Question

What is the monthly safety stock cost for the route shipped through U.S. east coast ports, and the monthly safety stock cost for the route shipped through U.S. east coast ports?

What is the monthly pipeline inventory cost for the route shipped through U.S. west coast ports, and the monthly safety stock cost for the route shipped through U.S. west coast ports?

(After calculating this, you should find what is the monthly total inventory (cycle stock + safety stock + pipeline inventory) cost of the most economical route?)

Vinicola Sofia is a Chilean company that grows and exports grapes to major world markets. The company distributes their grapes to main U.S. cities through wholesalers. Currently, Vinicola Sofia is trying to identify the most economical route to ship their products.

Containers are loaded at Vinicola Sofia’s warehousing facility and then shipped to the port of Valparaiso, Chile. From there, containers can be shipped to U.S. west or east coast ports. Finally, containers are shipped from U.S. ports to wholesalers’ distribution centers. Vinicola Sofia owns the product until it is delivered at the final destination.

On average, it takes 15 days (0.5 months) to get the grapes through east coast ports. The total transportation cost of this route is $1700 per container. Similarly, it takes 18 days (0.6 months) to get the product through west coast ports. The transportation cost of this route is $1500 per container.

The demand of grapes in the U.S. is normally distributed with an average of 52 containers per month and monthly standard deviation of 5.2 containers. One container of grapes is worth $15000. Vinicola Sofia’s holding charge is 20% per month and the company includes the transportation cost when calculating inventory costs. It costs $700 to process the required paperwork to export the goods, independently of the volume shipped. The company’s cycle service level target is 95%.

(Note: For all this problem, assume 30 days in a month.)

(Note: Remember that Vinicola Sofia includes the transportation cost when calculating inventory costs. This means that the holding cost per container will be equal to the holding charge times the sum of the value of the load per container and the transportation cost per container.)

Based on a preliminary analysis, the company determined the economic order quantity of containers to ship by route:

• EOQ for product shipped through east coast ports: 5 containers
• EOQ for product shipped through west coast ports: 5 containers

What is the monthly safety stock cost for the route shipped through U.S. east coast ports, and the monthly safety stock cost for the route shipped through U.S. east coast ports?

What is the monthly pipeline inventory cost for the route shipped through U.S. west coast ports, and the monthly safety stock cost for the route shipped through U.S. west coast ports?

(After calculating this, you should find what is the monthly total inventory (cycle stock + safety stock + pipeline inventory) cost of the most economical route?)

Answer 1

• EOQ for product shipped through east coast ports: 5 containers is 2.08 container
• EOQ for product shipped through west coast ports: 5 containers is 2.10 Container

Safety stock = (Maximum daily usage * Maximum lead time in days) – (Average daily usage * Average lead time in days).

Monthly safety stock cost for the route shipped through U.S. east coast ports is $ 84760

Monthly safety stock cost for the route shipped through U.S. West coast ports is $ 98280.

Monthly pipeline inventory cost for the route shipped through U.S. East coast ports is $390000

monthly pipeline inventory cost for the route shipped through U.S. west coast ports is $468000

Max. daily usage	US East Cost Port	US west Coast Port
Safety Stock	5.65	6.55
Pipeline Invenoty	26.00	31.20
Cycle Stock	1.04	1.05
Monthly Total Inventory (In Qty)	32.69	38.80
Monthly Total Inventory (In $ Value)	4,90,419.17	5,82,033.79

Looking to Above calculated Table U S East Port Route is most economical route