Question

During the past two months, Thomas Train, vice president of transportation for Specialty Metals Company, a metals servicing company with operations in ten mid-western states, has been soliciting bids for the movement of tool steel - specialty steel used for manufacturing tools and related products. Tom’s goal is to reduce the shipping cost of this high-value steel. The supplier is located in Weirton, West Virginia, 350 miles from Specialty’s Toledo, Ohio, service center. Steel Haulers, Inc., a regional contract motor carrier, currently moves the tool steel under contract. Steel Haulers’ current rates are incremental: $2.80/cwt (cwt is hundred-weight or 100 pounds) for shipments weighing less than 150 cwt, $2.60/cwt for shipments between 150 and 250 cwt, $2.40/cwt for shipments between 250 and 400 cwt, and $2.25/cwt for shipment weights in excess of 400 cwt up to a maximum of 450 cwt. The carrier submitted a rate of $2.25/cwt for weights in excess of 400 cwt two hours before the submission deadline for the carrier proposals.

For various equipment, financial, and/or management reasons, Tom has eliminated all but two carrier proposals. One of the two remaining carrier proposals is from Flatbed, Inc., a contract motor carrier that has an excellent reputation for providing specialized steel hauling service. Flatbed submitted a rate of $2.60/cwt with a minimum weight of 100 cwt; the carrier gives no discounts for larger shipments. The second carrier under consideration is the Middlewest Railroad, which submitted a piggyback rate of $2.45/cwt with a minimum of 200 cwt; the rate is for Plan 2, door-to-door piggyback (train and truck) service with a maximum shipment weight of 400 cwt per load. Both motor carriers will provide one-day transit time, while the piggyback transit time is three days.

The final proposal Tom is considering is a private trucking proposal submitted by the transportation department. The estimated total operating cost for the private fleet (including overhead and depreciation) is $50,000 per year; the investment the vehicles require is $85,000. This annual operating cost equates to $2.50/cwt with a minimum of 400 cwt per shipment and fifty shipments per year. The private truck proposal recognizes Specialty’s inability to provide a load for the backhaul from Toledo to Weirton. But, given today’s deregulated environment, the proposal assumes the private fleet will be able to solicit return loads from other Toledo shippers 30 percent of the time and generate $15,000 in annual backhaul revenue.

Specialty has a contract with the steel mill to purchase two million pounds of tool steel per year. Last year, tool steel shipments averaged 250 cwt per order. Tool steel has a purchase value of $250/cwt. Unloading costs would be the same under each proposal. The chief financial officer estimates Specialty’s annual inventory carrying cost per dollar of average inventory stored to be 20 percent (15 percent for the cost of money and 5 percent for the cost of insurance, taxes, and handling); he estimates the cost to place an order to be $75. The inventory-in-transit cost is 15 percent per year.

Tom indicated that he would decide on the bid proposals today. Given the facts of the different proposals, what would you advise Tom to do? Please include your analysis.

Hints

1.         Use cwts instead of lbs as your units.

2.         Calculate four (4) annual costs as part of your total cost:

            a.         Ordering cost

            b.         Carrying cost

            c.         Transportation cost

            d.         In-transit carrying cost

3.         There are four transportation options

            a.         Flatbed (do this one first)

            b.         Middlewest Railroad

            c.         Steel Haulers

            d.         Private Trucking Fleet

4.         For each transportation option, find the order quantity/shipment size that minimizes the total cost. Use increments of 50 cwts (100, 150, etc.), in addition to EOQ.