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 i supplychain. Currently, it ships the desks from Vietnam to the UnitedStates via ocean carrier. Once they arrive in the United States,they are shipped via a third-party carrier to each store. Itusually takes 10 weeks between when an order is placed with thefactory and when the product is received in a store. The TePakidesk may be eco-friendly, but it isn't wallet friendly: Each deskcosts Warkworth $325 to make and it sells the desk for $850.Nevertheless, Warkworth has been able to identify a market segmentof customers that value the look of the desk and what itrepresents. Across it:s stores, it sells six desks per week, or 0.2desk per week per store. Given the upscale nature of its business,Warkworth's stores are located in nice areas that unfortunatelyhave high rents. Consequently, between the opportunity cost ofcapital and the cost of physical space, Karen estimates that itcosts Warkworth $150 to hold each TePaki desk in one of its storesfor one year. It would be a financial disaster if each deskactually spent the entire year in inventory in a store, but the$150 does represent the true cost of holding a desk in a store forthat period of time. Shipping a TePaki desk from Vietnam to a storecosts Warkworth $80 per desk, about $40 for the ocean portion ofthe journey and $40 for the land portion within the United States.Shipping a TePaki desk from Vietnam to a store costs Warkworth $80per desk, about $40 for the ocean portion of the journey and $40for the land portion within the United States. Andy Philpot,Warkworth's director of operations, has been arguing for some timethat Warkworth should set up a distribution center in southernCalifornia to receive products from Asia, and from there distributethem to its various stores. Warehouse space is much cheaper thanprime retail space. Hence, the holding cost per TePaki desk peryear in a warehouse would only be $60. The only problem with thisapproach, according to Andy, is that the total shipping cost fromfactory to store could increase by $8 per desk due to the extrahandling and shipping distance once all of the desks are routedthrough a distribution center. Karen understands why thedistribution center approach could make sense, but she worriesabout getting all of the execution done right. Instead, shesuggests that it ship all of the desks directly to the stores as itcurrently does, but then ship product between stores as needed. Theonly problem with that approach is that it probably will cost itabout $40 per desk to ship from one store to another. To add to thediscussion, Kathy White, Warkworth's marketing director, isconcerned with how these ideas will affect the desks' in-storeavailability. She proudly reminds everyone that Warkworth currentlyhas a .99 in-stock probability for the TePaki desk. Andy, a typicalops guy, quips that it could save a ton if it were willing to makeits customers wait a week or so to get their desk delivered to thestore from a distribution center.

1. How much does Warkworth incur in holding costs each year withits current system of delivering directly from the factory to itsstores?

2. Say Warkworth opens a distribution center in southernCalifornia. How much would it incur in holding costs each year withthat strategy?

3. Say Warkworth opens a distribution center in southernCalifornia. How much does it incur in holding costs per desk?

4. Would you recommend that it consider Karen's idea of holdingall inventory at the stores but shipping between stores asneeded?

5. Say Warkworth listened to Andy and didn’t hold inventory atthe stores. Instead, inventory would be held in a distributioncenter and shipped to the stores as needed. How much would it savein inventory holding costs with this strategy?

Show any work.