1. Assume that the inventory holding cost is based on an annual rate of 37 percent. Suppose that the Atlanta warehouse currently receives 10,000 orders annually from the dealers in its region. If the backorder cost is estimated to be $250 per order, how much decrease in the service level would you be willing to tolerate when closing the Atlanta warehouse?

Cameron Power Equipment Established in 1922, Cameron Power Equipment (Cameron) was a leading manufacturer and distributor of outdoor power products, including lawn mow- ers, garden tractors, snow blowers, chain saws, and trimmers. Headquartered in the United Kingdom, Cameron had annual revenues of $2.5 billion, with operations in Europe, North America, Central and South America, Asia, and Australia. Cameron sold more than 300 dif- ferent models of outdoor power equipment around the world. Its products were sold through a network of more than 10,000 power equipment retailers (also referred to as “dealers”) in the United States.

Company operations in the United States included its head office and distribution cen- ter (DC) in Charlotte, North Carolina, and a manufacturing facility in Columbia, South Carolina.

The Distribution Network The Charlotte DC was a 250,000 square foot facility that handled approximately 30,000 stock keeping units (SKUs), including parts and accessories. The DC received goods from Cameron manufacturing facilities and suppliers, and distributed the products to its US warehouse network or directly to dealers. Direct shipments to deal- ers from the DC were limited to full truckload shipments, typically to large dealers. Tim was responsible for managing the network of the eight warehouses that comprised the US distribution network.

Warehouses handled distribution of equipment, parts and accessories to the dealers in their regions. The power equipment industry was subject to seasonal demand, with the spring and summer representing the peak sales periods, and fast, reliable deliveries to dealers was essential. The targeted service level to dealers was 99 percent with 48-hour lead times, but actual performance was a service level that averaged 97 percent.

Inventory levels at the warehouses were maintained at an average of 30 days. Tim commented on the balance between inventory holding costs and customer service: “We have found that keeping inventory levels at 30 days provides adequate customer service levels. I hired an MBA student on a summer internship last year and I asked her to evaluate out inventory holding costs. She provided an estimate of 16.5 percent, which included the cost

of capital at 9.5 percent, plus 7 percent for storage and handling costs, including warehouse rent, labor, insurance, taxes, and obsolescence.

The Atlanta Warehouse The Atlanta warehouse was a 15,000 square foot facility that serviced dealers in the Southeast, including Georgia, Alabama, Mississippi, Tennessee, and Louisiana. The total cost to operate the warehouse was $5,250 per month plus $6,500 per month in salaries, wages, and administrative expenses.

In order to minimize transportation costs, full truckload shipments were used to ship products to the Atlanta warehouse. Although the number of shipments varied each month, on average, eight shipments were made from Charlotte and four shipments were made from the Columbia plant. Freight charges were $725 per load from Charlotte and $625 per load from Columbia.

Since the Charlotte DC was not set up to support small-order fulfillment, Tim spoke to Cameron’s current transportation service provider in Atlanta, Merwin Logistics, about setting up a cross-docking shipping process. Under this arrangement, Cameron would make daily shipments to Merwin’s Atlanta terminal, where the loads would be cross-docked, con- solidated, and set to the dealers in LTL loads. Merwin quoted a fee of $7,000 per month to provide the cross-docking service. There were no changes in the delivery costs to the dealers. In order to maintain service levels to the dealers, Tim would need to make shipments from Charlotte to Merwin’s terminal in Atlanta each working day (i.e., 20 times every month). Shipments normally sent directly to Atlanta from Columbia would instead be sent to Char- lotte and consolidated with other SKUs on the daily shipments. The cost to ship from Columbia to Charlotte was $260 and would continue to be made in full truckloads four times per month. Freight costs from Charlotte to Atlanta remained unchanged.

The Atlanta warehouse maintained an average inventory of $320,000 valued at full cost. Tim felt that if the Atlanta warehouse was closed, they would realize a one-time systemwide reduction in inventory of approximately 50 percent of the value of inventory in the Atlanta warehouse.

The hurdle rate used for capital expenditures was set at 30 percent by head office, so Cameron leased its warehouse (instead of purchasing warehouses) in order to provide oper- ating flexibility and to avoid capital outlays. Leases for the warehouses were typically signed for a three-year period, and the leases for all eight warehouses were due to expire with the next 24 months, including three that were up for renewal in the next 9 months (including Atlanta).

Phasing out the Atlanta Warehouse Tim was attracted to the opportunities to elim- inate the costs of operating the Atlanta warehouse and reducing inventory levels. However, the phase-out of the Atlanta warehouse did have uncertainties and potential problems. Daily shipments from Charlotte would be an additional cost and service levels would have to be maintained. In some cases, deliveries to dealers would be extended by a day, depending on time of day their order was received and the available capacity on the truck. However, Tim was hopeful that service levels could be maintained at their current level under the proposed distribution model.

It was clear that Kelly Armstrong felt that costs could be reduced by closing at least two of the eight warehouses. Tim wanted to carefully analyze the situation at the Atlanta warehouse before making his recommendation about its future.

Answer rating: 100% (QA)

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