In-transit inventory costs

For supply chains, transportation flows enable products or components to change location, thus enabling them to be used at their demand points. The timing of these transportation flows in turn interacts with transport capacity and chain structure to impact supply chain performance. Given this interaction, the total supply chain impact of a choice of transportation flows has to include transport costs, cycle stock costs, safety-stock costs, and in-transit inventory costs. For each possible transport mode, there are... 

Given a holding cost per unit per unit time, the associated in transit inventory cost is hLD. Note that the average in transit inventory is independent of the shipment size Q but only depends on the transport lead time and the demand rate. 

When selecting a mode of transportation, managers must account for unit costs and cycle, safety, and in-transit inventory costs that result from using each mode. Modes with high transportation costs can be justified if they result in significantly lower inventory costs. 

The product s value also influences its inventory carrying cost and the desirability of premium transportation. Low-value, low-margin grocery products may be shipped by rail car and stored in field warehouses. High-value component parts and products such as high-fashion merchandise may be shipped by air freight to minimize in-transit inventories and reduce inventory carrying costs and markdowns. 

In particular, consider an alternate proposal for the rail option, whereby the trains travel at a lower average lead time that is less variable. Since transport cost per unit of train shipments is low, these lower average lead time and less variability could reduce both the in-transit inventory holding costs to ship by rail and the associated safety stock. We examine next the impact of these changes on the total supply chain cost experienced by the shipper. 

Notice that the equation above is Litde s law, which states that the average number of units in a queue is the demand rate times the average lead time. Little s law links lead time to work in process inventory. In our case, the inventory in transit is work-in-process inventory between the component plant and the assembly plant where it is required. Once we get the average in-transit inventory, we merely have to multiply it with the holding cost per unit per unit time to get the holding cost associated with the in-transit inventory. 

In-transit inventory holding cost between Santa Fe and Boston... 

Thus, total in-transit inventory holding cost between all component plants and assembly plants = l,440/day. 

Let us assume an in-transit holding cost rate of 22%, less than the onsite rate stated in Example 4.2, reflecting the fact that the in-transit rate covers only the cost of capital tied up in inventory (in this case, tied up in accounts payable and on the books in the "liabilities" column of the firm s balance sheet) and possible other risk-related costs like the risk of loss and/or damage in transit. Thus, with an item cost of 20, the annual in-transit holding cost is = (0.22)( 20) = 4.40/year. Let us also assume that the lead time in this case comprises the entire transit time (i.e., not allowing for a separate, constant order processing time), such that Xr = = 5 days. Finally, let us assume that the hard-working people... 

Based on the model presented in this chapter, is in-transit inventory holding cost affected by the inventory policy parameters (i.e., order quantity or reorder point) Why or why not How does in-transit holding cost affect the transportation decision ... 

The mode of transportation impacts inventory cost in different ways. First, a slower mode creates higher in-transit inventory, increasing the safety stock needed to protect against the uncertainties in supply and demand. It also increases the order lead time, so additional safety stock may be needed to protect against uncertainty in demand during the lead time. Second, larger shipment sizes may create cycle inventory, which happens when the batch shipment size exceeds the current demand. Thus smaller shipments using faster modes can reduce three types of inventories, but the associated transportation costs would increase. 

Golden s new proposal will result in low transportation costs for EE if the plant manager orders in lots of 4,000 motors. The plant manager, however, decides to include inventory costs in the transportation decision. EE s annual cost of holding inventory is 25 percent, which implies an annual holding cost of// = 120 X 0.25 = 30 per motor. Shipments by rail require a five-day transit time, whereas shipments by truck have a transit time of three days. The transportation decision affects the cycle inventory, safety inventory, and in-transit inventory for EE. Therefore, the plant manager decides to evaluate the total transportation and inventory cost for each transportation option. 

Alternative Lot Size (Motors) Transportation Cost Cycle Inventory Safety Inventory In-Transit Inventory Inventory Cost Total Cost... 

Inventory costs Supplier inventory, including raw material, in process and finished goods, in-transit inventory, finished goods inventory in supply chain Yes... 

About 2.5 million tons (2.3 million tonnes) of coal arc burned daily in U.S. power plants. This is equivalent to roughly 21,000 railcars in transit, so it is apparent that coorditiatiiig production and cotistimp-tioii is no easy task. Accidents, rail strikes, natural disasters (e.g., floods that take out bridges and rail lines) and severe weather (e.g., deep river freezes that halt barge traffic) can all severely disrupt deliveries for utility customers dependent on a reliable coal supply for base load plants. Nonetheless, to reduce costs U.S. utilities have significantly reduced typical inventory levels over time. Wliereas a coal inventory of ninety days of supply was once typical, inventories now frequently run in the range of thirty to forty-five days. 

Transit inventories cause additional capital costs in addition to the stationary inventories in warehouse locations that need to be considered in value chain planning. 

Transportation value variables are transportation costs ( for V p, e, /, /2 e /7 8, / e / in the transportation-lane specific currency as transit inventory value vTpel t and transit inventory capital costs t, V p,e,lMer,teT. 2... 

Detailed transit inventory capital costs are measured for each period in the transportation lane-specific currency. 

Monthly capital costs for transit inventories are calculated based on the transportation lane and product-specific transit inventory value in the basis currency of the end location and applying the interest rate equation. 

If transition efforts can be expressed in terms of costs, the total costs for pipeline transport can be used as the planning objective. In this context, total costs comprise transition costs, transport costs, and inventory costs. Transport costs account for operational pipeline costs, such as the energy costs for pumping. These costs are affected by the pipeline s pump rate which needs to be explicitly controlled and planned when the transported materials differ in viscosity or other physical properties. Inventory costs are... 

Intransit inventory costs When inventory is shipped from the supply point, we assume that title for the goods passes to the buyer, who then arranges all transport. Thus the buyer is responsible for the inventory of goods in transit between supply and demand points. What is the level of inventory in transit from the supply to demand points ... 

In establishing the TBP, the planner should consider the volume of sales, the cost of in-transit inspection for each delivery, and volatility in demand. In applying 3C, more frequent reviews (shorter TBPs) lower the supply chain inventory. 

The basic ideas of our results, however, apply to other transit modes as well. The essential tension for the decision maker is between using smaller shipments more frequently, but at a potentially higher per-imit shipping cost, versus making larger but less costly shipments less frequently. Qearly, this has implications for transportation and inventory costs, and potentially for customer service as well. Thus, as we develop the analysis to follow, we can see some of the coimec-tions implied by the discussion in the book up to this point inventory, transportation, and customer service (and the impact on customer service of imcerlainty in describing demand). In Chapter 5, we will incorporate another intercoimec-tion, specifically the network that specifies the locations in the supply chain linked by our transportation choices, and at which inventories are stored and/or converted until they move again toward their point of consmnption. 

The task force identified that plant capacities allowed any reasonable order to be produced and delivered in five days. The replenishment lead time was thus five days. The DCs ordered using a periodic review policy with a reorder interval of six days. The holding cost incurred was 0.15 per unit per day whether the unit was in transit or in storage. All DCs carried safety inventories to ensure a CSL of 95 percent. 

Faster modes of transportation are preferred for products with a high value-to-weight ratio (an iPad is a good example of such a product) for which reducing inventories is important, whereas cheaper modes are preferred for products with a small value-to-weight ratio (e.g., furniture imported by IKEA) for which reducing transportation cost is important. The choice of transportation mode should take into account potential lost sales and cycle, safety, and in-transit... 

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