Problem: 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 Wyoming 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
Up to 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?