Question: DistFast is an industrial distributor that sources a broad range of products from tens of suppliers. DistFast uses a third party transportation company to have its orders shipped to its warehouses. The two modes of transportation available for inbound shipping are LTL (Less than Truckload) and TL (Truckload). LTL shipping costs $2 per unit, whereas TL shipping costs $500 per truck. Each truck can carry up to 8,000 units. DistFast wants to decide the shipping mode (TL or LTL) based on annual demand of the products. The cost of a representative product is $50 per unit, and DistFast uses a holding cost rate of 20%.
EOQ = √(2DS/H), Total Inventory Cost (Q) = (Q/2)H + (D/Q)S
1. If the annual demand of a product is 2,000 units, which transportation mode should DistFast use for this particular product?
2. What is the annual cost (i.e., ordering, holding, and in-bound shipping costs) for DistFast as a result of the transportation mode you suggested in Part 1?
3. Determine a threshold for annual demand above which TL is preferred to LTL, i. e., find a specific value for the annual demand above which it is less costly to use the TL option.