casestudy on distributionnetworkformichaelshardwaregroupgate.ppt
- 1. Distribution Network for Michael’s Hardware
- 2. CASE STUDY Designing the Distribution Network for Michael’s Hardware Ellen Lin, vice president of supply chain at Michael’s Hardware. Current Scenario: 32 stores each in Illinios & Arizona. Illinios’ store sells an average of 50,000 units a year and Arizona’s store sell 10,000 units from each supplier. Direct Shipping model used in Illinois and LTL shipping in to Arizona keep inventory low.
- 3. Brief about the Case Suggested Alternatives for Illinois by Staff Direct shipping with larger trucks. Using larger trucks would lower transportation costs but increase inventories because of the larger batch sizes. Use milk run for transportation. lower inventory cost even if the cost of transportation increased. Suggested Alternatives for Arizona by Staff Direct shipping with small trucks. This was a significantly lower transportation cost than was currently being charged by the LTL carrier. This alternative, however, would increase inventory costs in Arizona given the larger batch sizes. Use milk run with small trucks for transportation. Milk runs would incur higher transportation costs than direct shipping but would keep inventory costs lower. Third party cross docking facility. 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
- 4. What is the annual distribution cost of the current distribution network? Direct Shipping Using Small Trucks in Illinois(Full) Batch size =10,000 Average inventory at store =50,000 Number of shipments / year =5 Truck cost / retail store / supplier = $2,250 Total truck cost = $576,000 Holding cost / retail store / supplier =$ 50,000 Total holding cost = $1,28,00,000 Total holding and truck cost = $1,33,76,000
- 5. The cost of the current network for Arizona is obtained as follows: Total transportation cost = 8×32×10,000×0.5 = $1,280,000 If batches of 500 are used for each store, holding cost = (500/2)×8×32 = $64,000. The total annual cost thus is $ 1,344,000.
- 6. How should Ellen structure distribution from suppliers to the stores in Illinois. What annual savings can she expect? Milk Run Using Small Trucks (Full) Number of stops / truck 4 Batch size / product / store = 2,500 Average inventory at store / product = 1,250 Number of shipments / store / year = 20 Truck cost / retail store / supplier /year = $ 3,000 Total truck cost / year = $ 768,000 Holding cost / retail store / supplier = $ 1,250 Total holding cost / year= $ 320,000 Total holding and truck cost = $ 1,088,000 Savings = $ 768,000
- 7. How should Ellen structure distribution from suppliers to the stores in Illinois. What annual savings can she expect? Milk Run Using Small Trucks (Full) Number of stops / truck 10 Batch size / product / store = 1,000 Average inventory at store / product= 500 Number of shipments / store / year = 10 Truck cost / retail store / supplier /year = $ 2,500 Total truck cost / year = $ 640,000 Holding cost / retail store / supplier = $ 500 Total holding cost / year= $ 128,000 Total holding and truck cost = $ 768,000 Savings = $576,000
- 8. What changes in the distribution network (if any) would you suggest as both markets grow? As Illinois grows, one would expect to see the number of stores aggregated on to a single truck to decrease. If demand quadruples from current levels, the optimal number of stores per milk run decreases from 4 to 2. As Arizona grows, one would first expect the need for intermediate facilities to diminish. This may require a significant increase in demand given the high transportation cost from suppliers to Arizona. According to our understanding of the case the intermediate facility stays optimal until the demand at Arizona increases by a factor of 4 relative to current levels.
- 9. THANK YOU