LOGISTICS

Lecture 04
Transport Mode Selection &
Logistics Decisions

Rosa G. González Ramírez

Universidad de Los Andes Chile
Agenda

▪ Overview of transportation
▪ Overview of Transportation modes
▪ Impact of mode selection on total logistics costs and total
landed cost.
 Transportation Fundamentals

▪ Efficient transportation makes possible to

compete in distant markets
▪ Promotes competition
▪ Allows economies of scale
▪ Increases standard of living
▪ Transportation is a very important component of
the cost of logistics and needs to be carefully
planned
 Transportation Planning

▪ Objective: Establish primary transportation modes,

contract types, routing options to minimize total
expected landed cost
▪ Key Points
▪ Physical network (suppliers, plants, distribution centers)
is likely already fixed
▪ Plan is run annually with quarterly tweaks
▪ Transportation plan limits what you can do in execution
▪ Approximate approaches are acceptable, but we have
lots of time so why not optimize . . .
▪ Process: Strategic → Tactical → Operational

Source: Caplice (MIT)

 Strategic Transportation Planning

▪ Issues in Strategic Planning

▪ What modes of transportation should I use?
▪ What carriers should I partner with and how?
▪ How will seasonality affect my carrier assignments?
▪ Should I use dedicated or private fleets?
▪ Which carriers provided quality service in the past?
▪ Should I use pool points, cross-docks, or multi-stop
routes?

Reference: Caplice (MIT)

 Tactical transportation Planning

▪ Issues in tactical planning

▪ How can I quickly secure rates for a new
DC/plant/lane?
▪ What lanes are having performance problems?
▪ Which carriers are complying to or exceeding their
contracts?
▪ Are site managers complying with the strategic plan?
▪ Where should I establish a seasonal contract? How
▪ Design of routes to pick up supplies

Reference: Caplice (MIT)

 Operational Planning
▪ Some operational issues
▪ Which carrier should I tender this load to?
▪ How can I collaboratively source this weeks’
loads?
▪ Should I use a contract carrier or look at the spot
market?
▪ How can I best communicate with my carriers?
▪ How to program the routes

Reference: Caplice (MIT)

Factors in transportation decisions

▪ Shipping cost per unit

▪ Line-haul rate
▪ Accessorial or terminal charges
▪ Mean transit time
▪ Transit time variability
▪ Carrying cost while unit is in transit
▪ Loss and damage (Because of carrier,
packaging)
 Mode Selection Factors

▪ Different modes of transportation present different

characteristics. Some of the factors used to select a mode of
transportation include:
▪ Freight rates
▪ Reliability
▪ Transit time
▪ Loss, damage, claims, processing and tracing
▪ Shipper market considerations
▪ Carrier considerations
Modes of single service

▪ Rail
▪ Long haul, heavy loads
▪ inexpensive (.025 $/ton-mile)
▪ Truck
▪ Door-to-door service
▪ whole load or less than truck load service
▪ More expensive(.25 $/ton-mile)
Modes of service

▪ Air
▪ light loads
▪ expensive (0.58 $/ton-mile)
▪ fast, reliable, less damage of
product
▪ Water
▪ Slow
▪ bulk and containers
▪ cost depends of service
($0.0073/ton-mile barges)
▪ Pipeline
Intermodal (coordinated) services

▪ Free exchange of equipment between modes

▪ Rail-truck, Rail-water, rail-pipeline, truck-air,
truck-water, truck-pipeline, water-air, air-pipeline
▪ Trailer on flat car (TOFC)
▪ Flexibility of delivery with low cost of rail
▪ Container on flat car (COFC)
▪ Standardized container can be transfer to other
modes of transportation
Mode Comparison

Reliability Loss &

Mode ¢/ton-mile Transit Time (absolute) Damage
Rail 2.28 3 4 5
Truck 26.19 2 3 4
Water 0.74 5 5 2
Pipeline 1.46 4 2 1
Air 61.2 1 1 3

Source: Caplice (MIT)

https://ctl.mit.edu/about/bio/chris-caplice
Mode/Inventory

▪ Mode selection should also consider the

indirect costs such as:
▪ Inventory
▪ Infrastructure
▪ Personnel overhead
▪ Reliability
▪ Packaging
Mode Selection (Caplice MIT)
Mode Selection (Caplice MIT)
 Transportation and Logistics Costs

Elements of Total Logistics Costs Affected by Average

Transit Time

Transportation Costs
Onsite Inventory Costs
In Transit Inventory Costs
Safety Stock Costs
Other Costs
Affected by Variability of
= Transit Time
Total Logistics Cost

Total Landed Cost=Total Logistics Cost +Purchasing cost

How to compute Safety Stock

▪ Something that we are interested is to assess the impact of

the variability of the transit time on safety stock
▪ Previously we looked at some formulas that could help us
understand the impact of transportation variability
 The Classical EOQ model
▪ In order to determine the optimal ordering policy let’s define the
following terms:
▪ D= Demand (deterministic) per period (units/period)
▪ A = Setup cost ($/lot)
▪ h = Holding cost ($/unit)
▪ Q = Order Quantity
▪ Assumptions.- Constant demand, no backordering, Instantaneous
replenishment
▪ Total Cost per time period= Cost for ordering+ cost for holding inventory

A($ / Lot ) + (Units / lot )h($ / unit )

D(units / timeperiod ) Q
TC =
Q(Units / lot ) ) 2
▪ Taking a derivative with respect to Q, setting the derivative to zero and
solving for Q we get:

TC DA h
=0=− 2 + Q=
2 DA
Q Q 2 h
Probabilistic Models: Relaxation of Stochastic Demand

▪ Deterministic relaxation.- This can modeled as a relaxation of

the single item EOQ model by creating a safety stock ss (or
buffer) to accommodate the demand during the order-lead
time.
▪ The size of the buffer should be large enough to accommodate
the demand during the lead time with a probability of 1-a or

Pr  D  LT  D + ss   a
▪ where LT is the mean lead (transit) time
 Safety Stock with service levels

▪ When the demand or lead time are deterministic we set the

reorder point to reach a particular service level
▪ Stochastic Lead Time
R = d LT + Zd LT
▪ Stochastic demand and lead time

R = d LT + Z LT d2 + d 2 LT
2

How to take lead time into account?

 Revisiting the EOQ formulation
▪ Total Relevant Cost per time period= Cost for ordering+ Cost for transport
+cost for holding inventory + Cost of In-transit inventory.
t
▪ In-transit inventory is given by: Q where t is the transit time and T the
T
cycle time, that is equal to Q/D. Consider that r is equal to the transportation
rate. D(units / timeperiod ) D(units / timeperiod )
TRC = A($ / Lot ) + r ($ / lot ) +
Q (Units / lot ) ) Q (Units / lot ) )
timeperiod
t( )
Q
(Units ) h ( $ / unit − timeperiod ) + Q lot Q ( units ) ) h ( $ / unit − timeperiod )
2
( timeperiod / lots) )
D
That is equivalent to:
D(units / timeperiod ) D(units / timeperiod )
TRC = A($ / Lot ) + r ($ / lot ) +
Q (Units / lot ) ) Q (Units / lot ) )
Q timeperiod
(Units ) h ( $ / unit − timeperiod ) + t ( ) D ( units ) ) h ( $ / unit − timeperiod )
2 lot
In-transit holding cost
 Revisiting the EOQ formulation
▪ Simplifying and taking a derivative with respect to Q, setting the derivative to
zero and solving for Q we get the same EOQ formula as before (WHY?)
▪ If we add terms for safety inventory and stock out costs we have
Total Cost per time period= Cost for ordering+ cost for holding inventory +
Cost for transport+ Cost for In-transit inventory cost + cost for safety stock +
Expected Cost of Stock Out (and shrinkage)
▪ The problem is that we don’t have a closed form expression to get the EOQ--
> we need to do a case by case analysis
Impact on Transportation on Total Costs
Transportation rate
▪ Value and Structure
Lead Time
▪ Value & Variability & Schedule
Capacity
▪ Limits on Q
Other
▪ Costs of infrastructure
▪ Management cost
 Mode Selection

▪ An important consideration for mode selection is the level of

service desired.

▪ If a company is in a market in which immediate or next-day

availability of the product is expected then either you have to
keep on-site inventory or you have to use express service.

▪ Once you determine the level of service required then the next
step is to design your transportation system, including mode
selection.
 Transit time and variability

▪ Different modes of transportation have different characteristics

Taken from Ballou’s Business Logistics Management 5th Ed.

Transit time and variability

Taken from Ballou’s Business Logistics Management 5th Ed.

 Mode selection

▪ Example:
▪ You are considering rail and full truck to transport a
particular component from your supplier’s facility, which
is located 1000 miles from your plant.
▪ The annual demand for the product is deterministic of
30.000 parts and each of the parts has a weight of 10#.
▪ Assume a rate of $2/mile for truck and $1/mile for train.
The cost of the component is 1000 $/piece, holding cost =
15% per year.
 Analysis

▪ We make the following assumptions

▪ Mean Transit Time (TT) is: truck: 4 days, train: 12,2 days
▪ Transit time std dev: truck: 1,48; train: 4,74 (assuming a
normal distribution from Table 6,2-Ballou, see next slide)
▪ Cost per shipment (A): truck: 2000, train: 1000 + 100 of
additional packaging material
▪ Desired level of service = 99%
▪ Days per year = 365
 Analysis
▪ Doing the calculation of parameters:
z(0.95/2)*2
Z(0,05/2+0,95)*2 Range (TT) std_dev(TT) Mean (TT) A EOQ Safety Stock
SS= Z(service
level)*Demand*std (l
Nivel de confianza Z= lead time).
se determina Tomar de la fórmula
considerando los dos From table 6-2 std=Range From table 6-2 de R para lead time
Método extremos (0,975) (1000 miles) IC/Z (1000 miles) Input data Raiz(2AD/h) estocástico)
Z(0,99)*D*Std_dev=No
rmInv(0,99;0;1)*Dema
Distrib.Norm.Inversa( nd/365*Std_dev(lead
Ej. Train 0,975,0,1)*2 21,5-2,9 18,60/3,92 12,20 1100,00 Q time)
Train 3,92 18,60 4,74 12,20 1100,00 663,32 907,27
Truck 3,92 5,80 1,48 4,00 2000,00 894,43 282,91

Demand 30000 interest (i) anual 0,15

Cost per part 1000

Remember, the R for stochastic lead time (demand is constant) is:

R = d LT + Zd LT
 Analysis
▪ Doing the calculation of parameters:
z(0.95/2)*2
Z(0,975)*2 Range (TT) std_dev(TT) Mean (TT) A EOQ Safety Stock
Train 3,92 18,60 4,74 12,20 1100,00 663,32 907,27
Truck 3,92 5,80 1,48 4,00 2000,00 894,43 282,91

▪ The costs are given by:

Cost of
Cost of ordering Inventory at Cost of Safety Cost of in-transit
(transp) plant Stock inventory Total Cost
Mode D/Q*A Q/2*h SS*h =D*MeanTT*h Sum
Train 49749,37 49749,37 136090,92 150410,96 386000,63
Truck 67082,04 67082,04 42436,96 49315,07 225916,10
Example from Ballou (pag. 241/221)
The carry-all Luggage company produces a line of luggage goods. The typical
distribution plan is to produce finished goods inventory located 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 cost plant and a West
cost warehouse. The average transit time for rail shipments is t =21 days
(please note that this is not the cycle time and is analogous to lead time. The
book denotes as T). At each stocking point, there is an average of
100,000 units of luggage having an average value of C = $30 per unit.
Inventory carrying costs are i = 30% per year.

The company wishes to select the mode of transportation that will minimize total
costs. It is estimated that for every day that the transit time can be reduced
from the current 21 days, average inventory levels can be reduced by 1 percent,
which represents a reduction in safety stock. There are D = 700,000 units
sold per year out of the West Coast warehouses. The company can use the
following transport services
Transport Rate ($/unit) Door-to-Door # of shipments
Service transit time (days) per year
Rail 0.10 21 10
Piggyback 0.15 14 20
Truck 0.20 5 20
Air 1,40 2 40
• Procurement or Purchasing cost and transit-time variability are negligible (the
latter means that we ignore safety stock costs).

• Annual demand (D) will be in transit by the fraction of the year represented by
t /365.
• The annual cost of carrying this inventory is ICDt.
• The average inventory at both ends of the distribution channel can be
approximated by Q/2, where Q is shipment size.
• The holding cost per unit is ixC, C at the plant is the price, at the warehouse is
C plus transportation cost.
• Annual transportation cost = RxD = rate per demand
 Mode Selection
Cost Type Method of Computation Rail Piggyback Truck Air
Transportation rxD $70.000,00 $105.000,00 $140.000,00 $980.000,00
In-transit Inventory iCDt $362.465,75 $241.643,84 $86.301,37 $34.520,55
Plant Inventory iCQ´/2 $900.000,00 $418.500,00 $378.000,00 $182.250,00
Field Inventory iC'Q´/2 $903.000,00 $420.592,50 $380.520,00 $190.755,00
Totals $2.235.466,00 $1.185.736,00 $984.191,40 $1.387.526,00

Where r=transport rate; t=transit time. Q is the lot size and Q´is
defined as an assumption made by Ballou in terms of the
inventory kept at the plant and at the distribution center and
also about the level of safety inventories.
Analyze the solution proposed in this table and determine under
what conditions the assumptions made by Ballou are valid .
Minimizing Total Cost of Distribution
-Example
▪ In this lecture we present an example of decision making
in logistics. The aim of is to minimize an “overall” measure
of performance, i.e., the minimization of the total cost of
distribution.
 Example

A company that manufactures computers (computer-modules,

monitor&keyboard), and television sets (television, TV-console)
has three factories and 100 retail stores.
The factories are located in Green Bay (computer-modules),
Indianapolis (televisions, monitors&keyboards) and Denver (TV-
consoles).
Some of the components need to be assembled before they are sold,
this can be done in the retail stores or in a distribution center
located next to the plant of Indianapolis.
What is the distribution strategy that minimizes the annual
transportation and inventory costs?
Element Cost Weight Factory
Computer modules $300 5 lbs Green Bay
Televisions $400 10 lbs Indy
Monitor/keboard $400 10 lbs Indy
Consoles $100 30 lbs Denver

Based loosely in a case study by Daganzo

Plant Locations

Green Bay

Indianopolis

Denver
 Example (cont.)
Assumptions:
▪ Trucks (Full truck loads are assumed)
▪ Capacity of 30.000 lbs
▪ Cost of $1 per mile
▪ Inventory
▪ An annualized cost of 15% of the cost of the product is
incurred for every working day (250 working days/year) a
product is stored or on the road (15% per year of holding
costs).
▪ Retail Stores
▪ Each store sells 10 television/console sets and 10 computers
(module, monitor, keyboard) per day (250 working days/yr)
▪ The average distance between a factory and a store; and
between the factories in Green Bay and Denver and the plant
in Indianapolis is assumed to be 1000 miles
Possible Strategies

▪ When there are multiple plants (suppliers) and destinations

there are different distribution possibilities:

Direct With Hybrid

Consolidation
center

▪ Assuming that all strategies are equally effective to meet the

customers’ needs, some factors to consider when selecting
strategies include:
▪ Shipping costs (more frequent shipments)
▪ Cost of inventory at the plant
▪ Cost of inventory at the retailer
▪ Cost of in-transit inventory
 Example (cont.)
▪ Strategy 1-A:Direct shipment no consolidation
▪ The DC in Indianapolis is skipped and everything is sent directly
from the factories to the retail stores in full truck loads (without
intermediate stops). The final assembly is done at the retail stores
(Indy does not consolidate products).
▪ Strategy 1-B: Direct Shipment, consolidation at Indy.
▪ Same but the two products of Indy are consolidated at the plant
into the same truck.

▪ Strategy 1-C: Direct shipment, consolidation and use Q*

▪ Same but rather than having full truckload shipments, we determine
the optimal lot size for each product. In the case of Indy, products
are sent consolidated at the plant.

▪ Assumption: linear production/consumption, we will ignore in transit inventory

 Example (cont.)
▪ Strategy 2-A: Consolidate at the DC in Indy
▪ We consolidate all the products in Indy, and from the DC are sent
to the retailers. Shipments to DC-Indy are done as full truckload.
From the DC to retailers we perform shipments with the same
amount of each product that fit in the truck.
▪ Strategy 2-B: Direct Shipment, consolidation at Indy.
▪ Same as 2A but using Q* for the shipments (individual products
from the plants to the DC; and combined shipments from the DC to
the retailers using EOQ as well). Notice that from the DC we are
sending a truck with multiple items.
Rough Costs calculations

▪ Cost of inventory at the plant = (average shipment

size/2)(unit cost) (Carrying cost)= (Q/2)(C)(I)

▪ Cost of inventory at retailer= (average shipment

size/2)(unit cost) (Carrying cost)= (Q/2)(C’)(I)

▪ Cost of in transit inventory= (unit cost) (holding

rate)*(demand in days) (days of transit) =
(C)(I)(d/365)(t)

▪ Cost of transportation per cycle = (Demand/shipment

size) (cost of transportation)=(D/Q)(A)
STRATEGIES USING FULL TRUCKLOAD POLICIES
 Cost for first strategy 1(A) direct shipping
▪ Policy: Wait until a full truck load of product can be sent from the plants to each of the 100
retail stores. Capacity per truck is 30000 pounds. Each trip is 1000 miles. The cost is
$1/mile. Assuming that the DC in Indianapolis does not consolidate the shipments of the
two products. The cost of transportation + inventory for each retail store is:
Alternativamente
Units that fit in a truck Q=Wtruck/w_item
(weight Limitations)
STRATEGY 1(A): DIRECT SHIPMENT. Assuming that the products from Indy are Shipped independently

INPUT DATA Lot size: based on full truckload shipments

N=Full
Demand unit Yearly Truck
Element Factory per retail Weight Unit cost weight Loads/year Lot size: Q=D/N
Computer Module Green Bay 2500,00 5,00 300,00 12500,00 0,42 6000,00
Monitor Keyboard Indy 2500,00 10,00 400,00 25000,00 0,83 3000,00
Television Indy 2500,00 10,00 400,00 25000,00 0,83 3000,00
Consoles Denver 2500,00 30,00 100,00 75000,00 2,50 1000,00

T=1/N Transportation and Inventory Costs

Frequency between
shipments or Cycle Time, T Trucking cost Avg. Inventory
Element (years) per year Average Inv Cost
Computer Module 2,40 416,67 3000 135000
Monitor Keyboard 1,20 833,33 1500 90000
Television 1,20 833,33 1500 90000
Consoles 0,40 2500,00 500 7500
Transp. cost per 1 retail 4.583,33 Inv. cost at plant 322.500,00
Total transp. cost 100 retails 458.333,33 Inv. Cost at 100 retails 32.250.000,00
TOTAL COST 33.030.833,33
Cost for first strategy 1(A) direct shipping

▪ Total transportation cost = (4.583,33)*100 retailers= $458.333

▪ Total Inventory cost at plants = $322.500
▪ Total inventory at retail stores = (322.500)*100 = $32.250.000
▪ Total cost for distribution strategy = $33.030.833
▪ % of transportation cost = 458.000/33.030.833 = 1.39%

Can you attain a lower logistics cost?

Cost for first strategy- 1(B) Shipment consolidation
▪ Policy: Wait until a full truck load of product can be sent to each of the 100 Retail
stores. But, assuming Indianapolis combines shipments of both products
STRATEGY 1 (B): DIRECT SHIPMENT. Assuming that Indy consolidates its 2 products

INPUT DATA Lot size: based on full truckload shipments

Lot
Demand unit Yearly N=Full Truck size:
Element Plant per retail Weight Unit cost weight Loads/year Q=D/N
Computer-Module Green Bay 2500,00 5,00 300,00 12500,00 0,42 6000,00
Monitor&Keyboard / TV Indy 5000,00 10,00 400,00 50000,00 1,67 3000,00
Consoles Denver 2500,00 30,00 100,00 75000,00 2,50 1000,00

Transportation and Inventory Costs

Frequency between shipments or

Element Cycle Time, T (years) Trucking cost per year Average Inv Avg. Inventory Cost
Computer-Module 2,40 417 3.000 135.000
Monitor&Keyboard / TV 0,60 1.667 1.500 90.000
Consoles 0,40 2.500 500 7.500
Transp. cost per 1 retail 4.583 Inv. cost at plant 232.500
Total transp. cost 100 retails 458.333 Inv. Cost at 100 retailers 23.250.000
TOTAL COST 23.940.833

By Consolidating cargo we reduce total cost

Cost for first strategy- 1(B) Shipment consolidation

▪ Total cost = (4583,33 +232.500)*100 + 232.500= $23.940.833

▪ % of transportation cost = 458,333.00/23,940,833.00 = 1.91%

▪ The previous cost calculation assumes that there will be a linear

consumption of the product at the stores (the average cost of
inventory is assumed as one half of one shipment). However, the
plants also need to hold finished product to be able to send to the
plants. If we assumed staggered shipments to all the stores we have
that the average inventory needed is one half of the lot size to be
shipped, that costs $232,500 for all the plants .

By Consolidating cargo we reduce total cost

Second strategy: 2-(A) Using DC at Indy and full
truckloads
▪ Policy: Send all parts to DC at Indy by full truck loads. From the CD to the retailers
lot size of shipments should consider an equal amount of parts of each product
INPUT DATA Lot size: based on full truckload shipments
Demand unit
per Weight Yearly weight Full Truck
Element Plant retailer (wunit) Unit cost (Yw) Loads/year Lot size: Q=D/N
Transportation cost to Indy DC: sending all the products for the 100 retailers
Computer Module Green Bay 250000,00 5,00 300,00 1.250.000 41,7 6000
Consoles Denver 250000,00 30,00 100,00 7.500.000 250 1000

Between Indy and each of the 100 Retailers

Computer Module Green Bay 2500,00 5,00 300,00 12.500 545
Monitor Keyboard Indy 2500,00 10,00 400,00 25.000 545
Television Indy 2500,00 10,00 400,00 25.000 545
Consoles Denver 2500,00 30,00 100,00 75.000 545
T_weight: 137.500 4,58

Shipments from the DC: we have to send the same number of products, so we need to determine this number based on the weight:

Q=((Yw/T_weight)*Cap_truck)/wunit where Cap_truck=30000

Notice that if we compute the total weight per truck shipment we have:

Total weight per truck 29975

Second strategy: 2-(A) Using DC at Indy and full
truckloads (continue)
Transportation and Inventory Costs

T Frequency between Trucking cost Avg. Inventory

Element shipments (years) per year Average Inv invest/cost
Transportation cost to Indy DC
Computer Module 0,0240 41666,67 3000,00 135000
Consoles 0,0040 250000,00 500,00 7500
sum 291666,67 142.500
Between DC and Retail Store
Computer Module 272,50 12263
Monitor Keyboard 272,50 16350
Television 272,50 16350
Consoles 272,50 4088
Total Products shipment 0,22 4583,33 Inv. Cost DC-Retails 49050,00
Transportation cost to DC Inv. Cost Plants (Gbay,
from plants (100 retailer) 291.667 Denver) and the DC 285.000
Transportation cost from the
DC to 1 retailer 4583 Inv. Cost DC-100 retails 4.905.000
Transportation cost from
the DC to 100 retailer 458.333 Inv. Cost at Indy plant 32.700
Total Transportation Cost 750.000 Total Inventory Cost 5.222.700
TOTAL COST 5.972.700

Assumptions
▪ Staggered shipments (full truckload) from plants to Indy DC. No transportation cost from Indy plant to DC.
▪ Average Finished inventory at the plant as half load of a full-truck load to Indy DC
▪ Average finished pass-trough inventory at DC as one half of the shipment from the plants to DC
▪ Average finished inventory at Indy DC as one half of the shipment to the stores
▪ Every shipment contain the same number of parts to each store (balanced load)
STRATEGIES USING OPTIMAL EOQ POLICIES
First strategy- 1-(C) Direct shipment, consolidate orders in
Indy and use Q* rather than full truck loads
▪ Policy: Sent the Q* units directly to each of the 100 Retail stores, but consolidate items
of Indy. Assume that LTL shipments have a tariff of $1,5 dls (instead of $1)
INPUT DATA Lot size: based on EOQ (Q*)
Lot size:
Q=raiz(2AD/ic)
siempre que no
Demand per unit exceda cap N=Shipments per
Element Factory retail Weight Unit cost Yearly weight truck year
Computer Module Green Bay 2500,00 5,00 300,00 12500,00 409,00 6,11
Monitor Keyboard/ TV Indy 5000,00 10,00 400,00 50000,00 500,00 10,00
Consoles Denver 2500,00 30,00 100,00 75000,00 708,00 3,53

LTL tariff 1,5 2(2500)(1500)

Hence A=1500 Q= = 409
(300)(.015)

Transportation and Inventory Costs

Frequency between shipments

or Cycle Time, T (years) Trucking cost per year Average Inv Avg. Inventory Cost
0,1636 9168,70 204,50 9203
0,1 15000,00 250,00 15000
0,2832 5296,61 354,00 5310
Transp. cost per 1 retail 29.465,31 Inv. cost at plant 29.512,50
Total transp. cost 100 retails 2.946.531,43 Inv. Cost at 100 retails 2.951.250,00
TOTAL COST 5.927.293,93
Second strategy: 2-(B) Using DC at Indy and optimal
frequency of shipments
▪ Policy: Send all parts to DC at Indy, using optimal Q*. From the CD to the retailers
lot size has to be determined based on an optimal policy with multiple items,
respecting the capacity of the truck
INPUT DATA Lot size: based on EOQ (Q*)
Lot size:
Full Truck Q=raiz(2AD/ic)
Demand per unit Loads/year = respecting truck
Element Factory retailer Weight Unit cost Yearly weight D/Q capacity
Transportation cost to Indy DC: sending all the products for the 100 retailers
Computer Module Green Bay 250.000 5 300 1.250.000 61,2 4.083
Consoles Denver 250.000 30 100 7.500.000 250,0 1.000
SUM: 311
Between DC and retails
Computer Module Green Bay 2.500 5 300 12.500 12,25 204,0
Monitor Keyboard Indy 2.500 10 400 25.000 204,0
Television Indy 2.500 10 400 25.000 204,0
Consoles Denver 2.500 30 100 75.000 204,0
Total 137.500 Total 816

LTL tariff 1,5 *Notice that we are sending in total 12,25 full truckloads
2 AD1
Hence A=1500 Q1 = DnQ1 for all the products consolidated from the DC to a retailer
Dh Dh
h1 + 2 2 +  + n n
Qn =
D1 D1 D1 So in total we have 12,25 shipments.
The cost in red in the first product represents the 4 items
Second strategy: 2-(B) Using DC at Indy and optimal
frequency of shipments
Transportation and Inventory Costs

Frequency between shipments Trucking cost

Element (years) per year Average Inv Avg. Inventory cost
Transportation cost to Indy DC: sending all the products for the 100 retailers
Computer Module 0,0163 91.844 2.042 91867,50
Consoles 0,0040 375.000 500 7500,00
Total 466.844 99367,50
Between DC and retails
Computer Module 0,0816 12.255 102,00 4590,00
Monitor Keyboard 0,0816 - 102,00 6120,00
Television 0,0816 - 102,00 6120,00
Consoles 0,0816 - 102,00 1530,00
12.255 18360,00
Transportation cost to DC Inv. Cost Plants (Gbay,
100 retailer 466.844 Denver) and the DC 198.735
Transportation cost DC to 1
retailer 12255 Inv. Cost DC-100 retails 1.836.000
Transportation cost DC to
100 retailer 1.225.490 Inv. Cost at Indy plant 12.240
Total Transportation Cost 1.692.334 Total Inventory Cost 2.046.975
TOTAL COST 3.739.309
 Comparison of strategies

No optimal frequency Optimal frequency

Scenario 1A Scenario 1B Scenario 2A Scenario 1C Scenario 2B
Demand 250.000 250.000 250.000 250.000 250.000
Weight 13.750.000 13.750.000 13.750.000 13.750.000 13.750.000
Plant to DC's
Transp. Cost/retailer 4583,33 4583,33 29465,31
Transportation Cost $458.333,33 $458.333,33 $2.946.531,43
Inventory Cost $32.250.000,00 $23.250.000,00 $2.951.250,00
Plant to warehouse
Truckloads 291,67 324,99
Transportation Cost $291.666,67 $324.985,00
Inventory Cost $142.500,00 $82.515,00
Warehouse to DC's
Truckloads 458,33 1497,01
Transportation Cost $458.333,33 $1.497.005,99
Inventory Cost $4.905.000,00 $1.503.000,00
Inventory at plants $322.500,00 $232.500,00 $175.200,00 $29.512,50 $92.535,00
Total Cost $33.030.833,33 $23.940.833,33 $5.972.700,00 $5.927.293,93 $3.500.040,99