W. W. Grainger, Inc. is a leading supplier of maintenance, repair, and operating (MRO) products to businesses and institutions in the United States, Canada, and Mexico with an expanding presence in Japan, India, China, and Panama. The company works with more than 3,000 suppliers and runs an extensive Web site (www.grainger.com) where Grainger offers nearly 1.8 million products. The products range from industrial adhesives used in manufacturing, to hand tools, janitorial supplies, lighting equipment, and power tools. When something is needed by one of its customers, it is often needed quickly, so quick service and product availability are key drivers to Graingers success. Your assignment involves studying U.S. distribution in Graingers supply chain. Grainger works with over 250 suppliers in the China and Taiwan region. These suppliers produce products to Graingers specifications and ship to the United States using ocean freight carriers from four major ports in China and Taiwan. From these ports, product is shipped to U.S. entry ports in either Seattle, Washington, or Los Angeles, California. After passing through customs, the 20- and 40-foot containers are shipped by rail to Graingers central distribution center in Kansas City, Kansas. The containers are unloaded and quality is checked in Kansas City. From there, individual items are sent to regional warehouses in nine U.S. locations, a Canadian site, and Mexico. Grainger: U.S. Distribution In the United States, approximately 40 percent of the containers enter in Seattle, Washington, and 60 percent at the Los Angeles, California, port. Containers on arrival at the port cities are inspected by federal agents and then loaded onto rail cars for movement to the Kansas City distribution center. Variable costs for processing at the port are $7.00 per cubic meter (CBM) in both Los Angeles and Seattle. The rate for shipping the containers to Kansas City is $0.0017 per CBM per mile. In Kansas City, the containers are unloaded and processed through a quality assurance check. This costs $6.00 per CMB processed. A very small percentage of the material is actually sent back to the supplier, but errors in quantity and package size are often found that require accounting adjustments. Items are stored in the Kansas City distribution center, which serves nine warehouses in the United States. Items are also sent to warehouses in Canada and Mexico, but for the purposes of this study we focus on the United States. The nine warehouses each place orders at the distribution center that contains all the items to be replenished. Kansas City picks each item on the order, consolidates the items onto pallets, and ships the items on 53-foot trucks destined to each warehouse. Truck freight costs $0.0217 per CBM per mile. The demand forecasts for the items purchased from China/Taiwan for next year in cubic meters and shipping distances are given in the following table:

DEMAND (CBM)			DISTANCES
WAREHOUSE	AVERAGE		MILES FROM KANSAS CITY	MILES FROM LOS ANGELES	MILES FROM SEATTLE
Kansas City	20,920		0	1,580	1,870
Cleveland	17,170		790	2,300	2,490
Newark	24,750		1,190	2,710	2,840
Jacksonville	15,140		1,130	2,500	2,940
Chicago	22,880		490	1,960	1,970
Greenville	15,140		890	2,390	2,940
Memphis	17,170		480	1,800	2,390
Dallas	22,880		470	1,450	2,140
Los Angeles	34,300		1,580	0	1,160
Total	190,350

Although a high percentage of demand was from warehouses either south or east of Kansas City, the question has surfaced concerning the 18 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 (at a cost of $3,4300 per CBM per mile), 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 $7.00 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 (approximately 12 percent) 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. Grainger expects 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 it is not sure if it would actually save any money and whether it would be a good strategic change. a. What is the annual savings and payback period for the new system? (Adding Los Angeles distribution center) (Round savings to nearest whole number and "New payback period" to 2 decimal places.)

Total Annual Savings
Payback Period		Years

b. Based on your answer to part c, what is the new annual savings and new payback period? (Round savings to nearest whole number and "New payback period" to 2 decimal places.)

Total Annual Savings
Payback Period		Years.