Determine the operating costs of the current system in relation to the US distribution network. Assume that 40% of the volume arrives in Seattle and 60% in Los Angeles, and that the port processing cost for federal processing is $5 per CBM at both sites. Assume that all materials are transported by rail to the Kansas City distribution center, where they are unloaded and put through quality control. Assume that entire volume is subsequently transported by truck to the nine active warehouses in the US.
Readily available data
Total Demand 190.000
Shipping Rates $0.0018
Port Cost $5
Truck Freight Cost $0.0220 per Cubic Meter (CBM) per mile
Quality Assurance check $3
Warehouse Miles from Kansas City Miles from Los Angeles Miles from Seattle
Kansas City 0 1620 1870
New Jersey 1200 2780 2890
Cleveland 800 2350 2410
Chicago 520 2020 2060
Jacksonville 1150 2420 2990
Greenville 940 2320 2950
Dallas 500 1430 2130
Memphis 510 1790 2330
Los Angeles 1620 0 1140
Total 7240
The total volume of products shipped to Seattle and Los Angeles is given by:
Volume of products shipped to Seattle = 190.000x40% = 76.000
Volume of products shipped to Los Angeles = 19.000x60% = 114.000
Therefore, the total port processing fee at Seattle = 5x76.000 = $380.000
And the total port processing fee at Los Angeles = 5x114.000 = $570.000
After being processed at Seattle and Los Angeles ports, the products are shipped by rail to Kansas City, then unloaded and quality-checked.
Therefore, the shipping rates from Seattle = 0.0081x76,000x1,870 = $1.151.172
And the shipping rates from Los Angeles = 0.0081x114.000x1,620 = $1.495.908
The total quality-check cost at Kansas City = 190.000x3 = $570.000
After undergoing quality check, the products get distributed to nine warehouses by truck.
Therefore, truck freight cost = 190.000x7,240x0.022 = $30.263.200
The total cost involved in the whole system is as follows:
Demand 114.000 76.000
Los Angeles Seattle Total
Port Cost $570.000 $380.000 $950.000
Shipping Cost (rates) $1.495.908 $1.151.172 $2.647.080
Truck freight cost $30.263.200
Quality check $570.000
Total $34.430.280
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 would be inspected by federal officials (this needs to be done at all port locations) and immediately shipped by rail in their original containers to Los Angeles. All volume would be unloaded, and quality checked in Los Angeles (the quality check costs $5.00 per CBM when done in Los Angeles). Eighteen percent of the volume would then be kept in Los Angeles for distribution through that warehouse and the rest transshipped by rail to the Kansas City warehouse. The cost to transship to Kansas City would be $0.0018 per CBM. The material sent to Kansas City would not need to go through the "unload and quality check process" and would be stored directly in the Kansas City distribution center. Assume that the remaining volume be transferred by truck to the eight remaining warehouses in the United States at a cost of $0.0220 per CBM.
What should be done based on your analytics analysis of the U.S distribution system? Is there any obvious change that Grainger might make to have this option be more attractive?
Based on my analysis regarding the United States distribution system, the new Los Angeles distribution system should be added. That is because the annual savings of $466.863 will pay back the Los Angeles' upgrading cost of $1.500.000 within a period of 3.21 years (if the time value for money is not taken into consideration) (Jacobs & Chase, 2014). Therefore, the obvious change that Grainger might perform to make the option more attractive is that all the volumes from China and Taiwan should be shipped to Los Angeles. That will eliminate the shipping costs from Seattle to Los Angeles, which amounts to $155.952. Consequently, the total new savings will increase to $622.815, while the new payback period will reduce to 2.41 years (Jacobs & Chase, 2014).
Is this strategically something that Grainger should do? What has it not considered that may be important?
No, the option of upgrading the Los Angeles facility is strategically something that Grainger should not do. One thing that is important but has not been considered is the Seattle facility's costs that will not be when the new system begins to operate. If the facility's lease is terminated or it is sold, then the payback period will be less that the 2.41 years. However, the new system may face the challenge relating to the risk of using a single port since any problem with the Los Angeles port will have a direct impact on Grainger (Jacobs & Chase, 2014). Besides, the labor costs in Taiwan and China may greatly increase, making it difficult to source products from such countries (Bode & Wagner, 2015). Since the returns have long payback periods, it would be reasonable for Grainger not to upgrade the Los Angeles port and leave it in its current condition.\\n\u2003
References
Bode, C., & Wagner, S.M. (2015). Structural drivers of upstream supply chain complexity and the frequency of supply chain disruptions. (Journal of Operations Management), 36, 215-228. Retrieved on May, 2015 from http://www.sciencedirect.com/science/article/pii/S0272696315000030?via%3
Dihub Jacobs, F.R., & Chase, R.B. (2014). Operations and Supply Chain Management (14th ed.). New York, NY : McGraw-Hill.
