Suppose that the company is willing to consider dropping the distribution center limitations; that is, customer could be served by any of the distribution centers for which costs are available. Can costs be reduced? By how much?

Suppose that the company is willing to consider dropping the distribution center limitations; that is, customer could be served by any of the distribution centers for which costs are available. Can costs be reduced? By how much?

The San Marcau Company produces and distributes meter used to measure electric power consumption. The company started with a small production plant in El Paso and gradually built a customer base throughout Texas. A distribution center was established in Ft. Worth, Texas later, as business expanded to the north, a second distribution center was established in Santa Fe, New Mexico.

The El Paso plant was expanded when the company began marketing its meters in Arizona, California, Nevada, and Utah. With the growth of the West Coast business, the San Marcau Company opened a third distribution center in Las Vegas and just two years ago opened a second production plant in San Bernardino, California.
Manufacturing costs differ between the company’s production plants. The cost of each meter produced at the El Paso plant is $11.50. The San Bernardino plant utilizes new and more efficient; as a result, manufacturing costs are $.50 per meter less than at the El Paso plant.

The company’s rapid growth meant that not much attention was paid to the efficiency of the distribution system. But, San Marcau’s management decided it is now time to address this issue. The cost of shipping a meter from each of the two plants to each of the three distribution centers is shown in Table 1 below.

Table 1 Shipping cost per unit ($) from production plants to distribution centers

Distribution Center

Plant Ft Worth Sante Fe Las Vegas

El Paso 3.00 2.20 4.20

San Bernardino — 3.90 1.20

The quarterly production capacity is 30,000 meters at the older El Paso plant and 20,000 meters at the San Bernardino plant. Note that no shipments are allowed from the San Bernardino plant to the Ft. Worth distribution center.

The company serves nine customer zones from the three distribution centers. The forecast of the number of meters needed in each customer zone for the next quarter is shown in Table 2.

Table 2: Quarterly Demand Forecast
Customer Zone Demand (meters)

Dallas 6400

San Antonio 4880

Wichita 2130

Kansas City 1210

Denver 6120
Salt Lake City 4830

Phoenix 2750

Los Angeles 8580

San Diego 4460

The cost per unit of shipping from each distribution center to each customer zone is given in Table 3. Note that some of the distribution centers cannot serve certain customer zones.

Table 3: Shipping cost from distribution centers to customer zones ($)

Customer Zone

Dallas San Antonio Wichita Kansas City Denver Salt Lake City Phoenix LA SD

Ft Worth 0.3 2.1 3.1 4.4 6.0 — — — —

Santa Fe 5.2 5.4 4.5 6.0 2.7 4.7 3.4 3.3 2.7

Las Vegas — — — — 5.4 3.3 2.0 2.1 2.5

In the current distribution system, demand at the Dallas, San Antonio, Wichita, and Kansas City customer zones is satisfied by shipments from the Ft. Worth distribution center. In a similar manner, the Denver, Salt Lake City, and Phoenix customer zones are served by the Santa Fe distribution, and the Los Angeles and San Diego customer zones are served by the Las Vegas distribution center. To determine how many units to ship from each plant, the quarterly customer demand forecasts are aggregated at the distribution centers and a transportation model is used to minimize the cost of shipping from the production plants to the distribution centers.

Questions:

1. If the company does not change its current distribution strategy, what will its manufacturing and distribution costs be for the following quarter?

2. Suppose that the company is willing to consider dropping the distribution center limitations; that is, customer could be served by any of the distribution centers for which costs are available. Can costs be reduced? By how much?

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