U.S distribution network

Q 1. Relative to the U.S distribution network, calculate 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 the port processing fee for federal processing 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 warehouses in the United States.

Warehouse

Distances from Kansas City (miles)

Demand (CBM)

Shipping cost to warehouse (U.S $)

Kansas City

0

20900

0.00

New Jersey

1200

24700

652,080

Cleveland

800

17100

300,960

Chicago

520

22800

260,832

Jacksonville

1150

15200

384,560

Greenville

940

15200

314,336

Dallas

500

22800

250,800

Memphis

510

17100

191,862

Los Angeles

1620

34200

1,218,888

Total Shipping Cost

3,574,318

Therefore, the total cost that is associated with running the existing system is given by:

$(588,240 +950,000 + 750,000 + 3, 574,318)

= $5,682,558

Q 2. Consider the idea of upgrading the Los Angles 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 then 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.

Transport Costs from the Port to Los Angeles Distribution Center

Volume

Port Processing

Costs ($)

Distance to Los Angeles

Rail shipment Costs ($)

Los Angeles Unloaded and Quality Costs ($)

Total Costs ($)

Percent (%)

Cubic Meter (CBM)

Basic Information

190,000

5.00

0.0018

5.00

Seattle Port

40

76,000

380,000

1,140

155,952

380,000

915,952

Los Angeles Port

60

114,000

570,000

-

570,000

1,140,000

Sub-Total

2,055,952

Operating Costs at Los Angeles Distribution Center

350,000

Total Los Angeles Costs

2,405,952

Costs for Transshipment to Kansas City

Volume

Distance from Los Angeles to Kansas City

Rail Cost

Percent (%)

Cubic Meter (CBM)

82

155,8000

1620

$454,313

Transport Costs from Kansas City Distribution Center to Warehouse

Warehouse

Distance from Kansas City (Miles)

Demand (CBM)

Truck Volume Costs ($)

Kansas City

0

20900

0.00

New Jersey

1200

24700

652,080

Cleveland

800

17100

300,960

Chicago

520

22800

260,832

Jacksonville

1150

15200

384,560

Greenville

940

15200

314,336

Dallas

500

22800

250,800

Memphis

510

17100

191,862

Los Angeles

0

1620

0.00

Total

155800

2,355,430

Total Cost of the New System

5,215,695

New System’s Annual Savings

466,863

Q 3. What should be done based on your analytics analysis of the U.S distribution system? Should the new Los Angeles distribution center be added? 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. By doing so, the total new savings will increase to $622,815, while the new payback period will reduce to 2.41 years (Jacobs & Chase, 2014).

Q 4. 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 I incurred when the new system begins to operate. If the facility’s lease gets terminated or it gets 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). Additionally, it may be difficult to predict the patterns of the economic forces within the next two to three years. That is because the shipping costs may significantly get impacted by the rise in oil prices (Bode & Wagner, 2015). Besides, the labor costs in Taiwan and China may greatly increase, thereby making it difficult to source products from such countries (Bode & Wagner, 2015). Therefore, 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.

References

Bode, C., & Wagner, S. (2015). Structural drivers of upstream supply chain complexity and the frequency of supply chain disruptions. Journal Of Operations Management, 36, 215-228. http://dx.doi.org/10.1016/j.jom.2014.12.004

Jacobs, F.R., & Chase, R.B. (2014). Operations and Supply Chain Management (14th ed.). New York, NY: McGraw-Hill.