ABC Company is a manufacturer of plastics. The company has a single manufacturing facility in Utica, New York and distributes its products through five regional warehouses located in Atlanta, Boston, Chicago, Dallas, and Las Vegas. Under the current distribution system, the United States is partitioned into five major markets, each of which is served by a single regional warehouse in the market. That is, each customer is assigned to one market and receives deliveries from a single regional warehouse.

The warehouse receive items from the manufacturing facility. It typically takes 4 weeks to satisfy an order placed by any of the regional warehouses. Currently, ABC provides regional warehouses with a service level of 95%.

In recent years, ABC has seen a significant increase in competition and intense pressure from its customers to reduce costs. To do so, it would like to consider an alternative distribution strategy in which the five regional warehouses are replaced with a single, central warehouse that would process all customer orders. This warehouse will be one of the five existing warehouses. The companys CEO insists that whatever distribution strategy is used, ABC should maintain a service level of 95%.

Please address the following three questions:

A detailed analysis of customer demand in the five market areas reveals that the demand in the five regions is very similar; that is, it is common that if weekly demand in one region is above average, so is the weekly demand in other regions. How does this observation affect the attractiveness of the new system? Please explain (no calculations are needed).

To perform a rigorous analysis, you have identified a typical product, X. Table 1 provides historical data that includes weekly demand for this product for the last 10 weeks in each of the market areas. An order placed by a warehouse to the factory costs $2,000 per order and inventory carrying costs are $1.50 per unit per week. The costs of inbound and outbound transportation costs under the current distribution system are given in Table 2. Finally, Table 3 provides information about inbound and outbound transportation costs between the existing regional warehouses and the other market areas if a particular regional warehouse were to become the centralized warehouse.

Table 1: Historical Demand
Week	1	2	3	4	5	6	7	8	9	10
Atlanta	120	110	100	90	80	130	110	90	100	100
Boston	120	100	110	120	110	100	120	100	110	120
Chicago	250	275	225	200	300	250	225	250	250	275
Dallas	50	60	70	40	30	50	50	60	40	50
Las Vegas	300	310	320	330	310	290	270	280	290	300

Table 2: Inbound and Outbound Per-Unit Transportation Costs for Current System
Warehouse	Inbound	Outbound
Atlanta	14	12
Boston	12	12
Chicago	12	12
Dallas	14	12
Las Vegas	16	12

Table 3: Outbound Per Unit Transportation Costs for Centralized System
Warehouse	Atlanta	Boston	Chicago	Dallas	Las Vegas
Atlanta	12	14	16	13	17
Boston	14	12	13	15	16
Chicago	16	13	12	15	15
Dallas	13	15	15	12	13
Las Vegas	17	16	15	13	12

If you are comparing the two systems for Product X only, what is your recommendation? To answer this question, you should compare the total costs (i.e. ordering cost, inventory carrying cost, inbound transportation cost, and outbound transportation cost) for the two strategies, assuming demand occurs according to the historical data. Also, you should determine which regional warehouse should be used as the centralized warehouse.

It is proposed that if the centralized distribution strategy, the one with a single warehouse, is used, products will be distributed using UPS Ground Service, which guarantees that products will arrive at the warehouse in 3 days (0.5 weeks). Of course, in this case, transportation cost for shipping a unit from a manufacturing facility to the warehouse increases. In fact, transportation costs would increase by 20%. Thus, for instance, shipping one unit from the manufacturing facility to Boston would cost $12 * 1.2 = $14.40. Would you recommend using this strategy? Explain your answer.