Ford Motors has an assembly plant located in Chicago area. Ford purchases all ti

Question

Ford Motors has an assembly plant located in Chicago area. Ford purchases all tires for the cars assembled in the Chicago plant from Lassa, located in Pittsburgh, PA. Demand for tires at Ford assembly plant is normally distributed with an average of 550 tires per day and a standard deviation of 50 tires per day. Given 365 days a year, Ford purchases 200,750 tires each year from Lassa at a price of $20 per tire. Ford uses a continuous review inventory policy with a reorder point set to achieve a 95% service level.

Ford has two options for transportation of tires: Union Railroads or Steelers Trucking. Details on these options are given in the table below. (Note: Transit lead times has no variability in both options; always 10 days for Union Railroads and always 4 days for Steelers Trucking)

Ford owns the tires while in transit to its plant and annual holding cost during transit or at the Chicago plant is 25 percent of the unit tire cost. Given the information above which transportation option Ford should choose?

Union Railroads Steelers Trucking Minimum Shipment Size 10,000 2,000 Freight Cost per tire($) $0.5 $0.75 Transit lead time(days) 10 days 4 days Fixed Ordering Cost $1,000 $500

Explanation / Answer

Transportation option Ford should choose Union Railroads Steelers Trucking Tires to be shipped every year 200750 200750 Minimum shipment size 10000 2000 Number of shipments 20 100 Freight cost $100,375.00 $150,562.50 Fixed ordering cost $20,000.00 $50,000.00 Annual holding cost $27,397.26 $10,958.90 Total cost $147,772.26 $211,521.40 As the cost is lower in Union Railroads, it is advisable to choose Union Railroad as transportation option Working Note: Number of shipment = Annual number of tires to be shipped/minimum shipment size Freight cost = Annual number of tires to be shipped x Freight cost per tire Fixed ordering cost = Number of shipments x Fixed ordering cost per shipment Annual holding cost = Minimum shipment size x Transit lead time days/365 x number of shipment x Holding cost Holding cost = Cost per tire x 25%                            = $20 x 25% = $5 Union Railroads Steelers Trucking Number of shipments 200750 / 10000 200750 / 2000 Freight cost 200750 x $0.50 200750 x $0.75 Fixed ordering cost 1000 x 20 500 x 100 Annual holding cost 10000 x 10/365 x 20 x $5 2000 x 4/365 x 100 x $5

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