to hold a product in inventory. The...

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

Build a spreadsheet model that calculates the total cost of transportation for Air, Truck, and Rail transportation. Based on your total cost calculations, what mode of transportation would you recommend? What is the total cost of your recommendation?

How much would the cost per unit of the other two modes have to change in order to make you change your recommendation?

Expert Solution

(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

keosha answered 2 months ago

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