The Metalworks Corporation Case Study
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MetalWorks is a company that produces and distributes steel file cabinets and lockable steel storage boxes, known in the Industry as safety boxes. Currently the company runs two manufacturing facilities, one located in Des Moines, Iowa which manufactures both products and the other located in Dover, Delaware that produces just the file cabinets. These two facilities serve all of the approximately 120,000 accounts (retailers and stores) throughout the United States and a small number of additional accounts in Canada. The company currently operates out of two warehouses, one at each manufacturing facility.
MetalWorks was established in 1964 as a family venture and grew throughout the „70‟s and „80‟s at a fairly steady rate. Until 2004, the company only operated one manufacturing facility, a plant in Des Moines, Iowa. Approximately five years ago, MetalWorks purchased a competitor, which operated a manufacturing facility in Dover, Delaware. MetalWorks decided to keep the plant, so there are now two facilities that manufacture the same file cabinets. MetalWorks is currently owned by 12 shareholders and is managed by a newly appointed CEO.
The file cabinets are sold to retail stores for $75 each and the safety boxes are sold for $107 each. 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 a result of the merger of the two distribution networks that existed before 1991, the year that MetalWorks purchased its competitor. 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 contract after six months of continuous work by your marketing division. You have agreed to “improve the effectiveness of the distribution network and align cost of service with account profitability.” In your original proposal, you mentioned that this concept of re-engineering the entire distribution network, together with the fact that you committed not only to design but also to implement the new
distribution strategy made your proposal attractive to the MetalWorks shareholders.
Your team has collected the following data:
1. Year 2010 through 2012 forecast demand in units for each major customer accounts. 2. 60 potential locations for warehouses. These locations represent the most populated metropolitan areas in the United States, 3. A number of possible sizes for each new warehouse.
4. The set-up cost for establishing a warehouse, which is a function of both warehouse size and location. 5. Labor cost in dollars per unit for each potential new warehouse and each existing warehouse. 6. Inventory turnover ratios for each existing and potential warehouse. 7. Carriers that MetalWorks uses:
• Rail and truck carriers to transport products from the manufacturing facilities to the warehouses • A combination of TL (truck load) carriers and small trucking companies to distribute the products from the warehouses to the retailers.
8. Transportation costs:
Rail-Midwest charges transportation cost per mile for each car shipped.
Private Fleet and ABC 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 Trucking has a rate that changes as a function of the distance for each truck. 9. Variable manufacturing costs at each of the manufacturing facilities.
10. An estimated increase in demand for 2010, 2011, and 2012. It is estimated that the demand for safety boxes will increase 7% annually and demand for file cabinets will increase 10% annually. You have already created an Excel spreadsheet with all of this information so that you are able to import it into LogicNetPlus. This spreadsheet allows you to ensure that you are able to meet MetalWorks short term needs (2010) as well as that in 2011 and 2012.
Customer service is a crucial component to MetalWorks business since there are a number of competing products on the market. Although no specific dollar figure can be attributed to a specific level of customer service, the customers have been divided into two groups, the Tier One, or priority, customers and the Tier Two, or normal, customers. The CEO insists that to remain competitive, the delivery time to Tier One customer shall be no more than 60 hours and the delivery time to Tier Two customers shall be no more than 72 hours. This implies that the distance between a warehouse and a Tier One customer should be no more than 1,100 miles and the distance between a warehouse and a Tier Two customer should be no more than 1,300 miles.
The CEO and shareholders are considering two possible strategies in order to accommodate the increase in demand. 1. The first possibility is to expand the cabinet manufacturing, the safety box manufacturing, or both, at the facility in Des Moines. Both capacities can be expanded independent of the other. • The steel cabinet production can be increased by 50% at a cost of $1,500,000. Once the new equipment is installed, the variable production cost will be decreased by $0.05 per steel cabinet. Some plant shutdown time is involved, but can be ignored in the analysis.
• The safety box production can be increased by 25% at a cost of $750,000. Once the equipment has been installed, the variable production cost for the safety boxes will be reduced by $0.10 at this facility. Again, plant shutdown time can be ignored.
2. The alternative to expanding production at Des Moines is to open a new facility in Juarez, Mexico, a small border town that has the infrastructure for this manufacturing facility. • The cost to build and open this facility is $5,000,000.
• It will take one year to build this facility.
Your final recommendation should address the following issues: 1. Should the capacity for file cabinets be expanded at the Iowa facility? Should the safety box capacity be expanded? If so, when? Or, should a new manufacturing facility be established in Juarez? If so,when? 2. Should new distribution centers be established? If so, how many? 3. If new distribution centers are going to be established, where should they be located? What size is appropriate for each facility?
4. How should each plant‟s production be allocated among the distribution centers? 5. What issues did you take into account when answering the previous questions? What additional issues need to be taken into consideration? How do your responses account for the long-term future, i.e. beyond 2012? 6. After visiting Juarez, Mexico, the potential location for a new manufacturing facility, you receive additional Information about transportation taxes in Mexico. It turns out that if you decide to open a facility in Juarez, each truck crossing the border into the United States will be taxed $50. How would you modify the analysis of the case? No need to do this analysis: just describe how you would take additional taxation into consideration. 7. Keep in mind that you need to compare baseline total costs (i.e., the total cost of the current network) against the total cost of other alternatives. There are quite a few alternative scenarios that can be modeled as available options center on the number of warehouses, when warehouses should be opened, the size of these facilities, and capacity expansion. Cost decreases should ultimately be compared to capacity expansion expenditures.
Logging In: Double-click on the “IBM ILOG LogicNetPlus 7.0 XE” icon in order to open the program. • Click on the open folder icon.
o Click on project. Your screen should now appear similar to the following:
In order to “Log Out” of LogicNetPlus select “File”, then “Exit”, then “OK”.
Your First Run & Optimizing the System:
• In order to optimize the system start from the main screen and select “Optimize” then select “Parameters”, then “Min/Max Group of Sites”. Input the number of warehouses you wish for LogicNetPlus to calculate a solution for first in “Maximum Warehouse” then in “Minimum Warehouses”. Click on “Run”. Run the system as it currently exists (i.e., two plants, two plant warehouses). This is your baseline model.
In order to minimize the amount of time LogicNetPlus spends calculating the solution, it is recommended that you input the same number in both data fields.
Viewing the Solution:
Right click on the desired solution and select “Select Solution”. Now, right click on the chosen Solution and select “Display Solution” and it should appear similar to that shown below. This will show which cities host the optimal solution for operating a warehouse.
Viewing the Output Summary:
To view the output summary select “Solution”, then “Standard Report”, and finally select “Summary Report”. The output summary as shown below will provide a summary of the costs associated with a particular solution, such as the total cost for this particular solution, warehousing costs, transportation costs, and the average distance to particular customer sites.
Exporting data and reports:
Input data and reports in LogicNet Plus may be exported to Microsoft Excel or Access for further analysis. For example, if you want to save the “Cost Summary” for a number of warehouses that you ran, select “Solutions” > “View Reports” > “Summary”. In the cost summary report (as shown below), either select “Export” or click on the Excel icon. LogicNetPlus will now either save the file as an “.xls” in the directory that you specify or will open the file in Excel respectively.
ADJUSTING AND FIXING FACILITIES AND DATA
The data on all of the available manufacturing facilities can be found by clicking on “Data”, then “Sites”, then, “Plants.” The information included here is the addresses of the sites, their geographic coordinates, and their fixed operating costs.
You can look at all available production costs and capacities for each of the manufacturing facilities in the project. From the screen with the geographic information on the manufacturing facilities, click on the link on the navigation panel under “Plants” called “Production Info”.
This will result in you being able to view all products that each facility is capable of producing, the production capacity for each product, the unit cost of production, and the hours of production each unit takes.
Note: This is where you will be able to expand capacity at specific production facilities and reduce unit production cost.
You are able to look up the specifications of each of the products that the MetalWorks Corporation offers. First, you need to click on “Data”>“Products”>“Product Details”. You will then be able to view the name of each product, its weight, adjusted weight, and volume transportation, warehouse holding cost, in transit holding cost, freight class, and value.
Each potential warehouse location can be viewed on the map as a red triangle. The data on all available warehouse locations can be found by clicking on, “Data” > “Warehouse” > “Warehouse Details”. The information included here is the addresses of the sites, their geographic coordinates, the warehouse type, the sizing factor, and their fixed operating costs for every possible warehouse location.
You can look up all possible sizes for each potential new warehouse included in the project. From the screen with the geographic information, click on “Warehouse Capacity”.
This will result in you being able to view all of the possible options for sizing for each warehouse location as well as the fixed cost to open the warehouse, the fixed cost to close the warehouse, and all fixed operating costs.
This is where you go to create existing warehouses: e.g., suppose you open a warehouse in 2010 and you are now examining scenarios for 2012. After importing 2012 demand data, you will need to indicate that the warehouse opened in 2010 exists.
Each of the customer facilities is represented on the map by a green dot. The data on all of the available customer facilities can be found by clicking on “Data” > “Customers” > “Customer Details.” The information included here is the name and location of the sites.
Demand information for each customer is provided in the project. In order to view this information, you click on the box next to “Demand” on the page with the geographic information for each customer. The frequency of customer shipments to each customer is also provided. To view this information, you click on the link to Shipment Profile.
The information on all of the carriers that MetalWorks uses is available by clicking “Data” > “Transportation” > “Carriers”. This screen will give you all of the minimum charge, the return factor, the type of measurement, the maximum weight, the maximum adjusted weight, the maximum volume, and the maximum number of units that can be carried in each load.
Although you‟ll optimize each year separately, you need to make a decision based on the entire planning horizon. A warehouse that you decide to establish in a specific location at a given year is going to stay with MetalWorks until the end of the planning horizon.
The plant warehouses cannot be closed. Also, it is not possible to open a warehouse in 2010 and close it in 2013. When you optimize for every year, do not forget to edit the data (customer demand, existing warehouses, and manufacture facility) so that they reflect the scenario in that year. Your recommendation follows from a cost benefit analysis. The baseline model (2010 with two plants and two plant warehouses) provides the starting cost. The alternative investments concern plant expansion in the USA or plant creation in Mexico (these are one-time costs). Your benefit is the overall total cost reduction from the baseline model (these are estimated annual savings).