Reference no: EM133574124

CASE STUDY Designing the Distribution Network for Michael's Hardware

Ellen Lin. vice president of supply chain at Michael's HazOware, was looking at the financial results from the past quarter and thought that the company could signifi¬cantly improve its distribution costs, especially given the recent expansion into Arizona. Transportation Cost: had been very high, and Ellen believed that moving away from LTL shipping to Arizona would help lower trans¬portation costs without significantly raising inventories.

Michael's had 32 stores each in Illinois and Arizona and sourced its products from eight suppliers located in the Midwest. The company began in Illinois and its stores in the state enjoyed strong sales. Each Illinois store sold, on average, 50,000 units a year of product from each sup¬plier (for annual sales of 400.000 units per store). The Ari¬zona operation was started about five years ago and still had plenty of room to grow. Each Arizona store sold 10.000 units a year from each supplier (for annual sales of 80.000 units per store). Given the large sales at its Illinois stores, Michael's followed a direct-ship model and shipped small truckloads (with a capacity of 10.000 units) from each supplier to each of its Illinois stores. Each small truck cast $450 per delivery from a supplier to an Illinois store and could carry up to 10,000 units. In Arizona, how¬ever, the company wanted to keep inventories low and used LTL shipping that required a minimum shipment of only 500 units per store but cast $0.50 per unit. Holding casts for Michael's were SI per unit per year.

Ellen asked her staff to propose different distribu¬tion alternatives for both Illinois and Arizona.

Distribution Alternatives for Illinois

Ellen's staff proposed two alternative distribution strate¬gies for the stores in Illinois:

1. Use direct shipping with even larger trucks that had a capacity of 40.003 units. These trucks charged only 51,150 per delivery to an Illinois store. Using larger tracks would lower transportation ants hut increase inventories because of the larger batch sizes.

2. Run milk runs from each supplier to multiple stores in Illinois to lower inventory cost even if the cast of transportation increased. Large trucks (capacity of 40.000 units) would charge 51.000 per shipment and a charge of $150 per delivery. Small trucks (capacity of 10,000 units) would charge 5400 per shipment and a charge of $50 per delivery.

Distribution Alternatives for Arizona

Ellen's staff had three distribution alternatives for the stores in Arizona:

1. Use direct shipping with small trucks (capacity of 10.000 units) as was currendy being done in Illi¬nois. Each small truck charged $2,050 for a ship¬ment of up to 10,000 units from a supplier to a store in Arizona. This was a significantly lower transportation cost than was currently being charged by the LTL carrier. This alternative, how¬ever. would increase inventory costs in Arizona given the larger batch sizes.

2. Run milk runs using small trucks (capacity of 10,000 units) from each supplier to multiple stores in Ari¬zona The small truck crier charged 52.000 per shipment and S50 per delivery. Thus, a milk run from a supplier to four stores would cost $2,200. Milk runs would incur higher transportation costs than direct shipping but would keep inventory costs lower.

3. Use a third-party crass-docking facility in Arizona that charged $0.10 per unit for this cross-docking service. This would allow all suppliers to ship product (destined for all 32 Arizona stores) using a large truck to the cross-dock facility, where it would be cross-docked and sent to stores in smaller trucks (each smaller truck would now contain product from all eight suppliers). Large trucks (capacity of 40.000 units) charge $4.150 from each supplier to the cross-dock facility. Small trucks (capacity of 10,000 units) charge $250 from the cross-dock facility to each retail store in Arizona.

Ellen wondered how best to structure the distribu¬tion network and whether the savings would be worth the effort. If she used milk runs in either region, she also had to decide on how many stores to include in each milk run.

Study Questions

Question 1. What is the annual distribution cast of the current distribution network? Include transportation and inventory costs.

Question 2. How should Ellen structure disuibution from suppliers to the stores in Illinois? What annual savings can she expect?

Question 3. How should Ellen structure distribution from suppliers to the starts in Arizona? What annual savings can she expect?

Question 4. What changes in the distribution network (it' any) would you suggest as both markets grow?