Please review the case (analytic exercise) below:

Answer these questions based on the data given there.

Analytics Exercise: Distribution Center Location Grainger: U.S. Distribution In the United States approximately 40 percent of the containers enter in Seattle, Washington, and 60 percent at the Los Angeles, California, port. Containers on arrival at the port cities are inspected by federal agents and then loaded onto rail cars for movement to the Kansas City distribution center. Variable costs for processing at the port are $5.00 per cubic meter (CBM) in both Los Angeles and Seattle. The rate for shipping the containers to Kansas City is $0.0018 per CBM per mile. In Kansas City the containers are unloaded and processed through a quality assurance check. This costs $3.00 per CBM processed. A very small percentage of the material is actually sent back to the supplier, but errors in quantity and package size are often found that require accounting adjustments. Items are stored in the Kansas City distribution center, which serves nine warehouses in the United States. Items are also sent to warehouses in Canada and Mexico, but for the purposes of this study we focus on the United States. The nine warehouses each place orders at the distribution center that contains all the items to be replenished. Kansas City picks each item on the order, consolidates the items onto pallets, and ships the items on 53-foot trucks destined to each warehouse. Truck freight costs $0.0220 per CBM per mile. The demand forecasts for the items purchased from China/Taiwan for next year in cubic meters and shipping distances are given in the following table. Grainger: Reengineering the China/U.S. Supply Chain W. W. Grainger, Inc., is a leading supplier of maintenance, repair, and operating (MRO) products to businesses and institutions in the United States, Canada, and Mexico, with an expanding presence in Japan, India, China and Panama. The company works with more than 3,000 suppliers and runs an extensive website (www.grainger.com) where Grainger offers nearly 900,000 products. The products range from industrial adhesives used in manufacturing, to hand tools, janitorial supplies, lighting equipment, and power tools. When something is needed by one of its 1.8 million customers, it is often needed quickly, so quick service and product availability are key drivers to Graingers success. Your assignment* involves studying U.S. distribution in Graingers supply chain. Grainger works with over 250 suppliers in the China and Taiwan region. These suppliers produce products to Graingers specifications and ship to the United States using ocean freight carriers from four major ports in China and Taiwan. From these ports, product is shipped to U.S. entry ports in either Seattle, Washington, or Los Angeles, California. After passing through customs, the 20- and 40-foot containers are shipped by rail to Graingers central distribution center in Kansas City, Kansas. The containers are unloaded and quality is checked in Kansas City. From there, individual items are sent to regional warehouses in nine U.S. locations, a Canada site, and Mexico.

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, 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. It 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 they are not sure if it would actually save any money and whether it would be a good strategic change.

Answer these questions based on the data given.

1. In the present system, what is the annual cost of operations (sum of: port processing, shipping to Kansas City, quality assurance, shipping from Kansas City to the warehouses)

2. In the proposed system (upgrading the LA warehouse), what is the cost of port processing at the two ports? (Hint: same as before)

3. In the proposed system (upgrading the LA warehouse), what is the cost of shipping the incoming units from Seattle to Los Angeles? (Hint: 40 percent of the volume arrives at Seattle; shipping is by rail, at $0.0018 per CBM)

4. In the proposed system (upgrading the LA warehouse), what is the cost of quality assurance check at Los Angeles?

5. In the proposed system (upgrading the LA warehouse), what is the cost of shipping items from Kansas City distribution center to all warehouses (except to Los Angeles)? (Hint: shipping is by truck, at $0.022 per CBM)

6. In the proposed system, what is the annual cost of operations? (sum of: port processing charges, rail shipment of items received in Seattle to Los Angeles, quality assurance check at LA, rail shipment from LA to Kansas City (of all but the items needed at LA), truck shipments from Kansas City to warehouses (other than LA), operating cost at LA which is $350,000)

7. What is the annual savings in terms of operational costs when we switch to the proposed system (upgrading LA facility)? (The difference of the two total costs computed earlier)

8. Given that the one time cost of upgrading the facility at Los Angeles is 1.5 million dollars, what is the payback period (in years)?

   (provide two decimal places)

   (Payback period = the one time cost / the annual savings)

WAREHOUSE Kansas City Cleveland New Jersey Jacksonville Chicago Greenville Memphis Dallas Los Angeles DEMAND (CHM) DISTANCES MILES FROM MNES FROM MILES FROM AVERAGE OF DEMAND KANSAS CITY Las ANGELIS SEATTLE 20,900 11% 0 1,620 1,870 17,100 9% 800 2,350 2,410 24,700 13% 1.200 2,780 2,890 15,200 8% 1.150 2,420 2.990 22,800 12% 520 2,020 2,060 15,200 8% 940 2.320 2.950 17,100 9% 510 1.790 2,330 22,800 12% 500 1.430 2,130 34,200 18% 1,620 0 1,140 Total 190,000 WAREHOUSE Kansas City Cleveland New Jersey Jacksonville Chicago Greenville Memphis Dallas Los Angeles DEMAND (CHM) DISTANCES MILES FROM MNES FROM MILES FROM AVERAGE OF DEMAND KANSAS CITY Las ANGELIS SEATTLE 20,900 11% 0 1,620 1,870 17,100 9% 800 2,350 2,410 24,700 13% 1.200 2,780 2,890 15,200 8% 1.150 2,420 2.990 22,800 12% 520 2,020 2,060 15,200 8% 940 2.320 2.950 17,100 9% 510 1.790 2,330 22,800 12% 500 1.430 2,130 34,200 18% 1,620 0 1,140 Total 190,000