The following design matrix can be developed — point Ohio manufacturer hydraulic equipment hoses cylinders and controls consolidates items orders

At a point in Ohio, a manufacturer of hydraulic equipment (hoses, cylinders, and controls) consolidates the items on orders produced at various points in the United States. Consolidated orders are destined for Brazil and may be shipped via an ocean freight forwarder or using airfreight. The average order size is 292 lb. Ocean shipping ($4.94/lb) is less expensive than airfreight ($9.04/lb), but takes longer. Ocean movements from the consolidation center require transportation to the Port of Baltimore, vessel-waiting time for loading at the port, stop offs at Savannah and Miami for pickups, and sailing to Sao Paulo, Brazil. The total transit time averages 20 days. On the other hand, air shipments require only two days for handling and transit.

The manufacturer owns the goods in transit until they arrive at the destination port and is concerned with the cost of inventory while in transit. The product in transit is valued at $185/lb and 20,000 lb are shipped per year. The company's cost of capital is 17 percent per year.

From purely an inventory-transportation viewpoint, which transport mode should be used?

SOLUTION

The two transport options from the consolidation point are diagrammed in Figure 9-1. Whether to choose one mode other the other depends more than transportation costs alone. Because the transport modes differ in the time in transit, the cost of the money tied up in the goods while in transit must be considered in the choice decision. This intransit inventory cost is estimated from