a CASE STUDY Designing the Distribution Network for Michael's Hardware Ellen Lin, vice president of supply chain at Michael's Distribution Alternatives for Arizona Hardware, was looking at the financial results from the past quarter and thought that the company could signifi- Ellen's staff had three distribution alternatives for the cantly improve its distribution costs, especially given the stores in Arizona: recent expansion into Arizona. Transportation costs had 1. Use direct shipping with small trucks (capacity of been very high, and Ellen believed that moving away 10,000 units) as was currently being done in Illi- from LTL shipping to Arizona would help lower trans- nois. Each small truck charged $2,050 for a ship- portation costs without significantly raising inventories. ment of up to 10,000 units from a supplier to a Michael's had 32 stores each in Illinois and Arizona store in Arizona. This was a significantly lower and sourced its products from eight suppliers located in transportation cost than was currently being the Midwest. The company began in Illinois and its stores charged by the LTL carrier. This alternative, how- in the state enjoyed strong sales. Each Illinois store sold, ever, would increase inventory costs in Arizona on average, 50,000 units a year of product from each sup- given the larger batch sizes. plier (for annual sales of 400,000 units per store). The Ari- 2. Run milk runs using small trucks (capacity of 10,000 zona operation was started about five years ago and still units) from each supplier to multiple stores in Ari- had plenty of room to grow. Each Arizona store sold zona. The small truck carrier charged $2,000 per 10,000 units a year from each supplier (for annual sales of shipment and $50 per delivery. Thus, a milk run from 80,000 units per store). Given the large sales at its Illinois a supplier to four stores would cost $2,200. Milk stores, Michael's followed a direct-ship model and runs would incur higher transportation costs than shipped small truckloads (with a capacity of 10,000 units) direct shipping but would keep inventory costs lower. from each supplier to each of its Illinois stores. Each small 3. Use a third-party cross-docking facility in Arizona truck cost $450 per delivery from a supplier to an Illinois that charged $0.10 per unit for this cross-docking store and could carry up to 10,000 units. In Arizona, how- service. This would allow all suppliers to ship ever, the company wanted to keep inventories low and product (destined for all 32 Arizona stores) using a used LTL shipping that required a minimum shipment of large truck to the cross-dock facility, where it only 500 units per store but cost $0.50 per unit. Holding would be cross-docked and sent to stores in smaller costs for Michael's were $1 per unit per year. trucks (each smaller truck would now contain Ellen asked her staff to propose different distribu- product from all eight suppliers). Large trucks tion alternatives for both Illinois and Arizona. (capacity of 40,000 units) charge $4,150 from each supplier to the cross-dock facility. Small trucks Distribution Alternatives for illinois (capacity of 10,000 units) charge $250 from the Ellen's staff proposed two alternative distribution strate- cross-dock facility to each retail store in Arizona. gies for the stores in Illinois: Ellen wondered how best to structure the distribu- 1. Use direct shipping with even larger trucks that had a tion network and whether the savings would be worth the capacity of 40,000 units. These trucks charged only effort. If she used milk runs in either region, she also had $1,150 per delivery to an Illinois store. Using larger to decide on how many stores to include in each milk run. trucks would lower transportation costs but increase inventories because of the larger batch sizes. Study Questions 2. Run milk runs from each supplier to multiple stores 1. What is the annual distribution cost of the current distribu- in Illinois to lower inventory cost even if the cost of tion network? Include transportation and inventory costs. transportation increased. Large trucks (capacity of 2. How should Ellen structure distribution from suppliers to 40,000 units) would charge $1,000 per shipment the stores in Illinois? What annual savings can she expect? and a charge of $150 per delivery. Small trucks 3. How should Ellen structure distribution from suppliers to the stores in Arizona? What annual savings can she expect? (capacity of 10,000 units) would charge $400 per 4. What changes in the distribution network (if any) would shipment and a charge of $50 per delivery. you suggest as both markets grow? W