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A company produces a line of luggage goods. 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 East Coast plant and a West Coast warehouse. The average transit time for rail shipments is 21 days. Inventory holding cost is estimated at $9 per year at the East Coast Plant and in-transit holding cost is $3 per year. The company wishes to select the mode of transportation that will minimize the total costs. The demand is D = 1,000,000 units sold per year out of the West Coast warehouse. The company can use the following transportation services:
Transport Service
In-transit Holding Cost ($/unit) per year
Transit Time (days)
Number of Shipments per year
Rail
3
21
10
Ship
4.5
14
20
Truck
6
5
Air
15
2
40
Which mode of transportation is the cheapest? Explain whether you will change your mode or not. Show all your calculation clearly by using Total Cost Method.
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