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IENG 4579: Supply Chain Management

Fall 2010

The Usemore Soap Company:


A Warehouse Location Case Study
Background
The Usemore Soap Company produces a line of cleaning compounds, used mainly for
industrial and institutional purposes. Typical products including general cleaning
compounds, dishwasher powders, rinse agents, hand soaps, motor vehicle washing
compounds, and cleaning products for the food industry. The product line is composed of
more than 200 products and nearly 800 individual product items. Package sizes range
from 18-pound cases to large metal drums weighing 550 pounds.
Sales are generated throughout the 48 contiguous United States, with additional sales in
Hawaii, Alaska, and Puerto Rico. Customers typically purchase in quantities less than
10,000 pounds, i.e., less-than-truckload (LTL) quantities. Annual LTL sales, which pass
through the warehouses, are running at the 150 million pound level. These sales
represent approximately $100 million in revenue per year.
The primary marketing effort comes from a direct selling force operating under the
incentive of a liberal sales commission structure. Salespeople look upon themselves as
individual entrepreneurs and have a great deal of autonomy within the company. This
marketing strategy has generally proved successful for the company, as the company has
often been referred to as one of the most profitable divisions within its widely diversified
parent organization.
In spite of the high profitability, company management is concerned about the costs of
producing and distributing the product line to maintain its competitive edge. Growth and
shifting demand patterns are straining the production capacity of the four existing plants.
In addition, changing costs of distribution, as well as the fact that the distribution network
has not been studied in 12 years, raise questions about the proper placement of
warehouses. What follows is a summary of the problem conditions being faced by
management. You are to suggest an improved distribution network that meets the stated
customer service policy and minimizes total network production-distribution costs.

Distribution Network
The current distribution network consists of four full product line plants located at
Covington, KY, New York, NY, Arlington, TX, and Long Beach, CA (see Table 1). The
plants are currently producing product at the level of 595,102 cwt. 1, 390,876 cwt., 249,
662 cwt., and 241,386 cwt.
This output is shipped from plants either to field warehouses in the distribution network
or to customers within the local areas of the plant. In the latter case, plants serve as field
warehouses as well as producing centers. Thus, warehousing takes place at the four plant
locations as well as the six public warehouse locations, all shown in Table 2.

cwt. = 100 pounds

Plant
1
2
3
4

Location
COVINGTON,KY
NEW YORK,NY
ARLINGTON,TX
LONG BEACH,CA

X
2684
1423
4034
7870

Y
6223
4993
8436
9218
Total

Current
Capacity (cwt.)
620,000
430,000
300,000
280,000
1,630,000

Variable
Production
Cost
($/cwt.)
21.0
19.9
21.6
21.1

Current
Production (cwt.)
595,102
392,917
249,662
241,386
1,477,026

Table 1: Plants
Warehouse
Location
1
COVINGTON,KY
2
NEW YORK,NY
3
ARLINGTON,TX
4
LONG BEACH,CA
5
PITTSBURGH,PA
6
ATLANTA,GA
7
CHICAGO,IL
8
KANSAS CITY,KS
9
EL PASO,TX
10
SEATTLE,WA
Table 2: Current Warehouses

X
2684
1423
4034
7870
2185
2083
3426
4203
5655
8896

Y
6223
4993
8436
9218
5621
7260
5986
7027
9231
6336

Except for the plants serving as warehouses, the warehouses are supplied in full truckload
quantities. Less-than-truckload shipments serve customers. Customer order processing
takes place at each warehouse location.
In order to support demand growth over the next five years, two potential plant sites are
being considered at Chicago, Illinois, and Memphis, Tennessee (see Table 3). Additional
warehouse sites are being considered in the locations shown in Table 4.

Plant
Location
5
CHICAGO,IL
6
MEMPHIS,TN
Table 3: Potential Plants

X
3426
3125

Warehouse
Location
11
BOSTON,MA
12
MEMPHIS,TN
13
CLEVELAND,OH
14
DAVENPORT,IA
15
NEW ORLEANS,LA
16
S FRANCISCO,CA
Table 4: Potential Warehouses

Y
5986
7471

X
1249
3125
2543
3817
2638
8719

Variable
Production
Cost ($/cwt)
21.0
20.6

Y
4422
7471
5574
6275
8483
8492

Sales Data
Table 5 shows the six major sales territories, with the five year growth factor. The
company has more than 70,000 individual customer accounts, and these are aggregated
into 191 active demand centers. A demand center is a grouping of zip code areas into a
zip sectional center as the focus of the collected demand. It may be assumed that the
demand for a sales territory is averaged at its centroid. The demand at each of the 192
active demand centers is shown in the file Usemore.xls.
Five-Year
Region
Sales
Growth
Number Territory
Factor
1
Northeast
1.3
2
Southeast
1.45
3
Midwest
1.25
4
Northwest
1.2
5
Southwest
1.15
6
West
1.35
Table 5: Five-Year Growth Factor

Production Costs and Capacities


Production variable costs at existing plants vary by location. This variance results from
labor rate differences and volume purchases of raw materials. These costs for the four
existing plants and the two potential plants may be seen in Table 1 and Table 3.
Expansion at any plant site will not change the current variable cost. Fixed costs are not
included for existing plants because these are sunk costs. However, to construct a new
plant or expand an existing on would cost $4 million. This cost would result in an output
for the plant (or an output increase in the case of a plant expansion) of 1 million cwt per
year for the near future.

Warehousing Rates and Capacities


Company contracts with public warehouses show that rates are categorized as storage,
handling, and accessorial. Storage rates are quoted on the basis of average inventory
held. Handling charges are incurred whenever in or out movement of the product occurs
and are assessed on the basis of the flow through the warehouse. Accessorial charges are
for a number of services, such as bill of lading preparation and stock status reporting.
Similar charges are estimated for the four plant warehouses as a fair share of production
operations.
Also associated with warehousing are the stock replenishment costs. These are costs for
preparing the paperwork for normal replenishment and the expediting of stock into the
warehouse. Stock order costs as week as customer order costs are computed by
multiplying the average cost per order by the average number of orders for the
warehouse. The warehouse-related costs and other associated information are given in
Table 6.

Warehouse operating costs refer to the combination of storage and handling costs.
Storage costs are given by:

SC i SRi (26)(11.3Di

0.58

) SRi (293.8 Di

0.58

) , where

SCi = annual cost of stock storage at warehouse i ($)


SRi = storage rate at warehouse i from Table 6 ($/$)
Di = annual demand throughput at warehouse i (cwt.)
Handling costs are determined by:

HC i HRi ( Di

0.58

) , where

HCi = annual handling cost at warehouse i ($)


HRi = handling rate at warehouse i from Table 6 ($/cwt.)
Di = annual demand throughput at warehouse i (cwt.)
Order-processing costs refer to the charges incurred in handling the paperwork associated
with stock replenishment and customer orders. Both types of costs are computed for each
warehouse in essentially the same way. That is, the order-processing rate is multiplied by
the annual demand on the warehouse and the result is divided by order size.

Storage
Warehouse
Rate SR
Number
($/$)
1
.0672
2
.0567
3
.0755
4
.0735
5
.0946
6
.1802
7
.0946
8
.2072
9
.1802
10
.1442
11
.0946
12
.1982
13
.0766
14
.1262
15
.1126
16
.0991
Table 6: Warehousing Rates

Handling
Rate HR
($/cwt.)
0.46
0.54
0.38
0.59
0.50
0.75
0.74
1.14
1.62
1.14
1.04
1.06
1.06
1.22
0.82
0.64

Stock Order
Processing
($/Order)
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18
18

Stock Order
Size
(cwt./Order)
400
400
400
400
401
405
405
405
409
410
409
410
400
423
426
433

Customer
Order
Processing
($/Order)
1.79
1.74
2.71
1.74
0.83
3.21
1.23
1.83
4.83
2.74
3.93
3.18
1.08
1.56
1.20
1.78

Customer
Order Size
(cwt./Order)
9.05
10.92
11.59
11.30
9.31
9.00
8.37
13.46
9.69
8.28
10.20
15.00
9.07
11.72
9.35
8.70

There are no effective capacity limits on public warehousing. On the other hand, a
throughput of at least 10,400 cwt. is needed to open a warehouse. Available space is
limited at the current and potential plant sites to 350,000 cwt.

Transportation Costs
The inbound transportation cost to a warehouse from a plant depends on the volume
shipped and the distance between plant and warehouse:
P-W rate ($/cwt.) = 0.92 + 0.0034 d, where d is the distance between a plant and a
warehouse in miles.
Similarly, a warehouses outbound transport cost to customers is given by:
W-C rate ($/cwt.) = 5.45 + 0.0037 d, where d is the distance between a warehouse and a
plant in miles.
The distance dij in miles between two points i and j is roughly given by:
d ij K ( X i X j ) 2 (Yi Y j ) 2

, Where K is a scaling factor to convert distance between


coordinate points to actual distance. For the coordinates shown, K = 0.36 seems to work
reasonably well. You may verify this using any mapping software on the Internet.

Inventory Costs
Inventory costs depend on the average inventory maintained at a warehouse. Knowing
that the annual cost-to-carry-inventory rate is approximately 12 percent of the average
product value of $26 per cwt., the total cost to carry inventory at each warehouse is given
by:

IC i (0.12)(26)(11.3Di

0.58

) 35.3Di

0.58

, where

ICi = annual inventory carrying cost at warehouse i ($)


Di = annual demand throughput at warehouse i (cwt.)

Questions
The answers to the following questions are sought:
1. How many plants and warehouses should be operated assuming the demand in five
years?
2. Where should they be located?
3. Which customers should be assigned to which warehouses?
4. Which warehouses should be assigned to which plants?
5. What is the average length of inbound warehouse flows?
6. What is the average length of outbound warehouse flows?