Book Supply Chain Engineering: Models and Applications A. Ravi Ravindran & Donald Paul Warsing

4.11 Mini-case study: As a newly hired supply chain analyst for Milos Home Improvement, you have been asked to assess inventory and shipping policies at the companys distribution center (DC) in the Atlanta, GA area. Specifically, you have been asked to choose a replenishment option for a particular stock-keeping unit (SKU), a front brush guard, which is an optional accessory for a line of lawn tractors that are also sold by Milos. Important product- and operations-related data appear in Table 4.11. Your manager, Goober Pyle Jr., the VP of Logistics, is still suspicious of whether all that fancy college book learnin justifies the big salary that he is paying you. TABLE 4.11 Operations and Product Data for Exercise 4.11 Cost to receive an order in the DC $25 Annual on-site holding cost (% of item value) 30% Annual in-transit holding cost (% of item value) 25% Item weight 12 lb Item cost (delivered, TL) $35 Projected annual demand 26,000 units Operating days per year 365 Transportation Decisions in Supply Chain Management 223 The supplier of the front brush guard has offered two options for the freight terms and price (i.e., cost to Milos) for this item: Option 1: F.O.B. destination, freight prepaid terms, provided that the supplier can use its preferred truckload (TL) carrier to make full truckload shipments of 3200 units, on whatever schedule you requirei.e., shipping any day of your 365-day operating year. The order fulfillment lead time is 3 days, 1 day of which covers transit time from the suppliers facility in Memphis, TN. The TL carrier charges the supplier $2.25/mi, or $882 for the Memphisto- Atlanta shipment. Option 2: F.O.B. origin, freight collect terms, with a 1.5% discount in the price (i.e., unit cost to Milos) of the guards. In considering this option, you intend to utilize the same TL carrier that your supplier has been using. The total order fulfillment lead time for this option is the same as that for Option 1, 3 days in total, including a commitment by the TL carrier to the same 1-day transit time. Since you cannot guarantee the level of additional shipment volume that your supplier can, however, the carrier has quoted you a TL rate that is 10% higher than the rate the supplier was paying. a. Explain what you believe to be the relevant costs in choosing between these options. b. Compute the total relevant annual cost of Option 1, clearly stating each separate component of the total. c. For Option 2, what order quantity do you recommend? Why? Compute the total relevant annual cost for this order quantity, clearly stating each separate component of the total. d. Which option do you prefer? Why? e. Your boss Goober believes that you might be better off to hire the LTL carrier where his cousin Gomer works the night shift. A rate tariff for this carriers LTL service on this origin-destination lane is given in Table 4.12. For your recommended order quantity from (c), how would the annual transportation cost for LTL service compare to the options given earlier? What other information would you need in order to assess this option completely versus Options 1 and 2?