Although a high percentage of demand was from warehouses either south or east of Kansas City, the
Question:
Although a high percentage of demand was from warehouses either south or east of Kansas City, the question has surfaced concerning the 18 percent that will be shipped to Kansas City and then shipped back to the Los Angeles warehouse. This double-transportation could potentially be eliminated if a new distribution center were built in Los Angeles. The idea might be to ship material arriving at the Seattle port by rail to a new Los Angeles distribution center (at a cost of $0.0018 per CBM per mile), which would be located at the current location of the Los Angeles warehouse.
It is estimated that the Los Angeles facility could be upgraded at a one-time cost of $1,500,000 and then operated for $350,000 per year. In the new Los Angeles distribution center, containers would be unloaded and processed through a quality assurance check, just as is now done in Kansas City. The variable cost for doing this would be $5.00 per CBM processed, which includes the cost to move the containers from the Los Angeles port to the distribution center.
After the material is processed in Los Angeles, the amount needed to replenish the Los Angeles warehouse (approximately 18 percent) would be kept and the rest sent by rail to Kansas City. It would then be directly stocked in the Kansas City distribution center and used to replenish the warehouses. Grainger expects that very little would need to be shipped back to the Los Angeles warehouse after the new system was operating for about six months.
Grainger management feels that it may be possible to make this change, but it is not sure if it would actually save any money and whether it would be a good strategic change.
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw