A power plant in California uses coal at the rate of 100,000 pounds each day.

It also
uses MRO material at the rate of 1,000 pounds each day. The coal comes from
Wyomung and the MRO material comes from Chicago. Coal costs $0.01 per pound,
whereas MRO material costs $10 per pound, on average. Holding costs at the power
plant are 25 percent. Transportation choices available are as follows:
Train
Lead Time = 15 days
Carload (100,000 pounds) at $400 per carload
Full train (70 cars) at $15,000 per train
Truck
Lead time = 4 days
Minimum cost = $100
Upto 10,000 pounds at $0.08 per pound
Between 10,000 and 20,000 pounds at $0.07 per pound for entire load
Between 25,000 and 40,000 pounds at $0.06 per pound for entire load
Small TL (40,000 pounds) for $2,000
Large TL (60,000 pounds) for $2,600
Safety inventory of coal and MRO materials is kept at twice the consumption during
the lead time of supply. What mode of transport do you recommend for each of the
two products? Why?

Solution

Train

Safety inventory for coal = 100,000*2*15 = 3,000,000

Safety inventory for MRO = 1000*2*15 = 30,000

Total holding cost

Coal = (3,000,000*0.01)*.25 = $7,500

MRO = (30000*10)* .25 = $75,000

Let ‘x’ car load be used

Total Cost of transportation for Coal = (365)*400 = 146,000

If the whole train is used, Cost for coal= (365/70)*15000 = 78214.

Total Cost of transportation for MRO = (365*1000)/(100,000)*400 = 1460

Coal

Optimal cost = $7,500+$78,214 = $85,714

MRO

Optimal cost = $75,000+$1,460 = $76,460

Truck

Safety inventory for coal = 100,000*2*4 = 800,000

Safety inventory for MRO = 1000*2*4 = 8,000

Total holding cost

Coal = (800,000*0.01)*.25 = $2,000

MRO = (8000*10)* .25 = $20,000

Option Coal MRO

Upto 10,000 pounds = =
(100,000*365/10,000)*10000*0.08 (1,000*365/10,000)*10000*0.08
= 2,920,000 = 29,200
10000 to 20000 pounds = =
(100,000*365/20,000)*20000*0.07 (1,000*365/10,000)*10000*0.07
= 2,555,000 = 25,550
25000 to 400000 = =
pounds (100,000*365/20,000)*20000*0.06 (1,000*365/10,000)*10000*0.06
= 2,190,000 = 21,900
40000 pounds = (100,000*365/40,000) *2000 = (1,000*365/40,000) *2000 =
 =1,825,000 18250
60000 pounds = (100,000*365/60,000) *2600 = (1,000*365/60,000)
=1,581,667 *2600=15816.7

So, minimum cost for coal in this option is using 60000 pound truck

So, minimum cost for MRO in this option is using 60000 pound truck

So,

Coal

Optimal cost = $2,000+$1581667 = $1,583,667

MRO

Optimal cost = $20,000+$15,816.7 = $35,816.7

So, based on the comparison,

The total cost is minimum for coal while using full train load, cost = $85,714

The total cost is minimum for MRO while using 60000 pound truck, cost = $35,816.7