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
|
20
|
|
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.