A production facility needs to be supplied with two grades of steel (i.e., they have two products they purchase and must have shipped to them). Over the course of a year, the company uses 3,285,000 lbs of Grade 1 steel and 365,000 lbs of Grade 2 steel. Grade 1 steel costs $0.01 per lb and Grade 2 steel costs $10 per lb. NOTE: These are the costs to purchase the steel, NOT transportation cost. Holding costs at the production facility are 25% of the purchase cost per lb (i.e., each grade of steel has its own holding cost). As per their contract with the supplier, the production facility owns the steel in transport and therefore the company assesses these holding costs during transportation as well. Finally, assume that any shipment you receive contains a % of grade 1 and 2 steel that is equal to their respective %s of annual demand.

 

The production facility is reviewing a few options of transport for their steel:

Option 1: Ship by rail with carrier 1

In this option, one train consists of a minimum of 30 cars up to a maximum of 90 cars. Each car has a capacity of 10,000 lbs. Given the distance from the production facility to the supplier, to ship steel, it will cost $15,000 as a fixed fee for each train plus $400 per car that is on the train. This method results in a 15 day lead time.

 

Option 2: Ship by truck with carrier 2

With this carrier, you have 2 choices:

Use their fleet of small trucks and ship 10,000-40,000 lbs at a time for $0.09 per lb. In addition, you will be assessed a cost of $600 per truck used.

Use their fleet of large trucks and ship 40,000 to 60,000 lbs at a time for $0.06 per lb. In addition, you will be assessed a cost of $900 per truck used.

A) What is the minimum cost that Option 1 can provide (include cost to transport and cost to hold inventory)?

B) What is the minimum cost that Option 2 can provide with the small fleet of trucks (include  cost to transport and cost to hold inventory)?

C) What is the minimum cost that Option 2 can provide with the large fleet of trucks (include cost to transport and cost to hold inventory)?

D) What is your overall recommendation to minimize total cost? (Include mode of transport, size details of each shipment and total cost).

E)Assume that you must hold enough safety stock to cover demand over the lead time. What is the cheapest option now? (Include total cost, size details of the shipment and mode)

F) In this problem, it is necessary to check both the minimum and maximum for all the weight ranges. Why must we check both here?

Answer rating: 100% (QA)

A The minimum cost that Option 1 can provide is 15000 40030 10365000 25103650... View the full answer