SCTL 506 Homework
Conversion to Cross-Docking Solution
Calculate the NPV
It has been another three years since you implemented the ERP system. It has been a huge success. So much so, you’ve been promoted to Vice President of Operations. You now oversee operations across the country. You now sit on the executive team, contributing to the strategic management of Consolidated. In fact, there is a very important strategic decision facing the company.
Over the years, Consolidated has aggressively acquired many of the independent and regional auto parts dealers in the US. As part of those acquisitions, Consolidated acquired a sytstem of regional distribution warehouses. The executive team is considering redesigning their distribution system into a Hub and Spoke cross-docking system. You are considering testing a single cross-docking warehouse outside of Columbus, OH. If successful, Consolidated would likely develop three more cross-docking facilities. Working with a team of supply chain, logistics and financial analysts, your team has developed a series of estimates. Management has approved those estimates.
Currently, the warehouses that would be replaced by the Columbus facility carry 150 days of inventory. With the Columbus facility, that would be reduced to 5 days.
Rather than rely solely on LTL carriers, Consolidated would purchase a fleet of delivery trucks at an estimated cost of $25 million.
Annual maintenance and operating costs on that fleet is estimated to be $2.5 million.
The annual lease cost of the new facility would be $3.2 million. In Year 1, the lease on the Columbus facility will be IN ADDITION to the existing warehouses, which won’t be closed until Year 2. Therefore, total lease costs for Year 1 will be $6 million. Beginning Year 2, the net incremental will be $400k.
Labor costs at Columbus would be cut by 33% relative to the existing two warehouses.
A new enterprise logistics system will have to be purchased and customized at an estimated cost of $5.5 million in Year 1.
A dedicated consulting team would be hired to plan and implement IT solutions designed to more closely integrate supplier and customer systems with Conolidated’s system. Those consulting fees will be $2,750,000 in Year 1, $1,125,000 in Year 2, and $750,000 in Year 3.
Because of faster service times, management expects revenues to increase 3
% per year on a compound basis beginning Year 2.
The move will take place in Year 2 at a cost of $12.5 million.
Inventory At Regional Warehouses = $61.5 million (approx. $647/day)
Labor Costs At Regional Warehouses = $9 million
Gross Margin at Regional Warehouses = 45%
Revenues at Regional Warehouses = $375 million
Create a spreadsheet that calculates the Net Present Value of this project assuming management requires a 20% return on these sorts of strategic initiatives. Assume that after the 10th year, Consolidated will likely change its distribution strategy again. Since there is no clear single investment, you might consider calculating the net cash flows each year for the 10 years and then discount the net cash flows.
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