SCMP Candidate
Executive Summary
This is a very simple yet interesting case in the Logistics and Transportation module. The flour mill in Winnipeg transports 30% of the manufactured flour (150,000 MT) in rail cars to the packaging mills in Calgary (100,000 MT) and Toronto (50,000 MT). The objective of this assignment is to optimize freight options from Winnipeg to Calgary and Toronto in such a way that there are maximum net savings in freight costs.

My decision is that we should ship and unload in the multiples of 100 rail cars from Winnipeg to Calgary and 50 rail cars from Winnipeg to Toronto. This strategy will result in annual savings of $ 825,000 per year.

Production/Ship-to | % | MT | | | Bakeries | 70% | 350,000 | | | Two Mills (Calgart+Toronto) | 30% | 150,000 | | | Total Mill Annual Capacity(MT) | 100% | 500,000 | | | | | | | | | | Metric Tons | Ship to destinations | % | Per year | Per week | Per day | Calgary | 66.67% | 100,000 | 2,000 | 400 | Toronto | 33.33% | 50,000 | 1,000 | 200 | Total | 100.00% | 150,000 | 3,000 | 600 |

As can be seen in the above tonnage calculations, the annual quantity from for both Calgary and Toronto is 150,000 MT. Out of the 150,000 MT, 100,000 MT is transported from Winnipeg to Calgary and 50,000 MT is transported from Winnipeg to Toronto. Weekly and daily tonnage calculations are also calculated based on 50 weeks and 350 days per year.

FREIGHT TARIFF | | Calgary | Toronto | | $/car | $/MT | $/car | $/MT | Single Car | 2,000 | 25 | 4,000 | 50 | 25 cars | 1,760 | 22 | 3,600 | 45 | 50 cars | 1,520 | 19 | 3,120 | 39 | 100 cars | 1,360 | 17 | 2,880 | 36 | Current Freight Cost | MT | $/MT | Total S | Calgary | 100,000 | 25 | 2,500,000 | Toronto | 50,000 | 50 | 2,500,000 | TOTAL | 150,000 | | 5,000,000 |

The above two tables depicts freight tariff and the price point where the customer gets a reduction on freight rate. The current total freight bill is $ 5 million per year. The objective is this assignment is to ensure maximum savings in the freight cost.
Now, comes the most critical calculations. I will be exhibiting the calculation for the options should the Winnipeg mill ship 25, 50 and 100 rail cars at a time and the respective packaging mill unloading it within 12 hours. Each rail car can carry 80 MT so total tonnage involved is number of rail cars multiplied by 80 which in the case of Calgary is 2,000, 4,000 and 8,000 units.
Winnipeg ships Calgary packaging plant 1,250 rail cars and Toronto packaging plant 625 rail cars respectively on an annual basis. I am going to analyse what if situation when each of these locations ship 25, 50 and 100 rail cars at a time. CalgaryNumber of cars | No. of cars | MT | Cars/cycle | Freight/year | Inventory carrying cost | Yearly | 1,250 | 25 | 2,000 | 50 | $ 2,200,000 | 87,500 | $ 2,287,500 | 1,250 | 50 | 4,000 | 25 | $ 1,900,000 | 175,000 | $ 2,075,000 | 1,250 | 100 | 8,000 | 12.50 | $ 1,700,000 | 350,000 | $ 2,050,000 | | | | | | | | | | | | | | | Toronto Number of cars | No. of cars | MT | Cars/cycle | per year | Inventory carrying cost | Yearly | 625 | 25 | 2,000 | 25 | $ 2,250,000 | 87,500 | $ 2,337,500 | 625 | 50 | 4,000 | 12.5 | $ 1,950,000 | 175,000 | $ 2,125,000 | 625 | 100 | 8,000 | 6.25 | $ 1,800,000 | 350,000 | $ 2,150,000 | | | | | | | |

Cycles per car is derived by dividing annual rail cars by number of cars shipped and received at a time. That means the total tonnage in transit at a given point of time. Now based on the number of containers shipped and received together, the rail company provides tier based price breaks to the Winnipeg mill. The higher the number of rail cars, the lower the tariff.

Then comes the important task of calculating the inventory carrying costs. The formula of calculating inventory carrying cost is half of inventory tons x $ per ton x estimated carrying cost%.
We get the total cost by adding the freight cost and inventory carrying cost in each scenario in Calgary as well as Toronto.

As can be seen in the above scenario, in the Winnipeg to Calgary lane, the cost is lowest when 100 rail cars are shipped/shipped at a time and in the Toronto lane, the cost is lowest when 50 rail cars are shipped/received at a time.

I would like to address the three questions that is asked in this case study. 1) Should we choose the incentive rate proposal
Yes, the incentive rate proposal is definitely favourable since in both locations, freight cost goes down when shipping multiple rail cars compared to shipping individual rail cars. 2) Should we ship in 25, 50 or 100 car lots
For Calgary lane, it makes more sense to ship in lots of 100 rail cars and for the Toronto lane, it makes more sense to ship in lots of 50 rail cars. 3) How much money will it save the company?
As I said earlier, the current freight bill for both locations is $ 5,000,000. The revised freight cost of Winnipeg-Calgary lane plus the inventory carrying cost is $ 2,050,000. The revised freight cost of Winnipeg-Toronto lane plus the inventory carrying costs is $21,25,000. So, proposed total cost is $41,75,000 thereby achieving a savings of $825,000.