CASE STUDY$($SHOW ALL STEPS IN EXCEL?FORMULAS ALSO PLS$)$ CASE STUDY

Managing a Merger at Lightning Networks

After receiving regulatory approval from the European Union, Lightning Networks, a major

wireless carrier, and SatTV, the largest satellite TV provider in Europe, completed their $50$

billion euro merger in $2016.$ After initial skepticism when the deal was first announced,

analysts had warmed to the idea of synergies in the merger. Lightning expected to benefit

from the large customer base of SatTV and the company announced that it expected

significant annual cost savings within three years of the merger. Simone Durand, senior VP

of supply chain at Lightning, was charged with identifying some cost reduction

opportunities. She decided to focus her initial attention on the distribution networks the two

companies used to fulfill demand for installation and repair products. The merger offered an

opportunity to combine the two distribution networks.

The Current Distribution Network

Any new installation or repair by Lightning or SatTV required a set of products for the

technician to complete the job. Rather than carrying these products with technicians, both

companies had decided to centralize product inventories in a few locations. Annual product

demand for the two companies across six regions in Europe was as shown in Table $5-16.$

Lightning had served its product needs from three warehouses located in Madrid, Spain;

Rotterdam, Netherlands; and Krakow, Poland. SatTV had served its product needs from

three warehouses located in Toulouse, France; Munich, Germany; and Budapest, Hungary.

Each facility was specialized to handle either wireless or satellite products because of the

historical focus of the company it belonged to$.$ The specialization, capacity, and annual fixed

cost for each facility were as shown in Table $5-17.$ The capacity of each warehouse is given

in terms of how much annual demand it can handle. From Table $5-17,$ observe that the

Madrid warehouse can serve demand of up to $370,000$ units. The variable cost of shipping

one unit $($either wireless or satellite$)$ from each warehouse location to each market is shown

in Table $5-18.$

The Network Options

Simone had a short term and a long term decision to make. In the short term, she had to

decide whether to make all the warehouses flexible or not. Making all warehouses flexible

required an investment equivalent to an additional annual cost of $200,000$ euro. Flexible

warehouses, however, could be used to serve demand for both wireless and satellite

products.

In the longer term, Simone had to decide whether to restructure the distribution network.

She could choose to close some warehouses, leave others open as they were, or double the

capacity of some warehouses. Doubling the capacity of a warehouse would increase its

annual fixed cost by $80$ percent. Thus, if the capacity of the Madrid warehouse was doubled,

its annual fixed cost would be $1,080,000$ euro.

Closing a warehouse would also incur some cost, thus reducing the annual fixed cost that

could be saved. Simone$$s team estimated that closing a warehouse would save $80$ percent

of the annual fixed cost. Thus, closing the Madrid warehouse would still result in an annual

cost of $120,000$ euro because only $80$ percent of the fixed cost is saved.

Study Questions

$1.$ What is the annual cost if Lightning uses the current network $($with warehouses

specialized as in Table $5-17)$ optimally to meet European demand?

$2.$ Should Simone make all warehouses flexible given the additional cost of $200,000$

euro per year?

$3.$ What supply chain network configuration do you recommend for the long term if

demand is as in Table $5-16?$ Should any warehouses be closed? Should any

warehouses see their capacity doubled?

$4.$ What supply chain network configuration do you recommend for the long term if the

Northeast and Southeast demand is expected to increase by $30$ percent while all

other demands remain as in Table $5-16?$ Should any warehouses be closed? Should

any warehouses see their capacity doubled?