1. Relative to the U.S.
distribution network, calculate the cost associated with running the existing
system. Assume that 40% of the volume arrives in Seattle and 60% in Los Angeles, and the port
processing fee for federal inspection at both locations is $5.00 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.
Answer
K.C Distribution Center Only
Port to DC Costs
Volume Port Distance K.C. Unload Total
Pct CBM Processing to K.C. Rail Costs and Q.C. Costs
Basic Data 190,000 $5.00 $0.0018 $3.00
Seattle Port 40% 76,000 $ 380,000 1,870 $ 255,816 $ 228,000 $ 863,816
L.A. Port 60% 114,000 $ 570,000 1,620 $ 332,424 $ 342,000 $ 1,244,424
$ 2,108,240
DC to Warehouse Costs
Truck
Miles Freight
Warehouse Demand from KC Costs
$0.022
Kansas City 20,900 0 $- 11.0%
Cleveland 17,100 800 $ 300,960 9.0%
New Jersey 24,700 1,200 $ 652,080 13.0%
Jacksonvill
e 15,200 1,150 $ 384,560 8.0%
Chicago 22,800 520 $ 260,832 12.0%
Greenville 15,200 940 $ 314,336 8.0%
Memphis 17,100 510 $ 191,862 9.0%
Dallas 22,800 500 $ 250,800 12.0%
Los
Angeles 34,200 1620 $ 1,218,888 18.0%
19,000
Total: 0 $ 3,574,318
Total Cost of Current System: $ 5,682,558
2. 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 $5.00 per CBM when done in
Los Angeles). Eighteen percent of the volume 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 $0.0018 per CBM. The material sent to Kansas City would not
need to go through the unloading 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 $0.0220 per CBM.
Answer
K.C and L.A. Distribution Centers
Port to L.A. DC Costs
Distanc
Volume Port e L.A. Unload Total
Pct CBM Processing to L.A. Rail Costs and Q.C. Costs
190,00
Basic Data 0 $5.00 $0.0018 $5.00
Seattle Port 40% 76,000 $ 380,000 1,140 $ 155,952 $ 380,000 $ 915,952
114,00
L.A. Port 60% 0 $ 570,000 0 $- $ 570,000 $ 1,140,000
$ 2,055,952
L.A. DC Operating Costs: $ 350,000
Total L.A. DC Costs: $ 2,405,952
Transshipment Costs to K.C.
Volume Distance
L.A. to
Pct CBM K.C. Rail Cost
82% 155,800 1,620 $454,313
K.C. DC to Warehouse Costs
Truck
Miles Freight
Warehous Deman
e d from KC Costs
$0.022
Kansas City 20,900 0 $-
Cleveland 17,100 800 $ 300,960
New Jersey 24,700 1,200 $ 652,080
Jacksonville 15,200 1,150 $ 384,560
Chicago 22,800 520 $ 260,832
Greenville 15,200 940 $ 314,336
Memphis 17,100 510 $ 191,862
Dallas 22,800 500 $ 250,800
Los Angeles 0 1,620 $-
Total: 155,800 $ 2,355,430
Total Cost of New System: $ 5,215,695
Annual Savings of New System: $ 466,863
3. What should be done based on your analytics analysis of the U.S. distribution system? Should the
new Los Angeles distribution center be added? Is there any obvious change that Grainger might do
to make this option more attractive?
Answer
Based on the economic calculations, this appears appealing because the yearly savings of $466,863
would cover the $1,500,000 investment to modernize Los Angeles in 3.21 years (ignoring the time
value of money).
The obvious solution would be to move everything from China or Taiwan to Los Angeles. This would
eliminate the $155,952 shipping cost from Seattle to Los Angeles. The total new savings are
$622,815 with a revised payback period of 2.41 years.
4. Is this strategically something that Grainger should do? What has it not considered that may be
important?
Answer
It appears that rationalizing the system makes sense.
The costs of the Seattle facility that would not be incurred under the new system are not factored in
to this estimate.
The payback period would be shorter if the facility could be sold or the lease terminated.
The risk of using a single inbound port is one of the potential drawbacks of the new system.
Any problems with the Los Angeles port would have a direct impact on Grainger.
Another factor that is difficult to foresee is how economic dynamics will alter over the next two to th
ree years.
Increases in oil prices may have a significant impact on shipping costs.
Furthermore, labour prices in China and Taiwan may rise dramatically, making
these areas less attractive for sourcing product. Because the returns have such long payback
periods, it might be reasonable to just leave this part of the system as it is.
