casestudy on distributionnetworkformichaelshardwaregroupgate.ppt

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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