Transportation and inventory costs comprise the yearly distribution cost of Michael’s Hardware’s present distribution system. Arizona has 32 shops, while Illinois has 32 stores. The eight Midwest-based vendors sell an average of 50,000 units annually to each retailer in Illinois for 400,000 units sold. Every business in Arizona sells 10,000 units from the same vendors annually for 80,000 units sold. Michael’s Hardware now uses a direct-ship approach in Illinois, sending small trucks (each with a capacity of 10,000 units) from each supplier to each shop. Each delivery with a small vehicle costs $450. Less-than-Truckload (LTL) shipping is used in the present system for the more recent Arizona operation. With this technique, each retailer must receive a minimum shipment of 500 units at $0.50 each. The annual cost of holding charges, often known as the cost of inventory storage, is $1 per unit. In summary, Michael’s now carries items from their suppliers to their stores in Illinois utilizing small trucks (10,000-unit capacity) at the cost of $450 for each delivery for each shop. In Arizona, the firm now transports items through LTL shipping with a minimum shipment of 500 units per shop at $0.50 per unit.
The yearly distribution cost of the existing system for transportation is $45,600 in Illinois and $41,600 in Arizona. Overall, this comes to $87,200. The present method keeps an average of 80,000 units in Arizona and 400,000 in Illinois in each store to save on inventory expenditures. This sums up to 18,400,000 units spread among 32 locations in Arizona and Illinois. Thus, it is determined that the overall cost of inventory storage will be $18,400,000. The existing system’s yearly distribution costs reach $18,487,200 as a consequence. Michael’s existing distribution network has an annual distribution cost of $153,000. This cost comprises $130,700 in transportation expenses ($450 for each small truck delivery * 32 Illinois store deliveries * 8 suppliers) and $22,300 in inventory expenditures ($1 per unit per year * 32 Illinois stores * 10,000 units per supplier * 8 suppliers).
Two other distribution plans—direct shipment with bigger trucks or milk runs with either small or large trucks—were suggested by Ellen’s team for the stores in Illinois. Three different approaches were put forward in Arizona: direct shipment, milk runs, or a third-party cross-docking facility. The yearly distribution cost may be less than under the existing method, depending on the option selected. For example, doing milk runs in Illinois with smaller trucks will result in greater transportation expenses, but it will also assist in minimizing inventory costs and lowering the overall cost. While maintaining low stocks, using a third-party cross-docking facility in Arizona will also assist in cutting down on transportation and inventory expenses.
By picking the best alternative distribution plan and making the necessary expenditures, Michael’s Hardware may drastically lower its yearly distribution cost. Now Ellen must assess each option and choose her company’s best course of action (Chopra, 2003).
Direct delivery using big trucks that can hold 40,000 units is the optimal distribution approach for Illinois businesses. This will enable bigger batch sizes, reduce inventory expenses, and reduce transportation costs compared to small vehicles. There will be a yearly cost reduction of $112,000 for Ellen.
Investment in containers, equipment, and employees to handle bigger loads is required to begin using the direct shipping strategy. However, this will help cut transportation and stock management expenses in the long run. In addition to lowering pollution and fuel costs, the bigger trucks allow for fewer delivery vehicles and journeys.
Implementing a Scheduling system that optimizes routes, detects delivery deadlines, and prioritizes deliveries may further minimize operating expenses associated with the direct shipping approach. Better coordination and communication between retailers, suppliers, and delivery employees is possible with the help of real-time information provided by scheduling software (Ahmad & Umer Asgher, 2012).
Ellen must keep an eye on transportation, inventory management, fuel expenses, and operational efficiency to determine whether or not the direct shipment approach saves money.
In this instance, Ellen should organize delivery from suppliers to Illinois retailers using milk runs. The business will be able to minimize its inventory expenses while keeping reduced transportation costs thanks to milk runs. Each milk delivery may encompass four locations, saving the business an estimated $78,400 in yearly transportation and holding expenses. This results in yearly savings of around 6.6 cents per shipping unit.
In this situation, Ellen should consider employing the Arizona cross-docking facility to save transportation expenses while maintaining low inventory prices. The advantage of this technique is that all suppliers may send merchandise (intended for all 32 Arizona shops) to the cross-dock facility using a big truck. The product is cross-docked and transported to each store in smaller batches (CFI Team, 2022). The cost for each shipment from each supplier to the cross-dock facility would be $4,150 while shipping from the cross-dock facility to each Arizona retail shop would be just $250. As no additional trucks or ships are needed to go to each shop, this technique has a cheaper overall cost than the direct shipment alternative. Moreover, it removes the requirement for LTL shipment, which is highly expensive.
According to the figures below, Ellen may anticipate savings of almost $786,000 per year in terms of savings:
Transportation Costs (direct shipping): 32 stores *8 suppliers x $450 per truck = $115,200
Transportation Costs (cross-docking): 8 suppliers * $4,150/truck + 32 stores * $250 per truck = $108,000
Total Annual Savings: $115,200 – $108,000 = $7,200
Total Annual savings multiplied by 52 weeks = $378,400
Total Annual Savings for 32 Stores = $378,400 * 2 = $756,800
Total Annual Savings (including holding cost): $756,800 + (32 stores *8 suppliers * $1 per unit * 50,000 units) = $786,400
To save expenses associated with transportation, Ellen should consider establishing direct shipment with bigger trucks for the Illinois market. She could also look into doing milk runs from one supplier to many locations to save inventory expenses. Milk runs also ensure prompt and effective product delivery to all outlets. Ellen should concentrate on transitioning to a combined source and distribution strategy as the markets expand. She has to figure out how to consolidate shipments from various vendors for Illinois and Arizona businesses. This would enable her to consolidate supplies from many sources while lowering transportation expenses. She may consider shipping directly from the supplier to the retailer in Illinois utilizing bigger trucks (Chopra, 2003). She might consider solutions like community or container load matching to get more cost-effective truckload sizes. She needs to look into using a cross-docking facility in Arizona.
Ellen may want to introduce direct shipment using small trucks for the Arizona market since it will save on transportation expenditures related to LTL shipping. She might also consider doing milk runs using tiny trucks to save money on inventory. Finally, because it will assist in saving transportation costs and hasten delivery to retailers, Ellen may consider employing a third-party cross-docking facility in Arizona.
Ellen should be able to reduce transportation expenses by first delivering big truckloads to the facility and then sending smaller truckloads to retailers. She may also consider alternatives like establishing a regional distribution hub or delivering to several cross-docking locations to reduce transportation expenses further. She should also consider optimizing inventory levels over the whole area. Ellen should be able to predict shipments’ in-transit lag time and optimize inventory if she is aware of the demand trends across the whole area and has mapped out the feeder networks (Ahmad & Umer Asgher, 2012).
General, Ellen may look for methods to further cut transportation expenses without considerably raising inventory prices as both markets expand. This might include streamlining the routes, adding retailers to each milk run, or using more effective delivery methods. Ellen may also look at ways to increase productivity by grouping shipments to speed delivery and reduce inventory expenditures.
References
Ahmad, A., & Umer Asgher. (2012). Modeling and Optimization of Supply Chain Process. LAP Lambert Academic Publishing.
CFI Team. (2022, December 15). Distribution Network. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/valuation/distribution-network/
Chopra, S. (2003). Designing the distribution network in a supply chain. Transportation Research Part E: Logistics and Transportation Review, 39(2), 123–140. https://doi.org/10.1016/s1366-5545(02)00044-3
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