978-0134741062 Chapter 13 Solution Manual Part 2

Supply Chain Logistic Networks ⚫ CHAPTER 13 ⚫

Dummy location and is therefore is not used. Shipments to the Dummy location from F2

and F3 represent unused capacity.

Total Cost: F2-W1= 45,000($2) = $90,000

19. Thor International Company (part 2)

a. Once again using the Transportation Method (Location) module in POMS for

Windows, we get the optimal solution shown in the output that follows.

Module/submodel: Transportation Method (Location)

Problem title: Thor International

Objective: Minimize

Original Data

W1 W2 W3 W4 W5 Dummy

————————————————————————-

F1 2 3 3 2 6 0

Capacity

———————

F1 50000

F2 80000

F3 80000

DEMAND

Shipments

W1 W2 W3 W4 W5 Dummy

————————————————————————-

F1 35000 15000

With this solution, the total cost of the revised problem is greater than the total cost in

problem 18. Thus, the logistic manager should get a budget increase.

Total Cost: F2-W1= 45,000($2) = $90,000

F3-W2= 30,000($2) = $60,000

⚫ PART 3 ⚫ Managing Supply Chains

b. The logistics manager should receive a budget increase of ($430,000 – $390,000) =

20. Chambers Corporation

Using Transportation Method (Location) module in POMS for Windows

Alternative 1 (Portland)

Data Screen

Solution Screen

Alternative 2 (San Antonio)

Data Screen

Solution Screen

Data Screen

Supply Chain Logistic Networks ⚫ CHAPTER 13 ⚫

Solution Screen

A Systematic Location Selection Process

21. Preference matrix location for A, B, C, or D

Factor

Factor Score for Each Location

Location Factor

Weight

A

B

C

D

1. Labor climate

5

25

4

20

3

15

5

25

2. Quality of life

30

2

60

3

90

5

150

1

30

3. Transportation system

5

3

15

4

20

3

15

5

25

4. Proximity to markets

25

5

125

3

75

4

100

4

100

5. Proximity to materials

5

3

15

2

10

3

15

5

25

6. Taxes

15

2

30

5

75

5

75

4

60

7. Utilities

15

5

75

4

60

2

30

1

15

Total

100

345

350

400

280

22. John and Jane Darling

Factor

Factor Score for Each Location

Location Factor

Weight

A

B

C

D

1. Rent

25

3

75

1

25

2

50

5

125

2. Quality of life

20

2

40

5

100

5

100

4

80

3. Schools

5

3

15

5

25

3

15

1

5

4. Proximity to work

10

5

50

3

30

4

40

3

30

5. Proximity to recreation

15

4

60

4

60

5

75

2

30

6. Neighborhood security

15

2

30

4

60

4

60

4

60

7. Utilities

10

4

40

2

20

3

30

5

50

Total

100

310

320

370

380

⚫ PART 3 ⚫ Managing Supply Chains

Location D, the in-laws’ downstairs apartment, is indicated by the highest score. This points

out a criticism of the technique: the Darlings did not include or give weight to a relevant

factor.

23. Wagner Remodelers Inc.

a. As seen in the following calculation table, Royce has the highest Total Weighted

Factor score and is thereby considered the superior location

Location Factor

Factor

Weight

Factor Score for Each City

Coptic

Weighted

Factor

Sparta

Weighted

Factor

Royce

Weighted

Factor

1. Proximity to run-down housing stock

15

3

45

5

75

1

15

2. Community population size

15

3

45

5

75

5

75

3. Proximity to the sources of building materials

5

25

5

25

5

25

4. Transportation infrastructure

5

25

1

5

25

5. Availability of skilled workers

10

5

50

2

20

5

50

6. Favorable zoning processes

15

5

75

5

75

5

75

7. Low city property tax rates

5

25

3

15

3

15

8. Availability of excellent primary education

5

3

15

1

5

25

9. Availability of family entertainment

5

3

15

1

5

25

10. Attitude of community to building

rehabilitation

10

2

20

3

30

3

30

11. Proximity to real estate sales firms

10

2

20

5

50

5

50

Total

100

360

380

410

b. The superior location did not change; as seen in the following table, Royce still has the

highest Total Weighted Factor score

Location Factor

Factor

Weight

Factor Score for Each City

Coptic

Weighted

Factor

Sparta

Weighted

Factor

Royce

Weighted

Factor

1. Proximity to run-down housing stock

15

3

45

5

75

1

15

2. Community population size

15

3

45

5

75

5

75

3. Proximity to the sources of building materials

5

25

5

25

5

25

4. Transportation infrastructure

5

25

1

5

25

5. Availability of skilled workers

20

5

100

2

40

5

100

6. Favorable zoning processes

15

5

75

5

75

5

75

7. Low city property tax rates

5

25

3

15

3

15

10. Attitude of community to building

rehabilitation

10

2

20

3

30

3

30

11. Proximity to real estate sales firms

10

2

20

5

50

5

50

Total

100

380

390

410

Supply Chain Logistic Networks ⚫ CHAPTER 13 ⚫

24. Silky Industries

Solving this problem as 2 equations in 2 unknowns with A representing “availability of

resources” and B representing “availability of customers”:

will be the favored location.

Location Factor

Factor

Weight

Factor Score for Each City

Blake

Weighted

Factor

Irmo

Weighted

Factor

1. Availability of resources

75

5

375

6

450

2. Availability of customers

25

10

250

7

175

Total

100

625

⚫ PART 3 ⚫ Managing Supply Chains

CASE: R. U. Reddie for Location

A. Overview

Rhonda Reddie, owner and CEO of a company that manufactures wardrobes for stuffed animals,

is faced with the prospect of sizeable demand increases in the near future with insufficient

capacity to take advantage of it. Expanding capacity at her existing plants is not an option for

various reasons. Consequently, she must decide if it is a good idea to increase capacity by

purchasing a new plant. If the answer is yes, then she must decide where the plant should be

located. The two options she would consider are St. Louis and Denver.

B. Purpose

This case was written to provide the student with enough data to analyze the decisions Reddie

must make, using tools such as the transportation method and net present values. Students learn

where the cost figures come from that are used in the cash flow analysis and net present value

calculations. In this case, the location decision will affect the cost of goods sold because of

differing cost factors at each location which affect the distribution patterns in the supply

network. In addition, the capital costs of the plant and equipment differ by location, as does the

cost of the land. Consequently, the location decision affects annual operating costs, the extent of

the capital investment, and hence the financial results as represented by the net present value of

the investment. Instructors can use the case to demonstrate the cross-functional aspects of these

major decisions in practice.

C. Transportation Models

Appendix A contains the linear programming models for Denver and St. Louis in matrix form.

The models determine the optimal shipping pattern if Denver or St. Louis are the chosen

locations. The objective function value is the optimal cost of goods sold for the entire network of

plants with a given option for the new fourth plant. The demand data are the “most likely”

estimates given in the case. Students will have to determine the objective function coefficients,

which consist of the variable production cost per unit at a plant plus the transportation cost to

ship one unit from the plant to one of the destinations in the supply chain. The distribution cost is

$0.0005: The actual cost to ship to another destination will depend on the number of miles the

unit must be shipped. For example, the cost to produce one unit in Cleveland and ship it to

Boston is $3.00 + $0.0005 (650 miles) = $3.325.

Supply Chain Logistic Networks ⚫ CHAPTER 13 ⚫

D. Optimal Distribution Plans for each Location

There are actually two distribution plans for each location: One for year 1 and another for years 2

and beyond. Appendix A contains the computer output from POM for Windows for the two

options. The tables below provide the optimal distribution plans and costs.

Denver

From

To

Year 1

Years 2 to 10

Boston

80

140

St. Louis

220

60

Cleveland

200

260

St. Louis

200

140

Chicago

370

430

St. Louis

20

70

Denver

110

NONE

Denver

500

670

St. Louis

NONE

230

The Total Cost of Goods Sold ($000) for the Denver alternative is:

Year 1 $5,790

Years 2 – 10 $6,606.25 per year

St. Louis

From

To

Year 1

Years 2 to 10

Boston

80

140

Denver

220

NONE

Chicago

NONE

60

Cleveland

200

260

Chicago

200

140

Chicago

170

230

Denver

330

270

St. Louis

440

500

Denver

60

400

The Total Cost of Goods Sold ($000)for the St. Louis alternative is:

Several things can be noted at this stage. First, on the basis of variable costs (COGS) alone,

Denver seems to be the better choice. However, as we shall see later, other financial

considerations must be made. Second, the distribution assignments (i.e., which warehouses must

⚫ PART 3 ⚫ Managing Supply Chains

E. Net Present Value

One important measure of the viability of a location decision involving capital outlays is the use

of a net present value (NPV) criterion. However, in this case we must compute incremental cash

flows because the new plant is to be used as a member of an existing network of plants. The only

measures of cash flow we get here is the total system COGS with and without the new

investment. The case gives the COGS for a Status Quo (without the new plants) solution so that

these incremental costs attributable to the new investment can be computed. For example, the

Denver alternative will generate the following incremental COGS ($000):

Denver Status Quo Incremental COGS

The revenue flows due to the addition of a new plant are the same regardless of the location. In

year 1, 400 (000) additional units can be sold at a price of $8 per unit, for an incremental

addition of $3,200. In years 2 and beyond, 700 (000) additional units will generate $5,600 in

incremental revenues. Given the assumptions regarding taxes, depreciation, and the data on

Supply Chain Logistic Networks ⚫ CHAPTER 13 ⚫

F. Conclusions

The case raised some non-quantitative factors in this decision. The instructor should press the

students as to how they would reconcile these factors, particularly since two of the three favor

Denver. One way to rationalize the decision is to use a preference matrix where each alternative

can be scored subjectively across all the major criteria. For example, using the base case in

which St. Louis had the better NPV, we might have the following matrix where a score of 5 is

excellent and a 1 is poor:

Factor Weight Denver St. Louis

Workforce availability 0.20 4 2

⚫ PART 3 ⚫ Managing Supply Chains

Appendix A

Denver Year 1

B CL CH StL D DUM SUPPLY

B 3.8 4.13 4.3 4.4 4.8 0 400

CL 3.33 3 3.18 3.3 3.7 0 400

D 500

Denver Years 2 – 10

B CL CH StL D DUM SUPPLY

B 3.8 4.13 4.3 4.4 4.8 0 400

CL 3.33 3 3.18 3.3 3.7 0 400

Supply Chain Logistic Networks ⚫ CHAPTER 13 ⚫

Optimal cost = $6,606.25 B CL CH StL D DUM

B 140 60 200

St Louis Year 1

B CL CH StL D DUM SUPPLY

B 3.8 4.13 4.3 4.4 4.8 0 400

CL 3.33 3 3.18 3.3 3.7 0 400

Optimal cost = $5,935.5 B CL CH StL D DUM

B 80 170 50 100

StL 440 60

St Louis Years 2 – 10

B CL CH StL D DUM SUPPLY

B 3.8 4.13 4.3 4.4 4.8 0 400

CL 3.33 3 3.18 3.3 3.7 0 400

⚫ PART 3 ⚫ Managing Supply Chains

Optimal cost = $6,689.5 B CL CH StL D DUM

B 140 60 200

Appendix B

Denver Location NPV⎯Most Likely

Denver

0

1

2

3

4

5

6

7

8

9

10

Profit or Loss

Change in Revenues

3200

5600

COGS

1098

2052

Gross Profit

2102

3548

Depreciation

1210

Fixed Costs

550

EBIT

342

1788

Taxes

136.8

715.2

Profit After Tax

205.2

1072.8

Cash Flows

Add Back Depreciation

1415.2

2282.8

Other Cash Flows

Initial Plant & Equip Costs

12100

Land Cost

1200

Sale of New Plant

6650

Tax on Gain

-2180

Free Cash Flow

1415.2

2282.8

6752.8

NPV @ 11%

$936.35

St. Louis Location NPV⎯Most Likely

St. Louis

0

1

2

3

4

5

6

7

8

9

10

Profit or Loss

Change in Revenues

3200

5600

COGS

1244

2135.5

Gross Profit

1956

3464.5

Depreciation

1080

Fixed Costs

750

EBIT

126

1634.5

Taxes

50.4

653.8

Profit After Tax

75.6

980.7

Cash Flows

Add Back Depreciation

1155.6

2060.7

Other Cash Flows

Initial Plant & Equip Costs

10800

Land Cost

800

Sale of New Plant

5800

Tax on Gain

-2000

Free Cash Flow

1155.6

2060.7

5860.7

NPV @ 11%

$1,058.62