The supply chain management team at AB Corporation (referred to as ABC) is considering whether the current production and distribution network is still cost efficient given the significant increase in transportation costs over the past few years. Compared to when the company first established its production facility in Chicago, transportation costs have increased more than four times and are expected to continue growing in the next few years. The team is investigating if a decision on building one or more new plants could save the company the transportation expenses in the future.
ABC is involved in the production and distribution of X and Y. Annual demand for the two products for the next planning horizon of one year is shown in the following table. The US-based company currently have one factory in Chicago that produces both products for the entire country. The X production line in the Chicago facility has a capacity of 5 million units, an annual fixed cost of $5 million, and a variable cost of $10 per unit. The Y production line in the Chicago facility has a capacity of 1 million units, an annual fixed cost of $1.5 million, and a variable cost of $20 per unit.
The supply chain management team have identified three new locations as potential sites for opening new plants: Princeton, Atlanta and Los Angeles. Each new plant could have one X line, one Y line, or both. Regardless of the location of the new plant(s), a new X line will have a capacity of 2 million units, an annual fixed cost of $2.2 million, and a variable production cost of $10 per unit. A new Y line will have a capacity of 1 million units, an annual fixed cost of $1.5 million, and a variable cost of $20 per unit.
The current and proposed transportation costs per unit are shown in the table below.
Questions to be addressed in your analysis:
1. What is the current annual supply chain cost? Note: this is the production and distribution cost of serving the entire nation from Chicago.
2. Do you recommend adding any plant(s)? If so, where should the plant(s) be built and what lines should be included? Assume that the Chicago plant will be maintained at its current capacity, but could be run at lower utilisation. Would your decision be different if transportation costs are half of their current value? What if they were double their current value?
3. If a new supply chain network could be designed from scratch (assume that the Chicago plant does not exist, but could be built at the cost and capacity specified in the case), what supply chain network do you recommend? Assume that any new plant built besides Chicago would be at the cost and capacity specified under the new network options. Would your decision be different if transportation costs were half of their current values? What if they were double their current value? Can you comment on your findings? Would your decision be different if transportation costs are half of their current value? What if they were double their current value?