Question

Warkworth Furniture specializes in environmentally friendly and sustainable furniture. One of its products, the TePaki desk, uses bamboo for the surface and recycled aluminum for the supports. The desk is made in its factory in Vietnam and shipped to all of its 30 stores throughout the United States, primarily in the large urban areas on either coast. Karen Williamson, the owner of Warkworth Furniture, is struggling with how it should organize i supply chain. Currently, it ships the desks from Vietnam to the United States via ocean carrier. Once they arrive in the United States, they are shipped via a third-party carrier to each store. It usually takes 10 weeks between when an order is placed with the factory and when the product is received in a store. The TePaki desk may be eco-friendly, but it isn't wallet friendly: Each desk costs Warkworth $325 to make and it sells the desk for $850. Nevertheless, Warkworth has been able to identify a market segment of customers that value the look of the desk and what it represents. Across it:s stores, it sells six desks per week, or 0.2 desk per week per store. Given the upscale nature of its business, Warkworth's stores are located in nice areas that unfortunately have high rents. Consequently, between the opportunity cost of capital and the cost of physical space, Karen estimates that it costs Warkworth $150 to hold each TePaki desk in one of its stores for one year. It would be a financial disaster if each desk actually spent the entire year in inventory in a store, but the $150 does represent the true cost of holding a desk in a store for that period of time. Shipping a TePaki desk from Vietnam to a store costs Warkworth $80 per desk, about $40 for the ocean portion of the journey and $40 for the land portion within the United States. Shipping a TePaki desk from Vietnam to a store costs Warkworth $80 per desk, about $40 for the ocean portion of the journey and $40 for the land portion within the United States. Andy Philpot, Warkworth's director of operations, has been arguing for some time that Warkworth should set up a distribution center in southern California to receive products from Asia, and from there distribute them to its various stores. Warehouse space is much cheaper than prime retail space. Hence, the holding cost per TePaki desk per year in a warehouse would only be $60. The only problem with this approach, according to Andy, is that the total shipping cost from factory to store could increase by $8 per desk due to the extra handling and shipping distance once all of the desks are routed through a distribution center. Karen understands why the distribution center approach could make sense, but she worries about getting all of the execution done right. Instead, she suggests that it ship all of the desks directly to the stores as it currently does, but then ship product between stores as needed. The only problem with that approach is that it probably will cost it about $40 per desk to ship from one store to another. To add to the discussion, Kathy White, Warkworth's marketing director, is concerned with how these ideas will affect the desks' in-store availability. She proudly reminds everyone that Warkworth currently has a .99 in-stock probability for the TePaki desk. Andy, a typical ops guy, quips that it could save a ton if it were willing to make its customers wait a week or so to get their desk delivered to the store from a distribution center.

1. How much does Warkworth incur in holding costs each year with its current system of delivering directly from the factory to its stores?

2. Say Warkworth opens a distribution center in southern California. How much would it incur in holding costs each year with that strategy?

3. Say Warkworth opens a distribution center in southern California. How much does it incur in holding costs per desk?

4. Would you recommend that it consider Karen's idea of holding all inventory at the stores but shipping between stores as needed?

5. Say Warkworth listened to Andy and didn’t hold inventory at the stores. Instead, inventory would be held in a distribution center and shipped to the stores as needed. How much would it save in inventory holding costs with this strategy?

Show any work.

Answer 1

1. How much does Warkworth incur in holding costs each year with its current system of delivering directly from the factory to its stores?
Currently WW incurs costs under 3 heads-

Desks sold per year=	10.40	<-=0.2*52
	Per desk	Full year
Manufacturing	325.00	3,380.00
Shipping- sea	40.00	416.00
Shipping- land (port to store)	40.00	416.00
Holding cost at the store	14.42	150.00
Total	419.42	4,362.00

It is given that each store sells 0.2 desks a week or in other words, 1 desk in 5 weeks. In a full year, a store could sell 52/5= 10.4 desks on an average. The holding cost of $150 is for 52 weeks period. Each desk stays in the store for an average of 5 weeks. Hence, the holding cost per desk is 150/52*5= 14.42

2. Say Warkworth opens a distribution center in southern California. How much would it incur in holding costs each year with that strategy?
By opening a warehouse in Cali, WW will incur a holding cost of $60, down from $150 as per current strategy as given in the data. There would be in increase in the shipping cost from $80 to $88.

3. Say Warkworth opens a distribution center in southern California. How much does it incur in holding costs per desk?
The total number of desks sold and the frequency is not expected to change for WW, irrespective of whether it stores th4e desks in the stores or in the warehouse. We apply the same method we applied in the first part. The holding cost of $150 is for 52 weeks period. Each desk stays in the store for an average of 5 weeks. Hence, the holding cost per desk is 60/52*5= $5.77

4. Would you recommend that it consider Karen's idea of holding all inventory at the stores but shipping between stores as needed?
I will not recommend implementing Karen's idea. This idea states to store the inventory of the desk at the stores directly, as is being done now. The holding costs in stores are higher at $150. Additionally, because of the movement between the stores, WW is expecting to incur an additional cost of $40 per desk. Hence, the total cost per desk is higher with this approach. If this idea had lowered the frequency or total cost of shipping desks from Nam to US, it would have been better than the current approach. However, we don't see that kind of benefit from this idea. Hence, I would not recommend it.

5. Say Warkworth listened to Andy and didn’t hold inventory at the stores. Instead, inventory would be held in a distribution center and shipped to the stores as needed. How much would it save in inventory holding costs with this strategy?
The holding cost of each desk in the warehouse is $60 per year as compared to holding the desk at the store. We have done the calculation of holding cost of each desk at store vs. in the warehouse in the previous parts. There is an additional shipping cost of $8 if stored in the warehouse. However, it is not required for the save in holding cost calculation.

	Per desk	Full year
Holding cost at the store	14.42	150.00
Holding cost at the warehouse	5.77	60.00
Total save	8.65	90.00