1. SS Russia Ltd buys an equipment from THL China as FOB basis.

The price of each

equipment is $200. Usage of the equipment by SS is normal with mean 5000 units
per week, and a standard deviation of 1000 units. SS can use rail or air to transport
the equipment from Beijing to Moscow. If it uses rail, it can transport minimum
24000 units, while via air requires a smaller lots 8000 units. Rail needs 4 weeks for
transportation and clearance, whereas air takes 1 week for that. Freight cost by air is
$5.50 per unit, while by rail it is $3.20 per unit. During transportation by rail a 0.25%
of the transported equipment find damaged while it is 0.15% by air. The annual
inventory-carrying cost is 20% of the price of the equipment while in-transit carrying
cost is 15% of the price. The firm considers a 98% (Z = 2.0) service level, which is
standard.

The company wants to decide on the mode of transport. Evaluate and find which
mode is the best?

Costs that should be consider in selecting mode:

m
er as
1. Freight charge

co
eH w
2. Stock carrying cost (warehouse stock)

o.
rs e
3. Safety stock carrying cost (if demand variability is there)
ou urc
4. In-transit stock carrying cost

5. Damage/lost/obsolete/theft cost
o
aC s

Cost
vi y re
ed d
ar stu
is
Th

Qty

Q
sh

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 lt Time

STOCKOUT RISK = 5%

SERVICE LEVEL = 95%

SAFETY STOCK = Z x sqrt(square of sd of demand x Lead time + square of sd of lead time x

square of average demand)

Z = area under normal distribution curve for service level

m
er as
Avg stock = Avg of opening stock and closing stock

co
eH w
o.
In-transit stock = Avg demand x lead time
rs e
ou urc
Rail:
o

Freight cost: 5000 x 52 x 3.2 = $832000

aC s
vi y re

Stock carrying cost:

Avg. stock = (24000 + 0)/2 = 12000

ed d

Cost =12000 x 200 x .20 = $480000

ar stu

Safety stock qty= 2 x SQRT(1000 ^2 x 4 + 0^2 x 5000^2)

is

= 4000
Th

Cost = 4000 x 200 x0.2 = $160000

sh

In-transit qty = 5000 x 4 = 20000 units

Carrying cost = 20000 x 200 x 0.15 = $600000

Damage qty = 5000 x 52 x 0.0015 = 650

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 Cost = 650 x 200 = $130000

Total cost = 832000 + 480000 + 160000 + 600000 + 130000 = $2202000

Air:

Freight cost: 5000 x 52 x 5.5 = $1430,000

Stock carrying cost:

Avg. stock = (8000 + 0)/2 = 4000

Cost =4000 x 200 x .20 = $160000

Safety stock qty= 2 x SQRT(1000 ^2 x 1 + 0^2 x 5000^2)

= 2000

m
er as
Cost = 2000 x 200 x0.2 = $80000

co
eH w
o.
rs e
In-transit qty = 5000 x 1 = 5000 units
ou urc
Carrying cost = 5000 x 200 x 0.15 = $150000
o
aC s

Damage qty = 5000 x 52 x 0.0025 = 390

vi y re

Cost = 650 x 200 = $78000

Total cost = 1430000 + 160000 + 80000 + 150000 + 78000 = $1898000

ed d
ar stu

Since cost with air is less than that of rail so air mode will be selected.
is
Th
sh

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 2. XYZ Ltd is manufacturing jeans pant and suppling to North American markets from its own sells
center. The cost of each jeans is $80. Demand of the jeans in North America is 30000 units per month
with a standard deviation of 200 units per day. The company can use express air or regular air to
transport jeans from Chittagong to New York. If the firm use express air, it can transport minimum
25000 units, while via regular ship requires a lowest lots of 40000 units. Express ship needs 15 days
for transportation and clearance, whereas regular ship takes 25 days for that. Freight cost by express
ship is $1.15 per unit, while regular ship will be $0.90 per unit. During transportation by express ship a
0.15% of the transported jeans are damaged while it is 0.12% by regular ship. The annual inventory-
carrying cost is 25% of the cost of the jeans. The firm considers a 95% (Z = 1.65) service level, which
is standard. (Consider 25 working days per month)

The company wants to decide on the mode of transport. Evaluate and find which mode is the best?

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

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