Please provide a brief introduction including a problem statement for the below case study:

Designing the Distribution Network for Michaels Hardware

Ellen Lin, vice president of supply chain at Michaels Hardware, was looking at the financial results from the past quarter and thought that the company could significantly improve its distribution costs, especially given the recent expansion into Arizona. Transportation costs had been very high, and Ellen believed that moving away from LTL shipping to Arizona would help lower transportation costs without significantly raising inventories.

Michaels had 32 stores each in Illinois and Arizona and sourced its products from eight suppliers located in the Midwest. The company began in Illinois and its stores in the state enjoyed strong sales. Each Illinois store sold, on average, 50,000 units a year of product from each supplier (for annual sales of 400,000 units per store). The Arizona operation was started about five years ago and still had plenty of room to grow. Each Arizona store sold 10,000 units a year from each supplier (for annual sales of 80,000 units per store). Given the large sales at its Illinois stores, Michaels followed a direct-ship model and shipped small truckloads (with a capacity of 10,000 units) from each supplier to each of its Illinois stores. Each small truck cost $450 per delivery from a supplier to an Illinois store and could carry up to 10,000 units. In Arizona, however, the company wanted to keep inventories low and used LTL shipping that required a minimum shipment of only 500 units per store but cost $0.50 per unit. Holding costs for Michaels were $1 per unit per year.

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

Distribution Alternatives for Illinois

Ellens staff proposed two alternative distribution strategies for the stores in Illinois:

Use direct shipping with even larger trucks that had 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.

Run milk runs from each supplier to multiple stores in Illinois to lower inventory cost even if the cost of transportation increased. Large trucks (capacity of 40,000 units) would charge $1,000 per shipment and a charge of $150 per delivery. Small trucks (capacity of 10,000 units) would charge $400 per shipment and a charge of $50 per delivery.