Superior Medical Equipment Company supplies electrical equipment that is used as components in the assembly of MRI, CAT scanners, PET scanners, and other medical diagnostic equipment. Superior has production facilities in Phoenix, Arizona, and Monterrey, Mexico. Customers for the components are located in selected locations throughout the United States and Canada. Currently, a warehouse, that receives all components from the plants and redistributed them to customers, is located at Kansas City, Kansas. Superior's management is concerned about location of its warehouse since its sales have declined due to increasing competition and shifting sales levels among the customers. The lease is about to expire on the current warehouse, and management wishes to examine whether it should be renewed or warehouse space at some other location should be leased. The warehouse owner has offered to renew the lease at an attractive rate of $2.75 per sq. ft. per year for the 200,000 sq. ft. facility. It is estimated that any other location would cost $3.25 per q. ft. for a similar-size warehouse. A new or renewed lease will be for five years. Moving the inventory, moving expenses for key personnel, and other location expenses would result in a one-time charge of $3, 00,000. Warehouse operating costs are expected to be similar at any location.
In the most recent year, Superior was able to achieve sales of nearly $70 million. Transportation costs from the plants to the Kansa warehouse were $2,162,535, and from the warehouse to customers were $4,819,569. One million dollars was paid annually as warehouse lease expenses. To study the warehouse location question, data shown in Tables 1 and 2 were collected.
Although transport costs are not usually expressed on a $/cwt./mile basis, given that the outbound transportation costs for the most recent year were $4,819,569, the weighted average distance of the shipments was 1128 miles, and the annual volume shipped was 182,100 cwt., the estimated average outbound rate from a warehouse is $0.0235/cwt./mile.
Table 1 Volume, Rate, Distance, and Coordinate Data for Shipping from Plants to the Kansas City Warehouse in Truckload Quantities (Class 100) for the Most Recent Year.
Examination Paper: Logistics Management
IIBM Institute of Business Management 4
Table 2 Volumes, Rate, Distance, and Coordinate Data for Shipping from Plants to the Kansas City
Warehouse in Truck in 5,000 lb Quantities (Class 100) for the Most Recent Year.
|
PLANT LOCATION
|
ANNUAL VOLUME,
|
TRANSPORT RATE,S/CWT
|
DISTANCE,MILES
|
GRID COORDINATES^a
X
|
GRID CO-ORD^A
Y
|
|
PHOENIX
|
61500
|
16.73
|
1163
|
3.60
|
3.90
|
|
MONTERREY
|
120600
|
9.40
|
1188
|
6.90
|
1.00
|
amiles = 230 X coordianate distance
bcwt =100 lb
Table 2: Volumes,Rate,Distance and co-ordinate data for shipping from plants to the Kansas city Warehouse in Truck in 5000lb quantities(Class 100) for the most recent year
|
PLANT LOCATION
|
ANNUAL VOLUME,CWTb
|
TRANSPORT RATE,S/CWT
|
DISTANCE,MILES
|
GRID COORDINATES^a
X
|
GRID CO-ORD^A
Y
|
|
Seattle
|
17000
|
33.69
|
1858
|
0.90
|
9.10
|
|
Los Angels
|
32000
|
30.43
|
1496
|
1.92
|
4.20
|
|
Denver
|
12500
|
25.75
|
598
|
5.6
|
6.10
|
|
Dallas
|
9500
|
18.32
|
560
|
7.80
|
3.6
|
|
Chicago
|
29500
|
25.24
|
504
|
10.20
|
6.90
|
|
Atlanta
|
21000
|
19.66
|
855
|
11.30
|
3.95
|
|
New York
|
41300
|
26.52
|
1340
|
14.00
|
6.55
|
|
Toronto
|
8600
|
26.17
|
1115
|
12.70
|
7.80
|
|
Montreal
|
10700
|
27.98
|
1495
|
14.30
|
8.25
|
|
Total Kansan city
|
182100
|
|
|
8.20
|
6.00
|
Questions:
1. Based on information for the current years, is Kansas City the best location for a warehouse? If not, what are the coordinates for a better location>? What cost improvement can be expected from the new location?
2. If by year 5 increases are expected of 25 percent in warehouse outbound transport rates and 15 percent in warehouse inbound rates, would your decision change about the warehouse location?