Question 1

DEMAND (CBM)	DISTANCES
WAREHOUSE	AVERAGE	MILES FROM KANSAS CITY	MILES FROM LOS ANGELES	MILES FROM SEATTLE
Kansas City	20,960	0	1,540	1,890
Cleveland	17,180	800	2,260	2,530
Newark	24,790	1,200	2,670	2,820
Jacksonville	15,180	1,140	2,530	2,920
Chicago	22,760	450	1,930	1,920
Greenville	15,180	850	2,430	2,920
Memphis	17,180	440	1,840	2,270
Dallas	22,760	430	1,490	2,170
Los Angeles	34,160	1,540	0	1,070
Total	190,150

Although a high percentage of demand was from warehouses either south or east of Kansas City, the question has surfaced concerning the 34,160 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 $8.00 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 (34,160 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, 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 $8.00 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