Custom Vans

In this case a shower manufactures needs to decide where to build two more plants that will be the most cost efficient. Below is the data provided in the case.

Store

CHICAGO MILWAUKEE MINNEAPOLIS DETROIT CAPACITY

Factory

GARY $10 $20 $40 $25 300

FORT WAYNE $20 $30 $50 $15 150

DETROIT $30 $40 $60 $5 150

ROCKFORD $5 $10 $30 $35 150

MADISON $10 $5 $25 $40 150

DEMAND 300 100 150 200

The Gary and Fort Wayne factories are the only two factories producing at the current time. Detroit, Rockford, and Madison are the proposed new factory locations. The Detroit and Madison proposed factories have other added benefits. Detroit can acquire fiberglass for $2 less a gallon than the other plants. Madison on the other hand can acquire labor for $1 less an hour than the other plants. The total cost savings are shown below for the Detroit and Madison Plant.

Detroit Plant =

Fiberglass less $2/gal - Total Savings 2gal/shower*-$2gal*150showers= -$600

Madison Plant =

Labor less $1/hr - Total Savings 3hrs/shower*-$1hr*150showers= -$450

1 Shower = 2 gallons of fiberglass + 3 hours of labor

When using the data above and applying it to the "Northwest Corner Rule" the following results would be true.

Optimal cost = $11250 CHICAGO MILWAUKEE MINNEAPOLIS DETROIT

GARY 300 0

FORT WAYNE 100 50

DETROIT 150

MADISON 100 50

Optimal cost = $12000 CHICAGO MILWAUKEE MINNEAPOLIS DETROIT

GARY 300 0

FORT WAYNE 100 50

DETROIT 150

ROCKFORD 100 50

Optimal cost = $11000 CHICAGO MILWAUKEE MINNEAPOLIS DETROIT

GARY 250 50

FORT WAYNE 150

ROCKFORD 50 100

MADISON 100 50

As you can see adding Rockford/Madison would give you the optimal shipping cost and meet your demand at the optimal cost of $11,000. This is $250 less than building the Detroit/Madison plant and $1000 less than building the Detroit/Rockford plant. But because of economic factors described above with Detroit's ability to get cheaper fiberglass and Madison's ability to get cheaper labor. The Rockford/Madison plant may not be as favorable.

Factory Optimal Cost Less Labor $ Less Fiberglass $ New Cost

Rockford/Madison $11,000 -450 $10,550

Detroit/Madison $11,250 -450 -600 $10,200

Detroit/Rockford $12,000 -600 $11,400

After running the data and taking into account the other savings, Detroit/Madison is the true cost optimizer with a total new cost of $10,200.

Acquiring cheaper materials and labor are always a bonus. But there are other factors not described in this case that would be measured before a decision is made. Here is a list of other factors that should be considered: property cost, taxes, labor skill level, highway accessibility, avg. fuel cost for the area, insurance costs, urban/rural, expansion possibilities, local