MIS Field Engineering Inc.

MIS Field Engineering Inc. has been providing general engineering support services for oil fields in Libya. Last month the company received an offer for a long-term contract to services (replace, repair) the mega rotary drill units (the shaft and end drill that actually cuts up the rock; comes in many shapes and made of tungsten carbide steel that are specialized for various drilling tasks). MIS is evaluating whether they should sign this contract, which comes into effect in September 2020.

This contract would mandate servicing three new drilling sites and to do that MIS must utilize its central depot. As this depot provides a variety of services to other fields, it would be capable of servicing 700 drill units annually. Although they are all located southeast of the central depot, the three new sites have varying levels of drilling activity for which they would require different number of repairs for their drill units. With a projected eight repairs per week, the first one is located 160 km south and 200 km east of central depot. Located at 150 km south and 180 km east of the central depot the second site is projected to send ten drill units per week for repair. With the deepest level of drilling that requires twelve repairs per week, the third site is located 140 km south and 160 km east of the central depot. MIS predicts that in all these sites at least eight drill units would need to be repaired in a week.

The management of the company has three options for servicing the damaged drill units. The first option is to pick up the damaged drill units from each site, bring them to the central depot, repair them and ship them back to the sites. The second option is to use a warehouse close to the sites which houses repaired units that have been brought from the central depot. With this option, each site would bring their damaged units to the warehouse and pick a repaired one from there. While the second option would be more cost effective in the long run, it would require MIS to a) find or build a warehouse close to the three sites and b) build a road from the central depot to the warehouse for transportation. Since the new region is flat with no topographic challenges a straight two-lane paved road can be constructed at the cost of $400,000 per kilometer, which would be useable for 10 years. As the region has been recently explored, no existing warehouse could be found. Therefore, the company must build a warehouse. The following three types of warehouse can be built:

Warehouse Type	Land and Building	Transportation & operating Cost per drill unit
Type 1	$500,000	$9,000
Type 2	$900,000	$6,000
Type 3	$1,500,000	$4,000

The third option available to MIS is to use a third party logistic (3PL) partner. The winner of MIS call for bid is SHP Logistics that offered the price of $13,500 for one-way transportation of drill units between the central depot and the three sites.

In the worst and best market condition, which type of warehouse do you recommend and why?

What would be the most optimal cost for constructing the road from the central depot to your selected warehouse?