Feasibility and Economic Justification Analysis

Evaluate the feasibility of and economic justification (if any) for building a new liquid chemicals distribution facility near New York City.

In speaking over the telephone with the sales/marketing managers for the Industrial Chemicals and Specialty Chemicals divisions, they point out that the Northeast is the most densely populated region of the country and that two of Canbide's competitors already have distribution facilities near New York. Without the facility, they jointly estimate that market share in the region will decline by about 5% per year for the next five years, then stabilize there. With a new facility, they jointly estimate that regional market shares will increase by 10-15% per year for the next three years, then 5-8% for the next two years. The increase in market share is equivalent to a 15% increase in the annualized sales volume.

You stop by the central records storage and request copies of the two previous studies that looked at building a new liquid chemicals distribution facility in the Northeast. Both of these studies assumed that, in order to minimize product transportation costs, liquid chemicals would be delivered to the new facility by an ocean-going barge. (On a cost per pound-mile basis, trucking costs are more expensive than rail travel. Rail is more expensive than barge, which is slightly more expensive than sea-going ship.) Both analyses found that the cost of construction plus the cost of operation plus the cost of transportation (from the barge to the facility and from the facility to the customer) out weighed the potential growth in sales.

You decide that the former analyses are sound, but you need to come up with a recommendation. You examine a detailed map of the Northeast and find that one city in eastern PA is located at the juncture of three interstate highways that lead to major population centers. You then look at a sectional map showing rail lines and discover that two major railroads also serve that city. You decide to propose an "in-land" location that will receive liquid chemical products by rail and make shipments by tank truck, but including ship or barge shipments may not be completely excluded.

What kind of data will you need to fully perform your analysis? Remember that adding a new distribution facility will reduce the volume through other facilities. Transportation costs will clearly be affected; instead of shipping products by truck from Charleston, SC (the nearest existing facility), products will be shipped from eastern PA to the Northeast. A new facility will also affect inventory levels (and valuations). Which products will you propose to distribute through the new facility? How will you estimate the construction costs of the new facility? How will you estimate the cost of real estate for the new facility? How will you estimate the operating costs of the new facilities?