Combining Warehousing and Transportation to Serve a Specific Market

Topics: Costs, Total cost Pages: 11 (1423 words) Published: May 25, 2014
Memo
Since the purchase of the Calgary Facility by Large Flour Mill – I have been investigating the possibility of supplying the Alberta market solely from our Calgary Plant, or opening up a second plant in Edmonton with the hopes of better serving our customers at all locations. The old mill moved a total of 100,000 tonnes annually, and since we anticipate to reach this type of volume in the future, this is the volume which was used to come up with a recommendation that makes sense for our organization. As you will see from the various tables and calculations in the following sections of this report – various factors were considered in two different scenarios. Our first option was to utilize our Calgary Plant at full capacity to support our various customer demand for both bulk and packaged product. To achieve the less costly structure under this alternative, our shipments from Winnipeg to Calgary would need to ship via 100 cars rail to our Packaging Plant in Calgary. To buffer against the variability in consumer demand, a safety stock worth $153,780.00 will be held annually. This will ensure that there are no stock outs 99 percent of the time. The unreliability in delivery however, will cost us $50,000.00 annually – which will be deducted from our margins. The trucking costs to our customer locations will amount to $960,000.00 if they leave our Calgary Plant. Total costs under this scenario equal $3,240,307.78. Option two, if a combination of the best costs are chosen would cost our company $2,857,349.44 annually to supply the same tonnage of product to our customers. Alternative two is therefore 11.8 percent less costly, would better support our operations in the future as we gain market share, and would enable us to better meet our customer expectations by removing the unreliability in delivery factor, which was present in the first scenario.

Inventory Costs and Safety Stock
Alternative 1
At this time, we are considering two different options in order to best service our Alberta market. If we were to go with Alternative 1, where all inbound flour is shipped to Calgary, and all four areas are served from the Calgary warehouse and packaging plant – we would incur the following costs highlighted in orange: Table 1

Option 1 - Winnipeg-Calgary
Car Lot Size
25
50
100
$/Car
$ 1,600.00
$ 1,440.00
$ 1,200.00
$/ tonne
$ 20.00
$ 18.00
$ 15.00
Tonnes shipped /year
100,000
100,000
100,000
Q (Order Quantity)
2,000
4,000
8,000
Daily Demand (100000/360)
278
278
278
Transport Cost / Year
$ 2,000,000.00
$ 1,800,000.00
$ 1,500,000.00
Working Inventory (Q/2)t
1,000
2,000
4,000
SD = 1 day at 99% certainty
2.33
2.33
2.33
SS Due to LT-t
647.2222222
647.2222222
647.2222222
Carrying cost for (a)
$ 87,500.00
$ 175,000.00
$ 350,000.00
Carrying cost for (b)
$ 194,166.67
$ 194,166.67
$ 194,166.67
Carrying cost for (a) + (b)
$ 281,666.67
$ 369,166.67
$ 544,166.67
Total Costs
$ 2,281,666.67
$ 2,169,166.67
$ 2,044,166.67

Based on the calculations in Table 1, the transportation costs incurred by shipping rail from Winnipeg to Calgary would be $2,281,666.67, $2,169,166.67, and $2,044,166.67 for a 25, 50, and 100 cars shipment respectively. These three alternatives however, will require us...
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