Ellen asked her staff to propose different distribution alternatives for Illinois and Arizona.

Distribution Alternatives for Illinois

$1.$ Use direct shipping with even larger trucks with a capacity of $40,000$ units. These trucks

charged only $$1,150$ per delivery to an Illinois store. Using larger trucks would lower

transportation costs but increase inventories because of the larger batch sizes.

$2.$ Run milk runs from each supplier to multiple stores in Illinois to lower inventory costs

even if the transportation cost increases. Large trucks $($capacity of $40,000$ units$)$ would

charge $$400$ per shipment and $$50$ per delivery.

Distribution Alternatives for Arizona

Ellen$$s staff had three distribution alternatives for the stores in Arizona:

$1.$ Use direct shipping with small trucks $($capacity of $10,000$ units$)$ as was currently being

done in Illinois. Each small truck charged $$2,050$ for a shipment of up to $10,000$ units

from a supplier to a store in Arizona. This was a significantly lower transportation cost

than was currently being charged by the LTL carrier. However, this alternative would

increase Arizona$$s inventory costs, given the larger batch sizes.

$2.$ Run milk runs using small trucks $($capacity of $10,000$ units$)$ from each supplier to multiple

stores in Arizona. The small truck carrier charged $$2,000$ per shipment and $$50$ per

$1$

delivery. Thus, milk run from a supplier to four stores would cost $$2,200.$ Milk runs

would incur higher transportation costs than direct shipping but would keep inventory

costs lower.

$3.$ Use a third$-$party cross$-$docking facility in Arizona that charges $$0\mathrm{.}10$ per unit for this

cross$-$docking service. This would allow all suppliers to ship the 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 $($each smaller truck would now contain

product from all eight suppliers$).$ Large trucks $($capacity of $40,000$ units$)$ charge $$4,150$

from each supplier to the cross$-$dock facility. Small trucks $($capacity of $10,000$ units

charge $$250$ from the cross$-$dock facility to each retail store in Arizona.

Ellen wondered how best to structure the distribution network and whether the savings would

be worthwhile. If she used milk runs in either region, she also had to decide how many stores to

include in each milk run.

$2$

Questions

$1.$ What is the annual distribution cost of the current distribution network? Include

transportation and inventory costs.

$2.$ How should Ellen structure distribution from suppliers to the stores in Illinois? What

annual savings can she expect?

$3.$ How should Ellen structure distribution from suppliers to the stores in Arizona? What

annual savings can she expect?

$4.$ What changes in the distribution network would you suggest as both markets grow?