Reference no: EM133674688

The Happy Ham is a foods company specializing in ham and had been originally selling its products throughout the Midwestern part of the continental United States since 2015. Owned and operated by Pam Sals, an immigrant, the key to the company's success lays in a secret seasoning process. By 2022 the firm had arranged with 250 retail outlets on the East Coast to stock its products. Although the company sells a variety of ham products, its competitive strength lay in one main product line, "Taylor Best" that had sales in 2022 of $3,350,000. Sales estimates (still being finalized) for 2023 indicate a 15 percent increase over the 2022 level.

Ham meat is supplied by Farm Foods, who have been raising ostriches for over 20 years. They clean and season the ham using Pam's patented process and provide the necessary industrial packaging for safe shipment to the retail outlets. Taylor Best is sold to retail outlets for $4.00 per pound and due to some planned promotions and better positioning in advertising, a 30 percent sales increase in 2024 is expected for the Taylor Best Line.

The seasoning process employed by The Happy Ham has some unique characteristics that clearly differentiate the company's products from those of its competitors. The seasoned hams can be refrigerated for up to 14 days without spoiling and remain fresh and edible for another seven days even without refrigeration. These features, however, do not permit the company to engage in forward buying since freezer costs are relatively high. Consequently, the company purchases steaks from Farm Foods facility, just outside of Springfield in simple economic order quantities (EOQ), which represent 1800 cases per order for 2024.

The Happy Ham coordinates the remaining distribution functions. The seasoned and packaged hams are purchased from the supplier on an FOB origin basis and sold to the retail outlets on an FOB destination basis. Approximately 40 percent of sales revenue in 2022 can be attributed to direct variable costs and 60 percent of these direct variable costs are estimated to be actual ham costs. These costing percentages are expected to hold for the next few years.

It takes an estimated eight days for railroad freezer cars to bring the seasoned steaks from the supplier's processing facility near Springfield to Trenton, New Jersey and another two days on average for commercial trucks to deliver them to the various retail outlets on the East Coast. Taylor Best is shipped in a case pack size of 25 pounds and inventory carrying costs expressed as a proportion of the cost of the steaks is 20 percent per annum. Order processing costs are estimated to be $25 per order. The Happy Ham pays $10 per hundred pounds shipped for the refrigerated railcars and another $12 per hundred pounds for the commercial truck shipments to stores on a daily basis.

From a logistical standpoint, management wanted to examine evaluate alternative modes of transportation with respect to Taylor Best for the planning year of 2024. Two alternatives are available: (1) the company could discontinue the use of railroad freezer cars for delivery up to Trenton and use company-owned private trucks and trailers; or (2) the company could bypass all transportation and use an air carrier service that would pick up the cases in Springfield and deliver them directly to the retail outlets served by the Trenton distribution center.

This re-evaluation of transport modes was triggered by an offer from a new small aircraft 1

company providing cargo shipping at very attractive rates: $3.00 for the first 10 pounds per case for a guaranteed two-day delivery service anywhere in the continental United States; each extra pound over 10 pounds per case was to be billed at the rate of 50 cents per pound.
The company-owned truck was expected to cost $2,750 per round-trip and had a maximum capacity of 1,290 cases of Taylor Best. Each trip leg was expected to take four days. Since the shipments from the distribution center to the individual retail outlets were relatively small, it was recognized that even if the firm chose the company-owned truck option, the delivery to retailers from the distribution center would still involve the use of commercial trucks.

Assumptions

1. Total costs include average inventory carrying costs, inventory order processing costs and transportation costs;

2. Average cycle stock equals 1/2 of EOQ plus safety stock; and

3. The number of order cycles equals annual demand in cases divided by the EOQ.

Question: What is the total annual logistics cost of inventory and transportation associated with the current practice of shipping product by railroad freezer cars to Trenton, NJ and then by commercial trucks to retail outlets? Safety stocks under this scenario are 550 cases. Base your calculations on expected 2024 sales. Show your calculations.