Question

A Swedish company with customers in virtually all of Europe wants to reduce its distribution costs...

A Swedish company with customers in virtually all of Europe wants to reduce its distribution costs and have read that many companies have adopted a more centralized distribution structure to reduce them. The company therefore plans to investigate whether there may be an option. In the starting position, the company has distribution warehouses in Sweden, UK, Germany, Spain, Turkey, Slovakia, France, and Romania, and the demand for these warehouses are approximately equal. The cost for this structure is: (2p) The option means that the company only has one warehouse and liquidate the rest. This will mean that warehousing costs are reduced to 1 600 000 SEK/ year, and that transportation costs will increase to 2 800 000 SEK/ year. The company will need to invest in a new information system, which will mean that these costs will increase to 640 000 SEK/ year. Stock Keeping costs in the current option consists of 75% of the cycle stock. The cycle stock will overall be the same in the more centralized alternative. The remaining 25% of the stock keeping costs of the current option is the cost of safety stock. Make an estimation of the economic feasibility of introducing a more centralized distribution structure.

Cost before change (SEK/year)

Warehousing,costs: Buildings Equipment Employees =  3500

Stock,Keeping,Costs: Capital,cost Risk,Cost = 3200

Transportation,cost, = 1900

Information,cost, = 360

Business   Accounting   
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Homework Answers

Answer #1

1. Savings in Warehousing costs: (3500 SEK/yr Less 1600 SEK/yr) = 1900 SEK/yr

2. Increase in Transportation Costs: (1900 SEK/yr Less 2800 SEK/yr) = -900 SEK/yr

3. Increase in Information Costs: ( 360 SEK/yr Less 640 SEK/yr) = -280 SEk/yr

NET savings in centralized distribution system: 720 SEK/yr.

There would be no impact on  Stock,Keeping,Costs: Capital,cost Risk,Cost = 3200 as the cycle stock in both the option is going to remain the same. Also the as the cycle stock is going to remain the same it is assumed that the Safety stock levels also remain the same and hence the cost if carrying it will also remain the same.

It is therefore advisable to go implement Centralized distribution system.

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