Transportation and Inventory Cost

timer Asked: Oct 1st, 2013

Question Description

I don’t understand this Business question and need help to study.

Question 1

JetFuel Inc. supplies jet fuel to the Seattle Tacoma International Airport.  The fuel is picked up from a refinery in tanker trucks, and delivered directly to the airport’s fuel reservoir.  Demand is known due to the scheduled nature of commercial aviation.  Problem parameters are given in the table below:

Distance from refinery to Sea-Tac

150 miles

Truck capacity

5,000 gallons

Demand per day

50,000 gallons

Truck travel speed

30 miles/hour

a.  Draw a diagram that shows the cumulative number of gallons against time (hours), for one 24 hour period.  Assume the refinery only produces fuel for JetFuel and this production occurs at a constant rate.  Assume consumption at the airport is constant, and the reservoir is never allowed to drop below 150,000 gallons.  Inventory held at the refinery can be as little as 0.  Trucks are dispatched full. 

b.  Can you identify the time between production and consumption for each gallon of fuel ?

c.  On the diagram, indicate inventory held at the refinery, and inventory held at the airport. 

d.  How large does our storage capacity need to be at the refinery? 

e.  Name one change that could be made to this logistics system to reduce transportation cost, and any necessary assumptions.

f.  Name one change that could be made to this logistics system to reduce inventory cost, and any necessary assumptions.

g.  If the transportation company has ownership of the fuel only between the refinery and the airport (not at the refinery or the airport), would the transportation company decrease logistics cost (sum of transportation and inventory) by shipping more or less frequently?

Question 2

JetFuel is thinking about serving several other municipal airports in the Puget Sound region, and one of their considerations is whether or not to build their own holding facility.  The demand at municipal airports is more variable, because these airports serve private jets and recreational flyers rather than commercial airlines.  The average and variance of demand is shown in the table below.

Renton Municipal Airport

Boeing Field

Vashon Municipal Airport

Ephrata Municipal Airport


Average daily demand

10,000 gallons

25,000 gallons

5,000 gallons

5,000 gallons

54,286 gallons

Variance in daily demand

5,000 gallons

5,000 gallons

2,000 gallons

1,000 gallons

0 gallons

a)  By how much would the inventory held be reduced if a central holding facility was used rather than holding the fuel at each airport?  Assume the airports hold 5 standard deviations, in addition to two days demand, and that you would hold the 5 standard deviations plus two days demand for the group at the holding facility.  You can ignore any in-transit inventory between the holding facility and the airports.

b)  Assume inventory held at the refinery is owned by the refinery, inventory in transit (between the refinery and the airports) is owned by JetFuel, and inventory at the airports is owned by the airports.  Would you advise JetFuel to use a holding facility?  Why or why not?

c)  To design a network structure for a delivery route, what would be the most important pieces of information to consider (assuming your priority was to minimize cost)? 

d)  How would your decision process be different if you were delivering milk instead of jet fuel?

e)  Which market (SeaTac versus municipal airports) do you think could be served at a lower logistics cost per gallon?  Why?

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