Magic Mattress, a mattress manufacturing company in Bangalore, is trying to finalize its
distribution network for northern India. The company has a manufacturing facility and a central inventory depot in Bangalore attached to it. In the northern region, the firm presently markets its product through six demand points Delhi, Kanpur, Jalandhar, Jaipur, Faridabad and Dehra Dun. Each of these demand points belongs to different states and union territories. If the firm serves retailers within the region from distribution centres (DCs) located in the same region (state/union territories) then it does not have to pay central sales tax (CST). CST is an interstate sales tax and is levied @ 4% on goods that are sourced from outside the region. If the firm locates DCs in all six regions it can avoid paying CST completely. The fixed cost per period of installing (apportioned) and operating a DC is Rs 2,500 per week. Transportation cost is Rs 0.2 per kilometer per unit, and the unit cost of a mattress is Rs 1,000. the firm has decided to locate at least one DC in the northern region so that the lead time for the retailer is less than 48 hours. The firm will try to serve a market in any region from a DC located closest to the market.
Demand point specific data.
Delhi Kanpur Jalandhar Jaipur Faridaba Dehra
d Dun Distance from 2,050 1,855 2,415 2,000 2,020 2,240 central warehouse Weekly 40 16 16 16 8 4 demand
Distances Matrix (in km).
Warehouse/ Delhi Kanpur Jalandhar Jaipur Faridaba Dehra
The firm wants to decide the optimal location of its DCs so as to minimize the total cost. The total cost will include transport cost, fixed facility cost and CST-related cost.
a) Where should the company locate its warehouse?
b) The Indian government is planning to reduce CST over a period of time. How will your decision change if CST is brought down to 2 per cent.