Question

Trips Logistics, a third-party logistics firm that provides warehousing and other logistics services, is facing a decision regarding the amount of space to lease for the upcoming four year period. The general manager has forecast that Trips Logistics will need to handle a demand of 100,000 units for each of the next three years. Historically Trips logistics requires 1 square feet of warehouse space for 1 units of demand. Trips logistics receives a revenue of $ 1.22 for each unit of demand. The spot market rate of space is $ 1.2 per square feet per year but a three year lease option for 100,000 square feet will cost $ 1 per square feet per year. The discount factor is 10%. A flexible lease option of minimum 60,000 square feet up to 100,000 square feet will cost an upfront one time commitment fee of $ 15,000/-

If there is a further uncertainty of a 10% change in spot market price year on year and a 20% change in demand year on year, what would be the best option for the warehouse requirement at Trips Logistics?

Answer 1