Reference no: EM133411969

Case Study: Pratt & Whitney, a major aircraft engine manufacturer, wants to re-evaluate the transportation mode it uses to send unfinished parts to its joint-venture facility in Chengdu, China. Annual demand is 3,600 units. At present the company uses air freight. It takes approximately six days from Los Angeles to Chengdu (including pickup and delivery and customs delays). There are 30 parts in a lot, each weighing 30 kilograms. The air freight cost per part is $80. The pickup and delivery charges at origin and destination add up to $16 per part. The alternative is to use an ocean liner to ship the parts to Shanghai and from there to either use a truck or a train (a 2,000 km distance). The ocean freight for this lot size will cost $20 per part and will take 15 days. The truck from Shanghai to Chengdu will cost $24 per part and will take six days (including pickup and delivery and customs delays). Transportation by rail will cost $18 per part and will take 14 days (including pickup and delivery, customs, and transfer delays). In addition, for rail there is a $12 per part charge for pickup and delivery. The company's inventory holding cost rate is 14 percent per year, and the value of each part is $1,100. Assume 365 days per year.

Question: Due to variability of lead times, at the destination, safety stocks of 80, 240, and 320 units will be kept if air, ship and truck, and ship and train are used, respectively. Determine the cheapest (total freight, delivery, and in-transit and safety holding cost) mode of transportation for these parts. Hint: The value of a part in Chengdu for calculating the safety-stock holding cost should include the freight cost.