The
MetalWorks Corporation
A
Network Configuration Project
Business Problem:
MetalWorks, Inc. is a company that
produces and distributes steel file cabinets and lockable steel storage boxes,
known in the industry assafety boxes. Currently, two manufacturing
plants located in Iowa, making both products, and Delaware, producing just the
file cabinets, serve about 120,000 accounts (retailers or stores) all over the
US and a small number of accounts in Canada. The company has two warehouses,
one at the manufacturing facility in Iowa and the second in Delaware.
The company was established in 1964 as a
family venture, and grew in the 70’s and 80’s at a fairly steady rate. Until 2009,
the company had only a single manufacturing facility, the one in Iowa. About
five years ago, MetalWorks bought one of its competitors in the file cabinet
business; this competitor had a manufacturing facility in Delaware, and now the
two manufacturing facilities produce the same file cabinets. MetalWorks is
currently owned by 12 shareholders and managed by a newly appointed CEO.
File cabinets are sold to retail stores
for $75 each, and safety boxes are sold for $107. Despite the high profitability of both
products, the new CEO is concerned that the company’s distribution network is
not as efficient as it could be. At a recent shareholder meeting, he pointed
out that the current distribution strategy employed by MetalWorks is merely the
merger of the two distribution systems that existed before 1991, the year in
which MetalWorks bought out its competitor. Thus, the shareholders decided to
engage a consulting firm to determine if the MetalWorks logistics network
should be altered, and if so, how. Your company, Advanced Logistics Consulting
(ALC), was awarded the engagement after six months of continuous work by your
marketing division, competing primarily with Andersen Consulting, A. T. Kearney
and Booz-Allen. You have agreed to “improve the effectiveness of the
distribution network and align cost of service with account profitability.” As
far as you can tell, it was this concept of re-engineering the entire
distribution network, together with the fact that you committed not only to the
design but also to the implementation of the new distribution strategy that
made your proposal attractive to the MetalWorks shareholders.
It is now time to redesign the
distribution network. For this purpose you have grouped the accounts into 200
major accounts, each corresponding to a major market for MetalWorks in the US
or Canada.
Your highly trained team has collected the following data:
- Forecasted demand in units for
each major customer account in 2016, 2017, 2018, and 2019.
2. 60 potential locations for warehouses. These
locations represent the most populated metropolitan areas in the US.
3. A number of possible sizes for each new
warehouse.
4. The annual operating cost of each potential
warehouse, which is a function of both warehouse size and location.
5. Inventory turnover ratios for each existing
and potential warehouse.
6. Carriers: MetalWorks uses
·
Rail and truck carriers to
transport products from manufacturing plants to warehouses.
·
A combination of TL (Truck
Load) carriers and small trucking companies to distribute its products from the
warehouses to the retailers.
7. Transportation rates:
·
Rail-Midwest charges transportation cost per mile for each car shipped.
·
Private Fleet andABC Fleet Co. charge transportation cost per mile for each truck.
·
Commercial TL rates are given in dollars
per mile per truck. These rates are given zone to zone as defined by the
carriers.
·
XYZ Truckinghas a rate that changes as a function of the distance for each
truck.
8. Variable manufacturing costs at each of the
plants.
Customer service is of particular concern
to MetalWorks, since there are a number of competing products on the market.
Although no specific dollar figure can be attached to a specific level of
service, customers have been divided into two groups, the Tier One customers
and the Tier Two, or Normal customers. The CEO insists that to remain
competitive, delivery time should be no more than 60 hours for Tier One
customers, and no more than 72 hours for Normal customers. This implies that
the distance between a warehouse and a customer should not be more than 2100
miles in the Tier One case, and 2300 miles in the Normal case.
MetalWorks has just finished a
comprehensive market study that shows significant volume growth in the markets.
This growth is estimated to be uniform across the different cities but variable
across products. The estimated yearly growth for 2017, 2018 and 2019 is about
7% per year for safety boxes and 10% for steel file cabinets.
To expand warehouse capacity, the client
would like you to consider opening more warehouses, either now or some year in
the future. They are concerned with
expanding too quickly, so they don’t want to open more than two new warehouses
in the first two years (2016 and 2017).
However, they would consider opening an additional one or two in the
following two years (2018 and 2019).
Once they decide to open a warehouse, that warehouse needs to stay open
in subsequent years.
To expand production capacity, the CEO
and the shareholders are considering two possible strategies:
- The first possibility involves expanding the manufacturing capacity
at the Iowa plant. By installing new machinery at the plant, the steel
cabinet production capacity can be expanded by 50% and the safety box
capacity by 25%. Once the new equipment is installed, the per cabinet
variable production cost at the plant will decrease by $0.05 per unit and
the variable production costs for safety boxes will decrease by
$0.10. This capacity expansion can
be done immediately with a one-time fixed cost of $2 million. Note: this only affects production
capacity in Des Moines.
- The other option involves building a new manufacturing plant in
Juarez, Mexico. Juarez is close to
the US border and has the infrastructure required for the manufacturing
facility. Of course, building such a facility will take about a year. That
is, the earliest it can be completed is at the start of 2017. This
facility will cost about $5 million to build.
MetalWorks would like to
address the following issues:
1. What should the 4-year plan for MetalWorks
be? In other words, should new warehouses
be established? If so, how many, when,
where and at what size? Should capacity
be expanded at the Iowa plant? If so, when should this be done? Should a new manufacturing facility be
established in Juarez?
2. What issues did you take into account when finding
a good solution? How did you reach the
conclusions that you reached? What
additional issues need to be considered?
3. LogicNet is the optimization software that
you used. Use what you have learnt in BUSML4382 class to explain to MetalWorks
how LogicNet works to find an optimal solution.
4. As you have learnt in BUSML4382 class,
sensitivity analyses are very important in optimization, by which you can
assess the robustness of your solutions. Management is concerned with several
factors that might influence the network, including customer service, fuel
costs, etc
4.1 Some of MetalWorks bigger customers
have said that they would give MetalWorks more business if they offered better
customer service. So management would
like to understand the additional costs associated with being closer to its
customers. Take your suggested manufacturing
network (i.e. capacity as is, increased capacity in Iowa, or Juarez – whichever
you are recommending) for 2019 and do sensitivity analysis around the maximum
distance to Tier One customers (the 2100 mile constraint). Try distances ranging from 500-2100 and plot
the total cost of the network (you can run scenarios at 500, 1000, and 1500). Note that for these runs you should unfix all
the warehouse locations (except Des Moines and Dover) and let the software add
as many warehouses as it would like, i.e. put the maximum number of warehouses
to something like 15. How should
management decide which distance would be most profitable? How much would this save the company? What
would you advise them to do?
4.2 Management is concerned about future
fuel prices and how that might affect the design of the network. As fuel prices increase or decrease, how
might you expect that to change your network?
Using your suggested manufacturing network for 2019, run scenarios where
truck transportation costs are decreased by 20% and increased by 20% and 40%
and see if the optimal locations of your warehouses change. For this analysis, also let the software
decide how many warehouses it would like to have (unfix all locations except
Des Moines and Dover and set the maximum to 15). What are your suggestions?
