CASE Warkworth Furniture
Warkworth Furniture specializes in environmentally friendly andsustainable furniture. One of its products, the TePaki desk, usesbamboo for the surface and recycled aluminum for the supports. Thedesk is made in its factory in Vietnam and shipped to all of its 30stores throughout the United States, primarily in the large urbanareas on either coast. Karen Williamson, the owner of WarkworthFurniture, is struggling with how it should organize its supplychain.
Currently, it ships the desks from Vietnam to the United Statesvia ocean carrier. Once they arrive in the United States, they areshipped via a third-party carrier to each store. It usually takes10 weeks between when an order is placed with the factory and whenthe product is received in a store.
The TePaki desk may be eco-friendly, but it isn’t walletfriendly: Each desk costs Warkworth $325 to make and it sells thedesk for $850. Nevertheless, Warkworth has been able to identify amarket segment of customers that value the look of the desk andwhat it represents. Across its stores, it sells six desks per week,or 0.2 desk per week per store.
Given the upscale nature of its business, Warkworth’s stores arelocated in nice areas that unfortunately have high rents.Consequently, between the opportunity cost of capital and the costof physical space, Karen estimates that it costs Warkworth $150 tohold each TePaki desk in one of Page 483its stores for one year. Itwould be a financial disaster if each desk actually spent theentire year in inventory in a store, but the $150 does representthe true cost of holding a desk in a store for that period oftime.
Shipping a TePaki desk from Vietnam to a store costs Warkworth$80 per desk, about $40 for the ocean portion of the journey and$40 for the land portion within the United States.
Andy Philpot, Warkworth’s director of operations, has beenarguing for some time that Warkworth should set up a distributioncenter in southern California to receive products from Asia, andfrom there distribute them to its various stores. Warehouse spaceis much cheaper than prime retail space. Hence, the holding costper TePaki desk per year in a warehouse would only be $60. The onlyproblem with this approach, according to Andy, is that the totalshipping cost from factory to store could increase by $8 per deskdue to the extra handling and shipping distance once all of thedesks are routed through a distribution center.
Karen understands why the distribution center approach couldmake sense, but she worries about getting all of the execution doneright. Instead, she suggests that it ship all of the desks directlyto the stores as it currently does, but then ship product betweenstores as needed. The only problem with that approach is that itprobably will cost it about $40 per desk to ship from one store toanother.
To add to the discussion, Kathy White, Warkworth’s marketingdirector, is concerned with how these ideas will affect the desks’in-store availability. She proudly reminds everyone that Warkworthcurrently has a .99 in-stock probability for the TePaki desk. Andy,a typical ops guy, quips that it could save a ton if it werewilling to make its customers wait a week or so to get their deskdelivered to the store from a distribution center.
1.How much does Warkworth incur in holdingcosts each year with its current system of delivering directly fromthe factory to its stores?
2.Say Warkworth opens a distribution centerin southern California. How much would it incur in holding costseach year with that strategy?
3. Say Warkworth opens a distribution center insouthern California. How much does it incur in holding costs perdesk?
4. Would you recommend that it consider Karen’sidea of holding all inventory at the stores but shipping betweenstores as needed?
5. Say Warkworth listened to Andy and didn’t holdinventory at the stores. Instead, inventory would be held in adistribution center and shipped to the stores as needed. How muchwould it save in inventory holding costs with this strategy?
