A power plant in California uses coal at the rate of 100 000 lbs. each day. It also uses MRO (maintenance, repair and operations) material at the rate of 1 000 lbs. each day. The coal comes from Wyoming and the MRO material comes from Chicago. Coal costs $0.01 per lb. whereas MRO material costs $10 per lb., on average. Holding costs at the power plant are 25%. Transportation choices available are as follows.
Train
Lead time = 15 days
Carload (100 000 lbs.) 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 lbs. at $0.08/lb.
Between 10 000 and 20 000 lbs. at $0.07/lb. for entire load
Between 20 000 and 40 000 lbs. at $0.06/lb. for entire load
Small TL (40 000 lbs.) for $2 000
Large TL (60 000 lbs.) 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 transportation do you recommend for each of the two products? Why?