Question

Candy producer Jim’s Jellybeans have customers all over the world. To be able to meet demand, the company has been forced to operate 15 separate warehouses across the globe. Lately, however, development in IT and warehouse automation has created new possibilities for Jim’s Jellybeans. The cost of the current operation is (for the whole company):

Transportation: $1 000 000

Stock keeping: $15 000 000

Cost for tied-up capital: $2 000 000

The company is faced with three alternatives:

Alternative 1: Automate picking. This means that each warehouse will be 30% more expensive (stock keeping cost) due to new equipment etc. But it also means that the order to delivery lead-time for each warehouse will decrease by as much as 60%. The reduced lead time lets the company reduce the number of warehouses to 10. As a result of this, transportation cost will double.

Alternative 2: Automate everything. Here, the number of warehouses are reduced to 5. The remaining warehouses are heavily automated and stock keeping cost is increased by 70% for these. Transportation cost increases by 500%.

Alternative 3: Do nothing. Keep the current system intact.

Na. What is the cost for tied-up capital for alternative 1?

Nb. What is the cost for tied-up capital for alternative 2?$

Nc. What is the total cost for alternative 1?$

Nd. What is the total cost for alternative 2? $

Ne. What is the total cost for alternative 3?$

Answer 1

Required a)

Total Cost for tied-up capital = $2 000 000

Total number of Warehouses = 15

Cost for tied up capital per warehouse = $2 000 000 / 15 = $133,333

Revised number of warehouse = 10

Total Cost for tied up capital = $133,333 * 10 = 1,333,330

Required b)

Total Cost for tied-up capital = $2 000 000

Total number of Warehouses = 15

Cost for tied up capital per warehouse = $2 000 000 / 15 = $133,333

Revised number of warehouse = 5

Total Cost for tied up capital = $133,333 * 5 = $666,667

Required c)

Under alternative 1,

Transportation Cost (revised)= $1,000,000 * 2 = $2,000,000

Stock keepingcost (revised) = $15,000,000 *1.3 * 0.4 = $7,800,000

Cost for tied-up capital (revised) = $1,333,330

Total Cost = $11,133,330

Required d)

Under alternative 2,

Transportation Cost (revised)= $1,000,000 * 6 = $6,000,000

Stock keepingcost (revised) = $15,000,000 * 1.70 = $25,500,000

Cost for tied-up capital (revised) = $666,667

Total Cost = $32,166,667

Required e)

Transportation: $1 000 000

Stock keeping: $15 000 000

Cost for tied-up capital: $2 000 000

Total Cost under alrenative 3 = $18,000,000

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