This is the question:

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)

Analytics Exercise: Distribution Center Location Grainger: Reengineering the China/U.S. Supply Chain W. W. Grainger, Inc., is a leading supplier of mainte- Your assignment involves studying U.S. distribution nance, repair, and operating (MRO) products to busi- in Grainger's supply chain. Grainger works with over 250 nesses and institutions in the United States, Canada, and suppliers in the China and Taiwan region. These suppliers Mexico, with an expanding presence in Japan, India, produce products to Grainger's specifications and ship to the China, and Panama. The company works with more than United States using ocean freight carriers from four major 3,000 suppliers and runs an extensive Website (www ports in China and Taiwan. From these ports, product is .grainger.com) where Grainger offers nearly 900,000 shipped to U.S. entry ports in either Seattle, Washington, or products. The products range from industrial adhesives Los Angeles, California. After passing through customs, the used in manufacturing, to hand tools, janitorial supplies, 20- and 40-foot containers are shipped by rail to Grainger's lighting equipment, and power tools. When something central distribution center in Kansas City, Kansas. The con- is needed by one of its 1.8 million customers, it is often tainers are unloaded and quality is checked in Kansas City. needed quickly, so quick service and product availability From there, individual items are sent to regional warehouses are key drivers to Grainger's success. in nine U.S. locations, a Canadian site, and Mexico. Grainger: U.S. Distribution In the United States, approximately 40 percent of the containers enter in Seattle, Washington, and 60 per- cent 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 CMB 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 cen- ter, which serves nine warehouses in the United States. Items are also sent to warehouses in Canada and Mex- ico, 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, as well as the shipping distances, are given in the following table. Distances Demand (CBM) Miles from Kansas City Miles from Los Angeles Miles from Seattle Warehouse Average % of Demand Kansas City Cleveland New Jersey Jacksonville Chicago Greenville Memphis Dallas Los Angeles 20,900 17,100 24,700 15,200 22,800 15,200 17,100 22,800 34,200 11% 9% 13% 8% 12% 8% 9% 12% 18% 0 800 1,200 1,150 520 940 510 500 1,620 1,620 2,350 2,780 2,420 2,020 2,320 1,790 1,430 0 1,870 2,410 2,890 2,990 2,060 2,950 2,330 2,130 1,140 Total 190,000 little would need to be shipped back to the Los Angeles warehouse after the new system has been operating for 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. Although a high percentage of demand was from warehouses either south or east of Kansas City, the ques- tion 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. Grainger expects that very Specific questions to address in your analysis: 1. Relative to the U.S. distribution network, calcu- late the cost associated with running the existing system. Assume that 40 percent of the volume arrives in Seattle and 60 percent in Los Angeles and that the port processing fee for federal process- ing at both locations is $5.00 per CBM. Assume that everything is transferred to the Kansas City distribution center by rail, where it is unloaded and quality-checked. Assume that all volume is then transferred by truck to the nine existing ware- houses in the United States. 2. Consider the idea of upgrading the Los Angeles warehouse to include a distribution center capable of processing all the volume coming into the United States. Assume that containers coming into Seattle