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?

Cost to be considered:

1. Freight cost

2. Stock Carrying/Holding Cost (Normal stock + Safety stock)

3. In-transit carrying cost

4. Damage cost

Air

1. Freight Cost = 52 x 5000 x 5.5 = $1430,000

Average stock = (8000 + 0)/2 = 4000 units

Stock Carrying/holding cost = 4000 x 200 x 0.2 = $160,000/year

Safety stock = Z x SQRT (SD2LT x d2+ LT x SD2d)

Z = Normal distribution factor for service level = 2

SDLT = Std. dev. of lead time = 0

SDd = Std. dev of Demand = 1000 unit/week

LT = Lead time = 1 week

D = Demand per unit time = 5000 unit/week

Safety stock Qty = 2 x SQRT(0 x 0 x 5000 x 5000 + 1 x 1000 x 1000) = 2000 units

Safety stock carrying cost = 2000 x 200 X0.2 = $80000/year

In-transit Quantity = demand per unit time x lead time = 5000 x 1 = 5000

In-transit Carrying cost = 5000 x 200 x 0.15 = $150000/year

Damage cost = 52 x 5000 x 0.0015 x 200 = $78000

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

Rail

Freight Cost = 52 x 5000 x 3.2 = $832000

Average stock = (24000 + 0)/2 = 12000 units

Stock Carrying/holding cost = 12000 x 200 x 0.2 = $480,000/year

Safety stock = Z x SQRT (SD2LT x d2+ LT x SD2d)

Z = Normal distribution factor for service level = 2

SDLT = Std. dev. of lead time = 0

SDd = Std. dev of Demand = 1000 unit/week

LT = Lead time = 4 weeks

D = Demand per unit time = 5000 unit/week

Safety stock Qty = 2 x SQRT(0 x 0 x 5000 x 5000 + 4 x 1000 x 1000) = 4000 units
Safety stock carrying cost = 4000 x 200 X0.2 = $160000/year

In-transit Quantity = demand per unit time x lead time = 5000 x 4 = 20000

In-transit Carrying cost = 20000 x 200 x 0.15 = $600000/year

Damage cost = 52 x 5000 x 0.0025 x 200 = $130000

Total cost by rail = 832000 + 480000 + 160000 + 600000 + 130000 = 2212000

Since total cost by air is less than rail so air mode would be selected.

Letter credit = bank Documents

Pro-forma Invoice (PI)

International Commercial Terms (Incoterms): FOB (Free/freight on broad)

C&F = Cost and Freight

DDP =delivery duty paid

DDUP delivery duty un-paid

FAS

Ex-works
Purchaser
Supplier
Purchaser’s Supplier’s
Bank (L/C) Bank

Third
Bank
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?