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    Transport Mode

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    Drinkwell Accounts
    1. SS Russia Ltd buys equipment from a Chinese supplier on FOB terms for $200 per unit. They can transport the equipment by air or rail to Moscow. Air can transport a minimum of 8000 units in 1 week, while rail can transport 24000 units in 4 weeks. 2. The document evaluates the total costs of transporting 5000 units per week by air or rail, including freight, inventory holding, in-transit holding, and damage costs. It finds that the total cost is lower for air transport at $1,898,000 compared to $2,212,000 for rail. 3. Therefore, air transport is recommended as the best mode for transporting the equipment.

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    Transport Mode

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    Drinkwell Accounts
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    1. SS Russia Ltd buys equipment from a Chinese supplier on FOB terms for $200 per unit. They can transport the equipment by air or rail to Moscow. Air can transport a minimum of 8000 units in 1 week, while rail can transport 24000 units in 4 weeks. 2. The document evaluates the total costs of transporting 5000 units per week by air or rail, including freight, inventory holding, in-transit holding, and damage costs. It finds that the total cost is lower for air transport at $1,898,000 compared to $2,212,000 for rail. 3. Therefore, air transport is recommended as the best mode for transporting the equipment.

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    1. SS Russia Ltd buys equipment from a Chinese supplier on FOB terms for $200 per unit. They can transport the equipment by air or rail to Moscow. Air can transport a minimum of 8000 units in 1 week, while rail can transport 24000 units in 4 weeks. 2. The document evaluates the total costs of transporting 5000 units per week by air or rail, including freight, inventory holding, in-transit holding, and damage costs. It finds that the total cost is lower for air transport at $1,898,000 compared to $2,212,000 for rail. 3. Therefore, air transport is recommended as the best mode for transporting the equipment.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    104 views5 pages

    Transport Mode

    Uploaded by

    Drinkwell Accounts
    1. SS Russia Ltd buys equipment from a Chinese supplier on FOB terms for $200 per unit. They can transport the equipment by air or rail to Moscow. Air can transport a minimum of 8000 units in 1 week, while rail can transport 24000 units in 4 weeks. 2. The document evaluates the total costs of transporting 5000 units per week by air or rail, including freight, inventory holding, in-transit holding, and damage costs. It finds that the total cost is lower for air transport at $1,898,000 compared to $2,212,000 for rail. 3. Therefore, air transport is recommended as the best mode for transporting the equipment.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    1. SS Russia Ltd buys an equipment from THL China as FOB basis.

    The price of each


    equipment is $200. Usage of the equipment by SS is normal with mean 5000 units
    per week, and a standard deviation of 1000 units. SS can use rail or air to transport
    the equipment from Beijing to Moscow. If it uses rail, it can transport minimum
    24000 units, while via air requires a smaller lots 8000 units. Rail needs 4 weeks for
    transportation and clearance, whereas air takes 1 week for that. Freight cost by air is
    $5.50 per unit, while by rail it is $3.20 per unit. During transportation by rail a 0.25%
    of the transported equipment find damaged while it is 0.15% by air. The annual
    inventory-carrying cost is 20% of the price of the equipment while in-transit carrying
    cost is 15% of the price. The firm considers a 98% (Z = 2.0) service level, which is
    standard.

    The company wants to decide on the mode of transport. Evaluate and find which
    mode is the best?

    Cost to be considered:

    1. Freight cost

    2. Stock Carrying/Holding Cost (Normal stock + Safety stock)

    3. In-transit carrying cost

    4. Damage cost

    Air

    1. Freight Cost = 52 x 5000 x 5.5 = $1430,000


    Average stock = (8000 + 0)/2 = 4000 units

    Stock Carrying/holding cost = 4000 x 200 x 0.2 = $160,000/year

    Safety stock = Z x SQRT (SD2LT x d2+ LT x SD2d)

    Z = Normal distribution factor for service level = 2

    SDLT = Std. dev. of lead time = 0

    SDd = Std. dev of Demand = 1000 unit/week

    LT = Lead time = 1 week

    D = Demand per unit time = 5000 unit/week

    Safety stock Qty = 2 x SQRT(0 x 0 x 5000 x 5000 + 1 x 1000 x 1000) = 2000 units

    Safety stock carrying cost = 2000 x 200 X0.2 = $80000/year

    In-transit Quantity = demand per unit time x lead time = 5000 x 1 = 5000

    In-transit Carrying cost = 5000 x 200 x 0.15 = $150000/year

    Damage cost = 52 x 5000 x 0.0015 x 200 = $78000

    Total cost by air = 1430000 + 160000 + 80000 + 150000 + 78000 = $1898000

    Rail

    Freight Cost = 52 x 5000 x 3.2 = $832000

    Average stock = (24000 + 0)/2 = 12000 units

    Stock Carrying/holding cost = 12000 x 200 x 0.2 = $480,000/year

    Safety stock = Z x SQRT (SD2LT x d2+ LT x SD2d)

    Z = Normal distribution factor for service level = 2

    SDLT = Std. dev. of lead time = 0

    SDd = Std. dev of Demand = 1000 unit/week

    LT = Lead time = 4 weeks

    D = Demand per unit time = 5000 unit/week

    Safety stock Qty = 2 x SQRT(0 x 0 x 5000 x 5000 + 4 x 1000 x 1000) = 4000 units
    Safety stock carrying cost = 4000 x 200 X0.2 = $160000/year

    In-transit Quantity = demand per unit time x lead time = 5000 x 4 = 20000

    In-transit Carrying cost = 20000 x 200 x 0.15 = $600000/year

    Damage cost = 52 x 5000 x 0.0025 x 200 = $130000

    Total cost by rail = 832000 + 480000 + 160000 + 600000 + 130000 = 2212000

    Since total cost by air is less than rail so air mode would be selected.

    Letter credit = bank Documents

    Pro-forma Invoice (PI)

    International Commercial Terms (Incoterms): FOB (Free/freight on broad)

    C&F = Cost and Freight

    DDP =delivery duty paid

    DDUP delivery duty un-paid

    FAS

    Ex-works
    Purchaser
    Supplier
    Purchaser’s Supplier’s
    Bank (L/C) Bank

    Third
    Bank
    2. XYZ Ltd is manufacturing jeans pant and suppling to North American markets from its own sells
    center. The cost of each jeans is $80. Demand of the jeans in North America is 30000 units per
    month with a standard deviation of 200 units per day. The company can use express air or regular air
    to transport jeans from Chittagong to New York. If the firm use express air, it can transport minimum
    25000 units, while via regular ship requires a lowest lots of 40000 units. Express ship needs 15 days
    for transportation and clearance, whereas regular ship takes 25 days for that. Freight cost by express
    ship is $1.15 per unit, while regular ship will be $0.90 per unit. During transportation by express ship a
    0.15% of the transported jeans are damaged while it is 0.12% by regular ship. The annual inventory-
    carrying cost is 25% of the cost of the jeans. The firm considers a 95% (Z = 1.65) service level, which
    is standard. (Consider 25 working days per month)

    The company wants to decide on the mode of transport. Evaluate and find which mode is the best?

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