Problem Set 2 Operations
1.
Mr. Stan Busfield, distribution center manager for Hogan Kitchenwares, must determine when to resupply his stock of spatulas. The DC experiences a daily demand of 400 spatulas. The average length of the performance cycle for spatulas is 14 days. Mr. Busfield requires that 500 spatulas be retained as safety stock to deal with demand uncertainty. a. 6100 b. 3550
2.
Mr. Busfield recently completed a course in logistics management and now realizes that there are significant costs associated with ordering and maintaining inventory at his distribution center. Mr. Busfield has learned that the EOQ is the replenishment logic that minimizes these costs. In an effort to find the EOQ for measuring cups, Mr. Busfield has gathered relevant data. Mr.
Busfield expects to sell 44,000 measuring cups this year. Hogan acquires the measuring cups for 75 cents each from Shatter Industries. Shatter charges $8 for processing each order. In addition, Mr. Busfield estimates his company’s inventory carrying cost to be 12 percent annually. a. b.
Find Mr. Busfield’s EOQ for measuring cups. Assume that Mr. Busfield accepts ownership of products upon arrival at his DC.
Now assume Mr. Busfield must arrange for inbound transportation of the measuring cups since Hogan accepts ownership of products at the supplier’s shipping point. Quantities of fewer than 4,000 measuring cups cost 5 cents per unit to ship. Quantities of 4,000 and above cost 4 cents per unit to ship. Determine the difference in total costs associated with an EOQ of 4,000 units and the EOQ level found in part (a) when transportation costs must be considered.
Given the information above and the low cost EOQ alternative determined in part (b), use period-order-quantity logic to determine the number of orders Hogan would place each year for measuring cups and the time interval between orders.
Based on your answer to part (a), find Mr. Busfield’s average inventory level of spatulas. Use simple reorder point logic to determine the order quantity for spatulas.
c.
3.
Mr. Dave Jones manages the warehouse inventory for Athleticks, a distributor of sports watches. From his experience, Mr. Jones knows that the PR-5 jogging watch has an average daily demand of 100 units and a performance cycle of 8 days. Mr. Jones requires no buffer stock at this time. a. b. c. d.
Assume Mr. Jones perpetually reviews inventory levels. Find the reorder point for the PR-5 jogging watch. 800
Find the average inventory level of the PR-5 watch. 400
How might the reorder point change if Mr. Jones reviews inventory once each week? Find the reorder point under these conditions.
Find the average inventory level of the PR-5 watch under this periodic review.
4.
Mr. John Estes oversees the distribution of Tastee Snacks products from the plant warehouse to its two distribution centers in the United States. The plant warehouse currently has 42,000 units of the company’s most popular product, Chocolate Chewies. Mr. Estes retains 7,000 units of the product at the warehouse as a buffer. The Cincinnati DC has an inventory of 12,500 units and daily requirements of 2,500 units. The Phoenix DC has an inventory of 6,000 units and daily requirements of 2000 units. a. b.
Determine the common days’ supply of Chocolate Chewies at each DC.
Given the above information and your answer to part (a), use fair share allocation logic to determine the number of Chocolate Chewies to be allocated to each DC.
5.
Stay Safe International manufactures industrial safety equipment at its plant in Evansville,
Indiana. The company has initiated DRP to coordinate finished goods distribution from the plant to DCs in Dallas, Texas, and Lexington, Virginia. a. b.
Given the accompanying information regarding hardhats, complete the DRP schedule for the warehouse and each DC.
Suppose that, without warning, no more than 500 units can be distributed from the
warehouse to the DCs on a given week due to a manufacturing breakdown. Hardhats sell for $12 each out of the Dallas DC and $14 from Lexington. Discuss whether the
warehouse should delay shipments until both DC requirements can be satisfied or allocate based on need.
6.
Scorekeeper, Inc., manufactures stadium scoreboards. Table 1 illustrates the demand for Scorekeeper’s scoreboards over the past 25 days. The mean of daily demand is 6 units.
Table 1
Day 1 2 3 4 5 6 7 8 9 10 11 12 13
a. b.
Demand 4 3 4 6 7 8 6 5 6 10 8 7 5
Day 14 15 16 17 18 19 20 21 22 23 24 25
Demand 6 4 2 5 6 7 6 6 5 7 8 9
Is the demand distribution normal? How do you know?
Calculate the standard deviation for daily demand. Assume in this case that the performance cycle is constant.
Table 2 summarizes Scorekeeper’s performance cycles over the past 40 replenishments. The expected cycle duration is 12 days.
Table 2
Performance Cycle (in days) 10 11 12 13 14 c. d. e. f. g.
Frequenc
y (f) 4 8 16 8 4
Is the performance cycle distribution normal? How do you know? Calculate the standard deviation for the performance cycle.
Given your answers to parts (b) and (d), find the safety stock required at 1 combined standard deviation under conditions of demand and performance cycle uncertainties. If the typical order quantity is 36 units, find the average inventory at 3 standard deviations under demand and performance cycle uncertainty.
Scorekeeper is striving for a 99 percent product availability level. Given the above information as well as your answer to (e), find the function value of the normal loss curve, f(k).
h. i.
Use Table 6-14 to find the value for k, given your answer to part (g), and calculate the required safety stock for the desired 99 percent availability level.
What would be the required safety stock for 99 percent availability should the order quantity change to 30 units?
Problem Set 3 Transportation
7.
The XYZ Chemical Company must ship 9,500 gallons of pesticides from its plant in Cincinnati, Ohio, to a customer in Columbia, Missouri. XYZ has a contract in place with Henderson Bulk Trucking Company as well as with the Central States Railroad. Both carriers are available for the move. Henderson will charge $600 per tank truck, and Central States’ rate is $1,000 per tankcar. Henderson tanks can hold a maximum quantity of 7,000 gallons. XYZ has a fleet of 23,500-gallon tankcars available in Cincinnati. a. b.
8.
Given the above information, evaluate the cost of each alternative. What other qualitative factors should be considered in this decision?
Shatter Industries, Inc., manufactures household and commercial glass products that serve a variety of purposes. a.
Refer to the National Motor Freight Classification 100-S (Table 8-1) to determine the LTL and TL product classifications for the following Shatter items: i. ii. iii. b.
Item 86960, glazed glass, boxed. Glass slides for microscopes.
Bent mirror glass, dimensions 7 feet by 5 feet.
Shatter ships many of its products from a warehouse in Atlanta, Georgia, to a distribution center in Lansing, Michigan. Refer to the rate tariff in Table 8-2 to find applicable charges for the following shipments over the route: i. ii. iii. iv. v.
5,200 lb. of mirrored shock glass (Item 86900, Sub 1—class 85). 32,000 lb. of class 65 product. 200 lb. of class 60 product. 19,000 lb. of class 150 product.
2500 lb. of class 200 product with a 5 percent temporary fuel surcharge added to the line-haul charge.
9.
Gigoflop Electronics has three shipments of class 100 product to be transported from Atlanta, Georgia, to Lansing, Michigan. The shipments weigh 5,000 lb., 10,000 lb., and 7000 lb.,
respectively. Gigoflop can ship each quantity individually or consolidate them as a multiple-stop shipment. Each shipment is to be delivered to a different location in Lansing. The carrier, Eckgold Trucking, charges $50 for each stop-off (not including the final destination). Refer to Table 8-2 and evaluate the costs of shipping individually versus consolidation. Which option should be used by Gigoflop?
Stanley Harris, traffic manager of This n’ That Manufacturers, is considering the negotiation of a freight-all-kinds (FAK) rate for shipments between Atlanta and Lansing. The company ships 200 (class 65) shipments of 5000 lb., 40 (class 400) shipments of 1,200 lb., 30 (class 100) shipments of 10,000 lb., and receives a 45 percent discount on published rates. a.
Refer to Table 8-2 to determine the current freight bill for the above shipments. Note: Take the discount from the published rate and round up for the applicable hundredweight rate.
Should Mr. Harris accept an FAK rate of $10 per hundredweight?
What factors aside from price should Mr. Harris consider with an FAK rate?
10.
b. c.
11.
Carole Wilson, Transportation Manager of Applied Technologies, has a shipment of 150 computer monitors originating at the company’s plant in Santa Fe Springs, California. The shipment, valued at $29,250, is destined for a DC in St. Louis, Missouri. John Miller, receiving manager at the St. Louis DC, has established a standardized transit time for the shipment to be 2.5 days. Mr. Miller assesses an opportunity cost of $6.00 per monitor for each day beyond the standard. Ms. Wilson has three transportation options available. a.
Cross Country Haulers, a long-haul trucking company, can ship the monitors at a contracted rate of $1.65/mile. The distance from Santa Fe Springs to St. Louis is 1940 miles. Cross Country estimates that it can deliver the shipment in 3 days. A truck can carry 192 monitors.
The Sea-to-Shining Sea (STSS) Railway can pick up the shipment at the plant’s dock and deliver the monitors directly to the St. Louis DC. STSS can ship the railcar of monitors for a flat charge of $1500. Ms. Wilson has recently experienced delays with the switching of its railcars and expects delivery to take 5 days.
Ms. Wilson has also negotiated an agreement with Lightning Quick Intermodal, Inc. (LQI), a third-party carrier that utilizes both motor and rail transportation. LQI can pick up the shipment by truck at the plant and deliver it to an intermodal railyard in Bakersfield, California, where the trailer is placed onto a flat railcar. The servicing railway, the Rocky Mountain Railway (RMR), then delivers the trailer to another
intermodal yard near St. Louis, where the trailer is unloaded and transported by truck to the DC. Lightning Quick offers the origin-to-destination transportation for $2500. Transit time is anticipated at 2.5 days. From past experience, Mr. Miller has discovered that the additional handling inherent with Lightning Quick’s service results in 3 percent product
b.
c.
loss and damage. Recovery of these losses is difficult and typically results in only 33.3 percent immediate reimbursement of the losses.
Evaluate the cost of each transportation alternative. 12.
Moving Hands, Inc., ships alarm clocks from Atlanta to Lansing. The company has begun
packaging the clocks in a stronger corrugated box to reduce the likelihood of damage in storage and transit. As a result of the improved packaging, the clocks’ product classification has dropped from 100 to 85 without significantly adding weight to the package. a. b.
What effect does the new packaging have on the transportation cost of a single 1000 lb. shipment? Refer to Table 8-2.
Suppose Moving Hands ships 300 loads of the 1,000 lb. quantity each year and the new packaging costs $10,000 to develop and produce. Will Moving Hands realize a full payback of the packaging investment in its first year?
13.
Bill Berry, transportation sales manager of Speedy Trucking Company, has considered serving a new customer, El Conquistador, Inc., an importer of Venezuelan goods, by hauling 12 truckloads of product each month from the receiving port in Bayonne, New Jersey, to a distributor in Pittsburgh, Pennsylvania, for $850 per truckload. Each serving truck must depart from the
Speedy terminal in Secaucus, New Jersey, 12 miles from the seaport. The distance from Bayonne to Pittsburgh is 376 miles. Upon unloading at Pittsburgh, trucks return empty (deadhead) to the Secaucus terminal 380 miles from the distributor. a. b.
If it costs Speedy an average of $1.20 per mile to operate a truck, should Mr. Berry accept the business at the negotiated rate? Why or why not?
Mr. Berry has coordinated back-haul moves for the Conquistador shipments above with a new customer in Youngstown, Ohio. The new customer, Super Tread, Inc., ships tires from its plant in Youngstown to the port in Bayonne for exporting. Each Conquistador shipment will be accompanied with a return shipment from Super Tread (12
truckloads/month). Speedy will charge Super Tread $1.30 per mile. Bayonne is 430 miles from Youngstown. The distance from Pittsburgh to Youngstown is 65 miles. Trucks must return to the terminal in Seacaucus upon delivering product from the back-haul (before picking up again at Bayonne). The terms of the Conquistador agreement outlined in part (a) remain intact. How much can Mr. Berry expect Speedy to profit (lose) per trip from the new arrangement?
How much can Mr. Berry expect Speedy to profit (lose) per month from the new arrangement should the company accept the business?
Is it worthwhile for Mr. Berry to arrange for the back-haul? Why or why not?
c. d.
14.
Super Performance Parts (SPP) produces braking devices exclusively for the Ace Motor Ccompany, an automotive manufacturer. SPP has been leasing warehouse space at a public facility 20 miles from the company’s plant. SPP has been approached by a group of four other Ace suppliers with the idea of building a consolidated warehouse to gain transportation and
materials handling economies. An investment of $200,000 would be required by each of the five companies to acquire the warehouse. Payment of the initial investment secures 10 years of
participation in the agreement. Annual operating expenses are anticipated to be $48,000 for each party. SPP is currently charged $6,000 per month for use of the public warehouse facilities. SPP’s outbound transportation from the public warehouse often consists of LTL quantities. Its annual outbound transportation bill is currently $300,000. SPP expects consolidated warehousing to more fully utilize truckload quantities with transportation expenses shared among the supplier pool. SPP’s annual outbound bill would be reduced by 25 percent in the consolidated plan. Differences in inbound transportation costs are assumed negligible in this case. a.
Compare the storage and shipping costs associated with consolidated warehousing as opposed to SPP’s current, direct shipping plan. Are any efficiencies apparent through consolidation?
Aside from potentially reducing costs, how else might SPP benefit by participating in the consolidated warehouse?
What disadvantages might exist in a consolidated warehouse as opposed to a direct-shipping situation?
b. c.
15.
Essen Beer Company has a brewery in Michigan’s Upper Peninsula and is setting up distribution at Jackson, Michigan, in the state’s Lower Peninsula. Essen packages its beverages in barrels and in 24-can cases. Barrels must be maintained at temperatures below 60 degrees Fahrenheit until retail delivery. The company’s logistics department must determine whether to operate
individual private warehouses for barrels and cases or to utilize a single warehouse with barrels placed in a carefully controlled environment separate from cases. Assume that cases are not to be stored or transported in refrigerated environments.
Essen experiences a weekly demand of 300 barrels and 5,000 cases. The company has arranged truckload transportation with Stipe Trucking Service. Stipe operates refrigerated and non-refrigerated trailers, as well as multi-compartmented trailers that are half refrigerated and half not. A refrigerated truckload can hold 72 barrels, while a non-refrigerated truckload holds 400 cases. The multi-compartmented trailer can hold 36 barrels and 200 cases. The costs for these services and other related expenses are detailed below:
Truckload costs
Refrigerated Non-refrigerated
Multi-compartmented Warehouse expenses Individual warehouses For case storage only: Capital Labor
For barrel storage: Capital Labor
Single, consolidated warehouse Capital Labor
a. b.
$550 $400 $500
$1,250/week $2,500/week
$2,500/week $1,600/week
$3,500/week $3,200/week
Considering demand and all costs depicted above, does the single, consolidated
warehouse or the two individual warehouses represent the least-total-cost alternative? Now assume that Stipe Trucking Service will provide only the multi-compartmented trailers to serve the proposed consolidated warehouse. Which plan is the least-cost alternative in this scenario?
16.
Comfy Mattresses, Inc., is opening a new plant in Orlando, Florida. Ron Lane, distribution
manager, has been asked to find the lowest cost outbound logistics system. Given an annual sales volume of 24,000 mattresses, determine the costs associated with each option below. a.
Build a private warehouse near the plant for $300,000. The variable cost, including warehouse maintenance and labor, is estimated at $5 per unit. Contract carrier
transportation costs $12.50 per unit on average. No external transportation services are necessary for shipment of mattresses from the plant to the warehouse in this scenario. The fixed warehouse investment can be depreciated evenly over 10 years.
Rent space in a public warehouse 10 miles from the plant. The public warehouse requires no fixed investment but has variable costs of $8 per unit. Outbound contract carrier
transportation would cost $12.50 per unit on average. The carrier also charges $5 per unit to deliver the mattresses to the warehouse from the plant.
Contract the warehousing and transportation services to the Freeflow Logistics Company, an integrated logistics firm with a warehouse location 25 miles from the plan. Freeflow requires a fixed investment of $150,000 and charges $20 per unit for all services
originating at the plant. The fixed investment covers a 10-year agreement with Freeflow. Name a few advantages aside from cost that the low-cost alternative above may have over the other alternatives.
b.
c.
d.
17.
Ms. Sara Ritter is the distribution manager for the Fiesta Soft Drink Company. She is considering full automation of the plant’s warehouse. At present, the warehouse utilizes a
mechanized system of materials handling. The current system employs 20 laborers at an average wage rate of $13/hour. Laborers work an average of 2,000 hours per year. The mechanization costs $18,000 annually to maintain. The equipment was purchased 2 years ago with uniform payments of $25,000 made annually. In year 9 the mechanical equipment will be replaced by new machinery with fixed annual costs of $35,000. In addition, it will cost Fiesta $12,000 per year to maintain the new equipment with the same 20 laborers.
The automated equipment would cost $1.2 million upfront for implementation. Only eight laborers and an automation specialist would be required to maintain operations in the new
system. The laborers would earn $16/hour over 2,000 hours each year. The automation specialist would earn a salary of $56,000 per year, increasing 2 percent annually after the first year. Much of the old mechanized equipment could be sold immediately for a total of $125,000.
Maintenance of the automated system is estimated at $60,000 each year with this cost growing by 3 percent annually after the first year. The automated system is expected to serve Fiesta for 15 years. a. b.
Examine the cash flow under each system. What is the payback period for automation? What advantages aside from long-term cost savings might an automated warehouse have over more labor-intensive systems?
18.
Dandy Collectibles is opening a new warehouse. Bob Lee, the warehouse manager, is trying to determine the labor compensation package that most productively utilizes resources. The typical compensation plan offers an hourly wage rate of $13. Mr. Lee is also considering an incentive plan. The incentive plan rewards solely on performance with order pickers earning $0.40/unit prepared for shipping. A typical week shows the number of ordered units that must be prepared for shipping.
Errors sometimes happen in Dandy’s order picking. Product mishandling occurs in 1 percent of the orders under the incentive plan and in 0.5 percent of the orders under the hourly wage plan. Errored orders are scrapped and result in lost revenue of $60 per occurrence. Hourly workers pick 20 units per hour. Incentive workers pick 28 units per hour. Regardless of the plan
designation, employees work 40-hour weeks. Union restrictions prevent Dandy from operating on Saturday and Sunday. The labor union also restricts Dandy from hiring part-time workers. Orders need not be filled daily, but all orders must be shipped by week’s end (Friday). Assume that hiring and training costs are negligible. a. b.
How many workers are needed under each plan for the typical week’s demand? Which plan meets the typical week’s demand at the lowest cost, including lost sales resulting from errors?
19.
Mitchell Beverage Company produces Cactus Juice, a popular alcoholic beverage. Recently the firm has experienced problems of product pilferage at the warehouse. In one month, 3,200
bottles of Cactus Juice, representing 0.4 percent of the month’s volume, could not be located for shipping. Should the problem go unresolved, it is anticipated that it will continue at this rate. The forecasted annual sales volume for Cactus Juice is 9.6 million bottles. Each bottle sells for $4.50. Steve Davis, vice president of distribution, has asked you to look into the following security options to reduce the pilferage problem. a.
Hire four security guards to patrol the warehouse floor all hours of the day, 7 days a week. The firm would offer a wage of $14.50/hour to the guards as well as a benefits package expected to be worth $2,000 per employee per year. The presence of security guards should lower pilferage to 0.2 percent of volume. Only one guard would be on duty at any one time.
Implement an electronic detection system based on bar code technology. This would require purchasing bar code equipment for the packaging facility and warehouse.
Electronic scanning devices must also be purchased and placed at warehouse entrances. Alarms sound whenever a bar-coded item passes through a warehouse entrance without clearance. The electronic detection package, including bar code printers and readers, will cost $120,000. In addition, employees at the plant and warehouse will be trained to use the new equipment at a one-time cost of $8000. Monthly maintenance of the system is expected to cost $800. Also, a bar code specialist must be hired. The specialist would earn a salary of $49,000 per year. Product pilferage is expected to be lowered to 0.1 percent of volume with the electronic security system. The system has an estimated life of 8 years. Accrue all costs evenly over the life of the equipment.
Install security cameras in key locations throughout the warehouse. It has been
determined that six cameras could adequately record warehouse operations. Each camera costs $1200. The support devices and installation will cost $36,000. Four security guards would be hired for the purpose of viewing the security monitors for suspicious activity. One guard would be on duty at all times. The guards each earn $12/hour, in a 42-hour workweek, and receive a benefits package worth $1000 per year. Pilferage under this system would be 0.05 percent of volume. The monitoring equipment is expected to have a life of 12 years. Accrue all fixed costs evenly over the life of the equipment.
b.
c.
Should the firm implement any of the options above, or make no investment and allow the
pilferage to continue at the rate of 0.4 percent of volume? Compare the costs and benefits of each option on an annual basis.
20.
Chronotronics produces two models of clock radios, the X-100 and the X-250 deluxe. Both
products are currently packaged in a single-wall corrugation. Through close observation, the firm has discovered that 0.5 percent of both X-100s and X-250s are damaged between packaging and customer delivery. Chronotronics can package either model, or both, in double-wall corrugated fiberboard, which would reduce product damage by half. The current single-wall packaging costs $0.80 per unit. Double-wall packaging costs 20 percent more. The X-100 and X-250 have market values of $40 and $70, respectively. Damaged units are a total loss. Chronotronics sold 12,000
X-100s and 7000 X-250s last year. Forecasts indicate consistent sales for the X-100 and a 5 percent increase in X-250 sales over the next year. Note: Round up for whole units lost. a. b. c.
21.
From a least-cost perspective, should Chronotronics utilize double-wall corrugation with the X-100 next year?
From a least-cost perspective, should Chronotronics utilize double-wall corrugation with the X-250 next year?
From discussion earlier in the text, how might packaging improvements affect transportation costs?
Your firm is planning to introduce a new product line. Your task is to determine the inventory implications of the new product. The typical product will ship an average of 20 units per day from the firm’s central DC. Historical sales patterns indicate that the standard deviation of daily sales should be approximately 3. The typical performance cycle for comparable products has been a mean of 7 days and a standard deviation of 2. a. b. c.
Assuming a replenishment quantity from the plant of 200 units, what are the safety stock and resulting average inventory for a 95 percent case fill rate?
What are the inventory implications (safety stock and average inventory) of increasing the case fill rate objective to 99 percent?
What would be the inventory implications for daily replenishment with a 99 percent fill rate objective, assuming that the same level of demand and performance cycle uncertainty is maintained?
22.
As the logistics representative on a manufacturer’s sales team, you have been asked to quantify the benefits that can be sold to a customer using more consistent service and transportation. The customer wants 99 percent case availability from its distribution centers that are re-supplied from the manufacturer. The average daily demand in cases from the customer’s DC is 1000 units with a standard deviation of 250. Historically, the replenishment performance cycle has been 10 days with a standard deviation of 4 days. The customer has traditionally used a 20 percent inventory carrying cost, and the average value of each case is $25. The customer orders weekly an order quantity of 7000 units. a. b. c.
What is the average inventory and annual carrying cost for the current situation? What is the average inventory and carrying cost impact of reducing the manufacturer’s performance cycle variation by 2 days?
How does reducing the performance cycle variation by 2 days compare with reducing the average performance cycle length by 2 days in terms of average inventory and inventory carrying cost?
23.
Spartan Plastics provides components to assembly plants in the automobile industry. Currently, they ship directly from their plant in St. Louis, Missouri, to plants in Lansing, Michigan; Toledo,
Ohio; and eight assembly plants surrounding Detroit, Michigan. In total, there are 10 assembly plants that each receive approximately 3000 pounds per day in shipments. Currently, the
company ships LTL from its plant to each assembly plant for a cost of $0.0013 per pound per mile. The company is considering two transportation alternatives to reduce cost. The first
alternative is using a milk-run approach where a truckload begins in St. Louis, stops in Lansing, then the Detroit plants, and finally Toledo. The transportation cost for the milk-run approach would be $1.30 per truck mile plus $100/stop, not including the final stop in Toledo. The second alternative is to consolidate a truckload to Ypsilanti, Michigan, and then cross-dock the
components for delivery to the assembly plant by the logistics provider. The truckload cost is still $1.30 per mile, and the cost per delivery to each assembly plant from Ypsilanti is $200. a. b.
24.
What are the cost characteristics of each delivery option?
What are the qualitative and service characteristics of each delivery option?
Presswick Industries supplies plastics used for medical applications such as pharmaceutical injections and collecting laboratory samples. Presswick produces the containers and tubes and then ships them to customers who incorporate the plastics into kits that are used in hospitals and labs. Currently, Presswick simply loads the containers and tubes into corrugated boxes and ships them to customers who are then responsible for disposing of the corrugated. Presswick is considering the possibility of using returnable packaging with some of its key customers to be more environmentally friendly and perhaps reduce cost as well. The current corrugated cost per unit (container or tube) is $.05 with an additional $.02 per unit for disposal. The cost of the recyclable container is $.25 per unit of capacity that can be used multiple times. The recyclable container does not have to be disposed of, but it must be transported back to Presswick at a cost of $.02 per unit of capacity. Assume that the recyclable containers can only be used for 1 year because the plastic in the containers begins to break down. a. b.
At what annual volume level does it make sense to use the recyclable containers versus the corrugated containers?
What other qualitative factors should be considered in the decision?
25.
Forest Green Products provides private label vegetables for grocery chains throughout the
Midwest. They currently have distribution centers in Columbus, Ohio; St. Louis, Missouri; and Minneapolis, Minnesota. The typical annual capacity requirements for Forest Green are 5 million cases with a case split of 35 percent, 40 percent, and 25 percent for Columbus, St. Louis, and Minneapolis, respectively. The company is reassessing its materials handling and storage
capability in each facility. The technology alternatives being considered are mechanized, semi-automated, and information-directed systems. Table 3 summarizes the acquisition, annual fixed cost, per case variable cost, and life span of each system alternative. The acquisition and annual fixed cost are quoted in terms of dollars per million units of capacity. In other words, a DC requiring two million units of capacity would double the specified cost. The annual fixed cost does not include depreciation for the acquisition cost. Assume that the total square footage of the 3 DCs is the same.
Table 3
Materials Handling
Alternative Mechanized Semiautomated
Information-directed a.
One-Time Acquisition Cost $1,000,000 $3,000,000 $1,500,000
Annual Per Case Usage Life Fixed Cost Variable Cost Span (Years) $50,000 $200,000 $150,000
$0.30 $0.08 $0.15
10 5 7
What system alternative should be used for each DC based on annual cost? How does this decision change if Net Present Value (NPV) is considered over the life of the system? Assume a 10 percent discount rate.
Assume that for simplicity’s sake, Forest Green wants to use only one system alternative for all three DCs. What is the system with the lowest NPV for the life of the system for the combination of DCs?
What other qualitative factors should be considered?
b.
c.
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