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Milo’s Home Improvement

Mini-case study: As a newly hired supply chain analyst for
Milo’s Home Improvement, you have been asked to assess inventory
and shipping policies at the company’s distribution center (DC) in
the Atlanta, GA area. Specifically, you have been asked to choose a
replenishment option for a particular stock-keeping unit (SKU), a
front brush guard, which is an optional accessory for a line of
lawn tractors that are also sold by Milo’s. Important product- and
operations-related data appear in Table 4.11. Your manager, Goober
Pyle Jr., the VP of Logistics, is still suspicious of whether all
that “fancy college book learnin’ ” justifies the big salary that
he is paying you. TABLE 4.11 Operations and Product Data for
Exercise 4.11 Cost to receive an order in the DC $25 Annual on-site
holding cost (% of item value) 30% Annual in-transit holding cost
(% of item value) 25% Item weight 12 lb Item cost (delivered, TL)
$35 Projected annual demand 26,000 units Operating days per year
365 Transportation Decisions in Supply Chain Management 223 The
supplier of the front brush guard has offered two options for the
freight terms and price (i.e., cost to Milo’s) for this item: •
Option 1: F.O.B. destination, freight prepaid terms, provided that
the supplier can use its preferred truckload (TL) carrier to make
full truckload shipments of 3200 units, on whatever schedule you
require—i.e., shipping any day of your 365-day operating year. The
order fulfillment lead time is 3 days, 1 day of which covers
transit time from the supplier’s facility in Memphis, TN. The TL
carrier charges the supplier $2.25/mi, or $882 for the Memphisto-
Atlanta shipment. • Option 2: F.O.B. origin, freight collect terms,
with a 1.5% discount in the price (i.e., unit cost to Milo’s) of
the guards. In considering this option, you intend to utilize the
same TL carrier that your supplier has been using. The total order
fulfillment lead time for this option is the same as that for
Option 1, 3 days in total, including a commitment by the TL carrier
to the same 1-day transit time. Since you cannot guarantee the
level of additional shipment volume that your supplier can,
however, the carrier has quoted you a TL rate that is 10% higher
than the rate the supplier was paying. a. Explain what you believe
to be the relevant costs in choosing between these options. b.
Compute the total relevant annual cost of Option 1, clearly stating
each separate component of the total. c. For Option 2, what order
quantity do you recommend? Why? Compute the total relevant annual
cost for this order quantity, clearly stating each separate
component of the total. d. Which option do you prefer? Why? e. Your
boss Goober believes that you might be better off to hire the LTL
carrier where his cousin Gomer works the night shift. A rate tariff
for this carrier’s LTL service on this origin-destination lane is
given in Table 4.12. For your recommended order quantity from (c),
how would the annual transportation cost for LTL service compare to
the options given earlier? What other information would you need in
order to assess this option completely versus Options 1 and 2?

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