1. Can Anita improve upon the current distribution operations ? Yes, she can. Actually, transportation companies are chosen the routes for moving merchandise between distribution centres and warehouses; then they charge Orion Food $1,30 for each mile traveled. Anita does not know the routes that transportation companies are using. It means, the control of the distribution costs at this time areunder control of the transportation companies. Anita must take control of the routes and specify the routes to the transportation companies. They can not continue choosing the routes because they have a vested interest and it could impact Orion costs. With more miles traveled, they can charge more money to Orion Foods. Having the routes map, distances and locations, she can make a routing analysisand take decisions about the routes used by transportation companies. Also, the contract allows her to specify the routes to the carriers. Because Orion Foods is paying for each mile traveled, it is vital for her to find the shortest routes and have the minimal cost for each route between distribution centres and warehouses. Using Logware and optimizing the current routes Orion Food can have asaving of $22.216 per year. Following table shows the result of the routing analysis,
Truckloads are calculated dividing Annual volume cwt by 300 cwt. 300 cwt is equivalent to 30.000 pounds and it is the actual shipment size.
Actual transportation cost is $652.274 per year, but using the shortest routes the total cost is reduced to $630.058. This is $22.216 less than the actual cost.This cost reduction will increase Orion Foods profits.
Also, Anita must specify to the transportation companies the routes that they must use for moving Orion Foods’ products. The followings are the routes to be used by now on,
Any change in routes should not be made before Orion Foods analyses options and found the best route. In this manner, Orion Foods can have the control of thedistribution costs.
2. Is there any benefit to expanding the warehouse at Burns, OR ? According to Simchi-Levi et al (2008, p. 89), the turn over ratio “is the ratio of the total annual outflow from the warehouse to the average inventory level. If the ratio is λ , then the average inventory level is total annual flow divided by λ ”. Using the turnover ratio concept, the capacity (inventory level) neededfor each distribution centre is calculated as follows,
LA + Phoenix + SaltLake + SanFrancisco 132000 + 84000 + 56000 + 105000 377000 = = = 47.125cwt Turnover 8 8
Portland + Buttle + Seattle 57000 + 15000 + 79000 151.000 = = = 18.875cwt Turnover 8 8
Fresno distribution centre has no problems because its maximum capacity is 50.000 cwt and new projections demands47.125 cwt. It means Fresno will use 94,25% of its capacity. Onthe other hand, Burns capacity needs to be expanded because its capacity is 15.000 cwt and new projections demand 18.875 cwt, so it means a shortage of 3.875 cwt. The minimal increment is 10.000 cwt, as a consequence, the Burns distribution centre must be expanded in 10.000 cwt and the cost of this expansion is $300.000. New capacity wouldbe 25.000 cwt.
This expansion will allow Burns distribution centre to receive new volume according to marketing projections, but there will have a lot of space without use. Burn will expand 10.000 cwt, but it only needs 3.875 cwt, as a result, 6.125 cwt will be wasted or 61,25% of its space will be without use (inefficient utilization of resources). According to Simchi-Levi et al (2008, p.57), forecasts not always are right and with longer forecasts horizon, the forecasts are worse. If projections will change for next 5 years and they will go up, Fresno distribution centre would be in problems because it would not have space and only could support 2.875 cwt more before reaching its maximum capacity. Burns only could go up until 25.000 cwt without problems. In the other hand, if...
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