US Electronics (USE) is an American manufacturer of electronic equipment. The company has a single manufacturing facility in San Jose, California. USE distributes its products through five warehouses located in Atlanta, Boston, Chicago, Dallas, and Los Angeles. In the current distribution system, the United States is partitioned into five major markets, each of which is served by a single regional warehouse. Customers, typi- cally retail outlets, receive items directly from the regional warehouse in their market. That is, in the current distribution system, each customer is assigned to a single market and receives deliveries from one regional warehouse. The warehouses receive items from the manufacturing facility. Typically it takes two weeks to satisfy an order placed by any of the regional warehouses. The warehouses use a reorder point system for controlling inventory. Currently, USE provides their cus- tomers with a probability of not stocking out of 90%. In recent years, USE has seen a significant increase in competition and huge pressure from their customers to improve service levels and reduce costs. To this end, USE would like to consider an alternative distribution strategy in which the

five regional warehouses are replaced with a single central warehouse that will be in charge of all the customer orders. This warehouse should be one of the existing warehouses. The company CEO insists that whatever distribution strategy is used, USE will design the strategy so that the customer probability of not stocking out is increased to about 97%. To perform a rigorous analysis, you have identified a typical product, Product A. The first table provides historical data that includes weekly demand for this product for the last 12 weeks in each of the market areas. An order placed by a warehouse to the factory costs $5,550 (per order) to process, and holding inventory costs $1.25 per unit per week for each unit in the warehouse.

In the current distribution system, the cost of transporting a product from the manufacturing facility to a warehouse is given in the second table (see the col- umn ?Inbound?). The second table also provides information about transportation cost per unit from each warehouse to the stores in its market area (see the column ?Outbound?).

?Finally, a third table provides information about transportation costs per unit from each existing regional warehouse to all other market areas, assuming this regional ware- house becomes the central warehouse.

a. A detailed analysis of customer demand in the five market areas reveals that the demand in the five regions are very similar; that is, it is common that if weekly demand in one region is above average, so is the weekly demand in the other regions. How does this observation affect the attractiveness of the new system?

b. Suppose you are to compare the two systems for Product A only, what is your recommendation? To answer this question, you should compare costs and average inventory levels for the two strategies assuming demands occur according to the historical data. Calculate all costs on an annual basis. Also, determine which regional warehouse will be used as the centralized warehouse.

c. Itisproposedthatinthecentralizeddistributionstrategy,thatis,theone with a single warehouse, products will be transported from the factory to the warehouse using UPS Ground Service, which guarantees that products will arrive at the warehouse in three days (0.5 week). You do not anticipate any changes in outbound transportation. Of course, in this case, transportation cost for shipping a unit product from a manufacturing facility to the warehouse increases. In fact, in this case, transportation costs increase by 50%. Thus, for instance, shipping one unit from the manufacturing facility to Atlanta will cost $18. Would you recommend using this strategy? Explain your answer.

d. The table below has the key financial accounts for USE. Management believes that this idea for centralizing distributon and using UPS can be applied to 500 items with similar potential savings for each item. The inventory holding cost savings would impact the asset inventory account, setup cost savings would impact the expenses?labor account, and transportation cost savings would impact the expenses?materials account. Estimate the impact that implementing the strategy that you recommend on USE?s net income, return on assets, profit margin, and asset turnover