question archive A retail firm operates a "decentralized" distribution system (factory to warehouse to shop), in which the system uses six smaller warehouses distributed around a region to receive a product from a manufacturer (called "primary distribution") and then send the product to a retail outlets (called "secondary distribution")
A retail firm operates a "decentralized" distribution system (factory to warehouse to shop), in which the system uses six smaller warehouses distributed around a region to receive a product from a manufacturer (called "primary distribution") and then send the product to a retail outlets (called "secondary distribution")
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A retail firm operates a "decentralized" distribution system (factory to warehouse to shop), in which the system uses six smaller warehouses distributed around a region to receive a product from a manufacturer (called "primary distribution") and then send the product to a retail outlets (called "secondary distribution"). The firm is offered the opportunity to shift to a "centralized" system, in which each unit of product will still undergo primary and secondary distribution, but now there will only be one warehouse in the middle of the region. The transportation of the product incurs financial cost and energy consumption per vehicle kilometer (vkm) of movement. In the case of the warehouse costs, inventory costs are incurred by virtue of needing to keep stock on hand in the warehouse between the time that the stock is purchased and the time it is sold, and energy is consumed to operate the warehouse. Transportation costs $1.50 and consumes 19 MJ of energy per vehicle-km. Assume that all other costs and rates of energy consumption are the same for either option, and therefore are not included in the calculation since they do not affect the outcome. Note also that the cost of energy is included in the warehouse and transportation cost values given. (a) Based on the data given, determine whether the decentralized or centralized system is preferred. (b) What is the environmental dilemma underlying this decision? Discuss in a short answer, up to one-paragraph long.
Warehouse costs energy use per warehouse:
Inventory Cost {$1000/Year] Energy (GJ/year)
Decentralized 190 155
Centralized 710 730
Transportation volume generated per year per warehouse:
1000vKm/year primary secondary
Decentralized 35 82
Centralized 181 645
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Answer:
(a) Decentralized or Centralized system
| Decentralized | Centralized | |
| Overall Total Cost | $2,193,000 per year | $1,949,000 per year |
| Overall Total Energy | 14,268GJ per year | 16,424GJ per year |
(PLEASE SEE EXPLANATION BOX FOR THE COMPUTATION)
Based on the data above the centralized system uses additional of 2,156GJ (15.11%) energy consumption per year than decentralized system however on the overall total cost it reduces by $244,000 (11.13%) per year. From this result considering the competitive market, a company needs to choose the solution with the most cost-effective result. In which the retail firm must choose the Centralized, even though if this means increasing annual energy use.
Answer: Centralized system is preferred
(b) Environmental dilemma underlying the decision
The environment dilemma would be that, even though the retail firm wants to save energy and go "green" to make environment friendly decision, market conditions are driving firms in the opposite way. Because the firm may carry fewer inventories and incur fewer costs if all stored product is centralized in a single warehouse, the centralized approach lowers inventory costs. The energy savings from this modification, however, are minimal. When looking at the "life cycle" of warehousing and freight transportation, the amount of energy consumed upon this warehousing side is minimal. Because freight component consumed the majority of energy there is no counteracting decrease in energy upon this warehousing side to counterbalance the increased consumption of energy by the additional transportation involved when the change is made under the centralized system towards a more transportation-intensive pattern.
Step-by-step explanation
(a) Decentralized or Centralized system
| Decentralized | Centralized | |
|
Warehouse side cost
|
[Note: System uses six (6) smaller warehouse]
=Inventory Cost x 6 =$190,000 x 6 =$1,140,000 per year |
[Note: System uses one (1) warehouse]
=Inventory Cost x 1 =$710,000 x 1 =$710,000 per year |
|
Warehouse side energy
|
[Note: System uses six (6) smaller warehouse]
=Energy x 6 =155GJ x 6 =930GJ per year |
[Note: System uses one (1) warehouse]
=Energy x 1 =730GJ x 1 =730GJ per year |
| Total cost and energy consumption (Total vkm) |
[Note: System uses six (6) smaller warehouse]
=(Primary Warehouse vkm + Secondary Warehouse vkm) x 6 =(35,000vkm + 82,000vkm) x 6 =117,000vkm x 6 =702,000vkm per year |
[Note: System uses one (1) warehouse]
=(Primary Warehouse vkm + Secondary Warehouse vkm) x 1 =(181,000vkm + 645,000vkm) x 1 =826,000 vkm x 1 =826,000vkm per year |
| Transportation Total Cost |
=Total vkm x transportation cost per vehicle-km =702,000vkm x $1.5 =$1,053,000 per year |
=Total vkm x transportation cost per vehicle-km =826,000vkm x $1.5 =$1,239,000 per year |
| Transportation Total Energy |
=Total vkm x MJ of energy per vehicle-km =702,000vkm x 19MJ =13,338,000 x 1GJ/1000MJ =13,338GJ per year |
=Total vkm x MJ of energy per vehicle-km =826,000vkm x 19MJ =15,694,000MJ x 1GJ/1000MJ =15,694GJ per year |
| Overall Total Cost |
=Warehouse side cost + Transportation Total Cost =$1,140,000 + $1,053,000 =$2,193,000 per year |
=Warehouse side cost + Transportation Total Cost =$710,000 + $1,239,000 =$1,949,000 per year |
| Overall Total Energy |
=Warehouse side energy + Transportation Total Energy =930GJ + 13,338GJ =14,268GJ per year |
=Warehouse side energy + Transportation Total Energy =730GJ + 15,694GJ =16,424GJ per year |
Based on the data above the centralized system uses additional of 2,156GJ (15.11%) energy consumption per year than decentralized system however on the overall total cost it reduces by $244,000 (11.13%) per year. From this result considering the competitive market, a company needs to choose the solution with the most cost-effective result. In which the retail firm must choose the Centralized, even though if this means increasing annual energy use.
Answer: Centralized system is preferred
