Case: Pashu Khadya Company Ltd

Submitted by: Ravi Mohanta

1. Cost components considered in making the decision: -

 Material Cost: This is the cost of the rice barn extract purchased from Lucknow.
 Transportation Cost: This is the cost incurred on transporting the goods from Lucknow
to the various production facilities. o
 Rail-rake cost: This is the cost of transportation for using the rail-rake.
 Rail-wagon cost: This is the cost of transportation for using the railwagon.
 Road Cost: This is the cost of transportation by road.
 Inventory Holding Cost: This is the cost incurred to hold the inventory in the warehouse.
 Holding Cost: Considered to be 20% of the cost of rice barn
 Local Transport and handling Cost: Applicable additional to the holding cost, but is
essentially a part of holding cost.
 Cost of additional storage: Applicable above storage capacity of warehouse (as per
exhibit 3)

2. Cost calculations for moving rice bran extract from Lukcnow to the four demand
centers in Maharashtra: -

Lot Size of the shipment = 1600 tons =

Q Qrake = 1600
Qwagon = 22

Qroad = 12
Cycle inventory = Q/2, eg 1600/2 = 800
Safety inventory = (Lead time/2) *
(Demand/365) In-transit inventory = Demand
(Lead time/ 365)
Total average inventory = Cycle inventory + Safety inventory + In-transit inventory
Holding cost = 20% of the one ton price = 1400 * .20 = 280 ~ Rs 300/ton
Total cost = Total average inventory + Transportation cost
Option 1: Road

Transportatio Lot Total cost

Deman Transportatio Cycle Safety In-transit Inventor Transi
n Cost (per Size of Total Cost Total
d (tons) n Cost per Inventor Inventor Inventor y Units t Time
ton) (tons Inventory Time
annum (a) y (1) y (2) y (3) (1+2+3) (avg)
) (b)
(a)+(b)
Kalyan 9000 950 12 8550000 6 73.97 147.95 68375.34 8618375.34 227.92 6 6
120156.1 15160156.1
Pune 16000 940 12 15040000 6 131.51 263.01 400.52 6 6
6 6
179334.2 26819334.2
Karad 24000 1110 12 26640000 6 197.26 394.52 597.78 6 6
5 5
Kirloska 120156.1 17080156.1
16000 1060 12 16960000 6 131.51 263.01 400.52 6 6
r 6 6

Option 2: Rail Wagon (without two-point booking)

Time
Transportatio Lot In- Total cost Tota for Transi
Demand Transportatio Cycle Safety Inventor
n Cost (per Size transit of Total Cost l suppl t
(tons) n Cost per Inventor Inventor y Units
ton) (tons Inventor Inventory Tim y Time
annum (a) y (1) y (2) (1+2+3) (avg)
) y (3) (b) e (avg)
(a)+(b)
Kalyan 9000 630 22 5670000 11 770.55 924.66 511861.64 6181861.64 1706.21 62.5 25 37.5
11627409.5
Pune 16000 670 22 10720000 11 1369.86 1643.84 907409.59 3024.70 62.5 25 37.5
9
1359464.3 18039464.3
Karad 24000 695 22 16680000 11 2054.79 2465.75 4531.55 62.5 25 37.5
8 8
Kirloska 12027409.5
16000 695 22 11120000 11 1369.86 1643.84 907409.59 3024.70 62.5 25 37.5
r 9
Option 3: Rake (without two-point booking)

Time
Deman Transportatio In- for
Lot Total cost Tota
d n Cost (per Transportatio Cycle Safety transit Total Cost Inventor suppl Transi
Size of l
(tons) ton) n Cost per Inventor Inventor Inventor y Units y t Time
(tons Inventory Tim
annum (a) y (1) y (2) y (1+2+3) (avg) (avg)
) (b) e
(3)
(a)+(b)
408287.6
Kalyan 9000 600 1600 5400000 800 252.74 308.22 7 5808287.67 1360.96 20.5 8 12.5
539178.0 10779178.0
Pune 16000 640 1600 10240000 800 449.32 547.95 1797.26 20.5 8 12.5
8 8
688767.1 16528767.1
Karad 24000 660 1600 15840000 800 673.97 821.92 2295.89 20.5 8 12.5
2 2
Kirloska 539178.0 11099178.0
16000 660 1600 10560000 800 449.32 547.95 1797.26 20.5 8 12.5
r 8 8

Observation: -

Safety stock is highest in case of transport medium, Wagon. The reason behind this is that this mode has the highest
lead time. Lead time is higher due to higher ordering time and transit time.

3. Following are the conclusions made from the above comparison: -

 Rail rake is the cheapest transportation available for all the locations.
 This is followed closely by Rail wagon in terms of cost. But the time taken to replenish the inventory is the highest,
causing high inventory cost.
 Road seems to be ideal for transportation within cities and not warehouse and locations because the cost is very high
and also the quantity transferred is very less as compared to rake and wagon.
 Lead time wise: Road is followed by rake and wagon, distantly. But due to the lesser capacity it is ruled out for
transport over longer distances.