Although a high percentage of demand was from warehouses either south or east of Kansas City, the question has surfaced concerning the $34,260$ CBM $($approximately $18$ percent of the total volume$)$ 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 $$6\mathrm{.}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 $(34,260$ CBM per year on average$)$ 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. They expect 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.

$*$The data in this case have been developed for teaching purposes and do not represent the actual situation at Grainger. The data, though, are representative of an actual problem that Grainger and similar companies must address to efficiently run the supply chain.

Relative to the U$.$S$.$ distribution network, the cost associated with running the existing system is $$6,147,316.$ Assume that $40$ percent of the volume arrives in Seattle and $60$ percent in Los Angeles and the port processing fee for federal processing at both locations is $$6\mathrm{.}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.

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 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 $$6\mathrm{.}00$ per CBM when done in Los Angeles$).$ Assume $34,260$ CBM would then be kept in Los Angeles for distribution through that warehouse and the rest transshipped by rail to the Kansas City warehouse. The cost to transship to Kansas City would be $$0\mathrm{.}002$ 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 would be transferred by truck to the eight remaining warehouses in the United States at a cost of $$0\mathrm{.}0220$ per CBM$.$ Calculate the cost associated with running the new system.