Choosing a transportation mode based solely on freight rates can lead to suboptimal supply chain decisions. A lower freight cost may generate additional inventory, increase working capital requirements and expose the business to longer replenishment cycles.
This case evaluates whether shifting low-to-medium-value automotive components from express road freight to intermodal Ro-Ro and rail transportation creates a sustainable financial advantage.
1. Problem Definition
A company imports 120 tons of raw materials and components per week from Europe to its manufacturing plant. The company is evaluating two transportation alternatives.
Option A — Express Road Freight
· Freight cost: €225/ton
· Transit time: 4 days
· Safety stock: 1 day
· Total inventory coverage: 5 days
Option B — Intermodal Ro-Ro + Rail
· Freight cost: €150/ton
· Transit time: 9 days
· Safety stock: 4 days
· Total inventory coverage: 13 days
The transported material has an average value of €7,500 per ton. The annual inventory carrying cost rate is assumed to be 20%, including the cost of capital, warehousing, insurance and obsolescence.
The operating model assumes 52 weeks of annual demand and stable average consumption.
The key question: Does the freight cost reduction justify the additional inventory and working capital required by the slower transportation mode?
