1.

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

market d Dun
Delhi 0 480 375 260 30 235
Kanpur 480 0 855 520 450 575
Jalandhar 375 855 0 635 405 365
Jaipur 260 520 635 0 290 495
Faridabad 30 450 405 290 0 260
Dehra Dun 235 575 365 495 260 0

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.