Forest Green Products provides private label vegetables for grocery chains throughout the Midwest. They currently have distribution centers in Columbus, Ohio; St. Louis, Missouri; and Minneapolis, Minnesota. The typical annual capacity requirements for Forest Green are 5 million cases with a case split of 35 percent, 40 percent, and 25 percent for Columbus, St. Louis, and Minneapolis, respectively. The company is reassessing its materials handling and storage capability in each facility. The technology alternatives being considered are mechanized, semi-automated, and information-directed systems. Table 3 summarizes the acquisition, annual fixed cost, per case variable cost, and life span of each system alternative. The acquisition and annual fixed cost are quoted in terms of dollars per million units of capacity. In other words, a DC requiring two million units of capacity would double the specified cost. The annual fixed cost does not include depreciation for the acquisition cost. Assume that the total square footage of the 3 DCs is the same.
Table 3
Materials Handling Alternative
Mechanized Semi automated information – directed
One time Acquisition cost $1, 000,000 $3, 000,000 $1, 500,000
Annual fixed cost $50,000 $200, 000 $150, 000
Per case variable cost $0.30 $0.08 $0.15
Usage life span (years) 10 5 7
a. What system alternative should be used for each DC based on annual cost? How does this decision change if Net Present Value (NPV) is considered over the life of the system? Assume a 10 percent discount rate.
b. Assume that for simplicity's sake, Forest Green wants to use only one system alternative for all three DCs. What is the system with the lowest NPV for the life of the system for the combination of DCs?
c. What other qualitative factors should be considered?