Lycoming Electric Company

Lycoming Electric Company

Case study - Lycoming Electric Company

1. If you were the logistics manager of Lycoming Electric, which system would you advise Ms Shannon to initiate? What criteria did you use to arrive at your decision?

The organization is better off using Rail as demand levels up to 6443.73 tons(calculated below, tradeoff point). Barge is less expensive at demand levels greater than 6443.73 tons. At a demand of 6443.73 tons, both systems produce the same total costs. Thus in ideal conditions, the decision can be based on demand of coal.

But analyzing other conditions, the Susquehanna river basin is one of the country’s most flood prone areas. Generally, floods occur each year somewhere in the basin, and major floods can occur in all seasons of the year. There occurs heavy snowfall and also heavy rainfall. Owing to the climatic issues in the region it would be reliable to depend on a single transport. Thus cost is not the only criterion that needs to be looked into. Reliability of delivery is critical as the weather in Pennsylvania might require stockpiling coal against disruption in the winter in water transportation. Alternative sources of coal may not be convenient to water or require a rail-water move, increasing the cost. Having the barge alternative may help hold down rail rates. A blended mixture of rail and barge may offer the best alternative to cost and assured supply.

2. At what level of demand in tons of coal per year would these two systems be equal?

Let ‘x’ be the number of tons

Total cost = Fixed Cost + Variable Cost/unit * Number of tons

Rail = 99444 + 9.335x

Barge = 116391 + 6.705x

Tradeoff point when both systems will be equal =>

99444 + 9.335x = 116391 + 6.705x

2.63x = 16947

x = 6443.73 tons

3. Graphically represent these two systems and their trade-off point.

Rail = 9.335x + 99444