Rail or road: a 5,400 MT movement against a monsoon deadline
A zonal depot must move 5,400 MT of bagged wheat to a deficit depot 520 km away before the monsoon. Two modes are available. By road, a 25 MT truck costs ₹1,450 per MT, door to door, with two days transit and unlimited trucks on call. By rail, one rake of 59 wagons carries 2,600 MT at ₹1,050 per MT, plus a fixed siding handling charge of ₹1.4 lakh per rake; the depot's siding can hold only one rake at a time and needs 30 hours to load it. The destination terminal allows 8 hours of free time per rake and then charges detention of ₹2,000 per wagon per day or part thereof. The destination yard has detained rakes for four to five days in each of the last three months. The finance cell has approved a total movement cost of ₹80 lakh, and the deficit depot holds 24 days of stock.
1. Work out the landed movement cost per tonne for each option, and say which is cheaper on paper.
Read the worked answer
Road. 5,400 MT × ₹1,450 = ₹78,30,000, or ₹1,450 per tonne exactly, since the rate is door to door.
Rail.
- Two rakes carry 2 × 2,600 = 5,200 MT. The residual 200 MT has to go by road, because a third rake for 200 MT is absurd.
- Rail freight: 5,200 × ₹1,050 = ₹54,60,000.
- Siding handling: 2 × ₹1,40,000 = ₹2,80,000.
- Road balance: 200 × ₹1,450 = ₹2,90,000.
- Total: ₹60,30,000, or about ₹1,117 per tonne.
On paper, rail saves ₹78,30,000 − ₹60,30,000 = ₹18,00,000, roughly ₹333 per tonne or 23%. Both options fit inside the ₹80 lakh approval.
Two checks before trusting the figure: confirm the current railway freight notification and the sanctioned rate contract rather than a rate quoted in a meeting, and confirm that bagged wheat will actually load to the wagons' permissible carrying capacity. Under-loading a rake raises the effective cost per tonne and quietly destroys the margin computed above.
2. Using the terminal's detention record, find the average detention per rake at which rail stops being cheaper, and state what you would do.
Read the worked answer
Detention per rake per day = 59 wagons × ₹2,000 = ₹1,18,000.
Break-even. The saving of ₹18,00,000 is consumed at 18,00,000 ÷ 1,18,000 = 15.25 rake-days. Spread over two rakes, that is about 7.6 days of detention per rake. So rail remains cheaper in cash terms until the terminal detains each rake for more than roughly a week.
Expected outcome. The yard's record is four to five days. At 4.5 days per rake: 2 × 4.5 × ₹1,18,000 = ₹10,62,000. Total rail cost becomes ₹70,92,000 against ₹78,30,000 by road, a net saving of ₹7,38,000, or about 9%.
The judgement. A 9% saving is not a reason to bet the monsoon deadline. The 200 MT road balance still has to be arranged, the siding can hold only one rake at a time so the second rake is placed after the first is cleared, and a single extra day of detention on each rake removes about ₹2.4 lakh of the margin. My decision: book rail only if the receiving terminal confirms in writing that it will have free space when each rake arrives and accepts a detention cap; stagger the rakes; keep a road contingency of trucks on call. If the terminal will not commit, take road. Missing the deadline costs more than ₹7.4 lakh in downgraded stock and emergency lift.
3. A subordinate suggests moving half the tonnage by rail and half by road 'to hedge the risk'. Evaluate this with numbers.
Read the worked answer
The hedge does not split at 50:50 in practice, because rail only becomes cheap at rake size. A half-share of 2,700 MT still means a full 2,600 MT rake plus 100 MT, so the real split is 2,600 MT by rail and 2,800 MT by road.
Cost of the hedge.
- Rail: 2,600 × ₹1,050 = ₹27,30,000, plus ₹1,40,000 handling = ₹28,70,000.
- Road: 2,800 × ₹1,450 = ₹40,60,000.
- Total: ₹69,30,000, or about ₹1,283 per tonne.
Comparison. All-rail, before detention, is ₹60,30,000; all-road is ₹78,30,000. The hedge sits between them and costs about ₹9 lakh against all-rail, buying schedule certainty for only half the tonnage. It also forfeits the full-rake economics on the rail leg and leaves the siding tied up for 30 hours for a smaller consignment.
When it is right. Hedging is justified when the consequence of late delivery is large relative to ₹9 lakh. Here the deficit depot holds 24 days of stock, so there is time to absorb a delay on one rake. With 24 days of cover the hedge is not worth ₹9 lakh; with 10 days of cover it would be. The subordinate's instinct is sound, but it should be triggered by days of cover at the destination, not applied as a fixed rule.