Flour

| Flour Inc. |

Memo

To: Bob Brown, Logistics Manager

From: Supply Chain Analyst

Date: [ 25/11/2013 ]

Re: Benefits of Shipping Incentive Rates for Bulk Flour Transportation

An analysis was completed to explore the issue of trade-offs between inventory and other supply chain costs versus incentives for bulk shipping rates.

Currently, flour is shipped on a regular basis via railway transportation from our flour mill in Winnipeg to our packaging plants located in Calgary and Toronto. The railway has been spotting 125 cars each week at our flour mill. Each car holds 80 tonnes of flour and is processed and shipped car-by-car. Shipments are held in rail cars until they are unloaded and we process the 125 cars each week. We are currently paying single car rates due to the lack of storage facilities at packaging plants.

Our mill produces 500,000 metric tonnes per year:

* 70% (350,000 metric tonnes) are shipped and sold to commercial bakeries and food processers

* 30% (150,000 metric tonnes) are shipped to our packaging plants

* 100,000 tonnes shipped to Calgary

* 50,000 tonnes shipped to Toronto

Based on the bulk incentive rates offered by the railway, an analysis was conducted to determine how much money could be saved from using multiple car rates. We considered shipping in car lots of 25 car lot shipments weekly, 50 car lot shipments every 2 weeks and 100 car lot shipments every 4 weeks. Storage facilities would have to be constructed at the packaging plants and we determined that the costs of storage would be 25% of the wholesale value of the flour or 87.50 per tonne. We also determined the company would need to keep a buffer stock of 1000 tonnes of flour if we were to have shipment cycles greater than 3 weeks.

The results of our analysis showed that the incentives for shipping our flour in car lot shipments of 50 every 2 weeks would save the company the most money. Savings of 424,000 compared with 212,500 using 25 car lots...