Question

Please I posted a question for 3days and haven't receive any response. Please below is the question; The previous solutions provided are incorrect.

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

a)

Original cost for tied-up capital for 15 warehouses = $ 2,000,000

Using alternative 1, number of warehouses decreases to 10

Cost for tied-up capital for alternative 1 = 2000000*sqrt(10/15)

= $ 1,632,993

b)

Using alternative 2, number of warehouses decreases to 5

Cost for tied-up capital for alternative 2 = 2000000*sqrt(5/15)

= $ 1,154,701

c)

Transportation cost for alternative 1 = 2*1000000 = $ 2,000,000 (given that transportation cost will double)

Stock-keeping cost for alternative 1 = 15000000*1.30*10/15 = $ 13,000,000 (given that store keeping cost increases by 30%)

Cost for tied-up capital for alternative 1 = $ 1,632,993

Total cost for alternative 1 = 2000000+13000000+1632993

= $ 16,632,993

d)

Transportation cost for alternative 2 = 1000000*5 = $ 5,000,000 (given that transportation cost increases to 500%)

Stock-keeping cost for alternative 2 = 15000000*1.70*5/15 = $ 8,500,000   (given that store keeping cost increases by 70%)

Cost for tied-up capital for alternative 2 = $ 1,154,701

Total cost for alternative 2 = 5000000+8500000+1154701

= $ 14,654,701

e)

Transportation cost for alternative 3 = $ 1,000,000

Stock-keeping cost for alternative 3 = $ 15,000,000

Cost for tied-up capital for alternative 3 = $ 2,000,000

Total cost for alternative 3 = 1000000+15000000+2000000

= $ 18,000,000