Introduction: Background Information
The popular R.U Reddie Company is located in Chicago and majorly deals with clothing that is specifically designed for cartoon animals; perhaps notable are the Wile E. Coyote and Snoopy. They deal with a wide range of products but most popular are the flak jackets and wedding tuxedos for the Wile E. Coyote and Snoopy respectively. Sales in this company is dependent on children who throw tantrums refusing to leave the toy store until their parents have purchased clothing items for their stuffed toys. Recent concerns and projections indicate an increased demand for the product that is greater than the plants carrying capacity. This trend is set to increase over time and it is estimated that the company will run short by 40,000 units in the coming year. In view of this, the company owner is considering opening another production plant for provision of additional units but concern is on where to locate this new plant and the impacts it will have on sales plus the cost. Currently this Corporation has three plants located in Chicago, Cleveland, and Boston. The first operational plant was the one in Chicago but an increase in sales in both the Northeast and Midwest led to the establishment of the Boston and Cleveland branches. Demand moved west resulting into the opening of the Denver and St. Louis warehouse centers meaning each plant had the capacity to deal with issues of increased demand for products. The good news is that this increased demand will lead to a significant increase in profits but perhaps troubling is the fact that in order to realize this additional profit the Corporation will have to establish another plant and in a suitable location. The existing plants are not spacious enough to handle the ever increasing demand. Such factors have led to concerns regarding the best location with regards to the new plant. St. Louis and Denver have been highlighted as possible suitable location but which one makes the cut? Both have significant advantages and a few disadvantages.
Recommendations: Solutions (Memo)
Adding another plant to a perfect running system is a big move that requires adequate research and deliberation but it is nevertheless essential in order to deal with the increase in demand of the product. To come up with the best possible location it is vital to consider the net present value of each alternative together with other non-quantifiable entities. Denver offers much in terms of merits including; it has a number of good suppliers, a good work force, and its proximity too. Perhaps the only disadvantage of Denver is the strict environmental rules and regulations that may prove costly; it may mean that the company will have to modify the plant soon as operations start. These matters of concern can simply be summarized as operational factors, market factors, and financial factors.
Analysis of Projections
| Table A1: Cost of Goods Sold Estimation (Linear Programming Model Based) for New Denver Plant | ||||||
| Market | Unit Transportation Cost | |||||
| Unit Production Cost | Plant | Boston | Cleveland | Chicago | St Louis | Denver |
| 3.8 | Boston | 0 | 0.325 | 0.5 | 0.6 | 1 |
| 3 | Cleveland | 0.325 | 0 | 0.175 | 0.3 | 0.7 |
| 3.25 | Chicago | 0.5 | 0.175 | 0 | 0.15 | 0.5 |
| 3.15 | Denver | 1 | 0.7 | 0.5 | 0.425 | 0 |
| Table A1: Cost of Goods Sold Estimation (Linear Programming Model Based) for New Denver Plant | ||||||
| Market | Unit Transportation Cost | |||||
| Unit Production Cost | Plant | Boston | Cleveland | Chicago | St Louis | Denver |
| 3.8 | Boston | 0 | 0.325 | 0.5 | 0.6 | 1 |
| 3 | Cleveland | 0.325 | 0 | 0.175 | 0.3 | 0.7 |
| 3.25 | Chicago | 0.5 | 0.175 | 0 | 0.15 | 0.5 |
| 3.15 | Denver | 1 | 0.7 | 0.5 | 0.425 | 0 |
| Market | Shipment Plan (Decision Variables # of ‘000 Units) | |||||||
| Plant | Boston | Cleveland | Chicago | St Louis | Denver | Total | Year N’s Capacity | |
| Boston | 140 | 0 | 0 | 60 | 0 | 200 | <= | 400 |
| Cleveland | 0.00 | 260 | 0 | 140 | 0 | 400 | <= | 400 |
| Chicago | 0.00 | 0 | 430 | 70 | 0 | 500 | <= | 500 |
| Denver | 0 | 0 | 0 | 230 | 670 | 900 | <= | 900 |
| Total | 140 | 260 | 430 | 500 | 670 | 2200 | ||
| = | = | = | = | = | Demand Total | |||
| Demand | 140 | 260 | 430 | 500 | 670 | 2000 | ||
| TC (COGS) | 6606.25 | |||||||
| Year 1’s Most Likely Demand | 80 | 200 | 370 | 440 | 610 |
| Year 2-10’s Most Likely Demand | 140 | 260 | 430 | 500 | 670 |
Conclusion
The Denver location is a better location to open a new plant with respect to cost and NPV. Projections show that it will significantly deal with the issue of demand while cutting on cost of its establishment. All factors considered; market, operations, and finances it offers a limited opportunity for failure but gives an absolute opportunity for success so the Denver location is the best.