Case Study
The Bis Corporations is a company that produces and distributes paints. Currently, eight manufacturing plants located in cities such as Atlanta and Denver serve about 2,000 retail stores including Home Depot, Wal-Mart as well as Bis-owned stores. The current distribution system is a single-tier network where all products are shipped from the plants to 17 warehouses, located all over the United States, and from there to retail accounts.
The company was established in 1964 as a family venture and grew in 1970s and 1980s at a fairly steady rate. Bis is now owned by 12 shareholders and run by a newly appointed CEO.
Bis produces and sells about 4000 different SKUs (stock keeping units) at a similar price and the gross margin in the paint industry is about 20 percent. Despite high profitability, the new CEO is concerned that the supply chain is not the most efficient one. Specifically, the CEO pointed out that inbound truck utilization, inventory turns, and service levels are just too low. In a recent shareholder meeting, he pointed out the current production and distribution strategy used by Bis was designed about 20 years ago and was never modified. It consists of the following steps:
• Produce and store at the manufacturing plants.
• Pick, load, and ship to a warehouse centre.
• Unload and store at the warehouse.
• Pick, load, and deliver to stores.
Thus, shareholders decide to look for outside help in modifying their logistics network and supply chain strategy.
Your company was able to secure the engagement, after six months of continuous work by the sales division. The commitment you made when you received the engagement was to improve the effectiveness and to align the cost of service with account profitability. In your original proposal, you mentioned that "this will be accomplished by reengineering the production, inventory, and logistics functions." It seems that the concept of reengineering the entire supply chain, together with you commitment not only to the design but also to the implementation of the new strategy, is what made your proposal attractive to Bis shareholders.
Your team has identified three important issues that need to be addressed:
1. What is the best network configuration that the Bis Corporation should use? An important observation made early on in the analysis was that the single tier network currently used by Bis forces low truck utilization and hence high transportation cost. It was thus proposed that Bis needs to consider replacing the logistics network with a two-tier distribution network that includes primary and secondary warehouses. In such a network, primary warehouses receive products from the plants and transfer inventory to secondary warehouses. The secondary warehouses in turn will sever the retail outlets. Since the number of primary warehouses is relatively small, it can potentially allow for high truck utilization and hence reduction in transportation cost. The challenge is to identify the number, locations, and size of the primary and secondary warehouses.
2. Given the new network configuration, where should the company position inventory? How much? Specifically, with 4000 SKUs in this supply chain, it is not clear how inventory should be positioned. Should inventory of every SKU be positioned at every facility or should some SKUs perhaps be stocked only at the primary warehouse while others only at the secondary facilities?
3. Which plant should produce which product? Should each plant specialize in a few products and thus be able to produce large batches and hence reduce production cost or should plants be flexible and able to serve all retailers in close proximity, thus focusing on reducing distribution costs?
To identify the best network configuration, you have grouped the retail outlets into 550 zones and the different products into 5 products into 5 families:
The data collected include the following:
1. Demand in 2013 by SKU per product family for each customer zone.
2. About production capacity (in SKU's) at each manufacturing plant.
3. Maximum capacity (SKUs) for each warehouse, new and existing.
4. Transportation costs per product family per mile for distributing product from the manufacturing plants from the warehouses.
5. Setup cost for establishing a warehouse as well as the cost of closing an existing facility.
6. Potential locations for new warehouses.
Customer service is of particular concern to Bis because there are a number of competing products in the markets. No specific dollar figure can be attached to a specific level of service; however the CEO insists that to remain competitive, delivery time should be no more than one day for most of the retail outlets.
The Bis Corporation has just finished a comprehensive market study that shows significant volume growth in its markets. This growth is estimated to be uniformed across different zones, but it varies from product family to product family. This estimated yearly growth is given in table.
Estimated Yearly Growth
Family 1 2 3 4 5
Multiplier 1.07 1.03 1.06 1.05 1.06
The variable production cost at the eight manufacturing facilities varies by product and by manufacturing plant. The CEO and co. shareholders oppose building a new manufacturing plant because of the costs and the risks involved. They are willing, however, to change the focus of different facilities so that each manufacturing facility produces the appropriate product based not only on manufacturing cost, as is currently done, but also on the entire supply chain costs, including transportation cost.
The Bis Corporation would like to address the following issues:
1. Should Bis switch from the current distribution network to a two-tier logistics network? How many primary and secondary distribution centers should be established and where should they be located?
A single-tier network is where all products are shipped from the plants to the warehouse. From the observation made in the analysis, the single-tier network causes low truck utilization and high transportation cost. Assumed location of production is in USA.
Total states in USA = 50, divided by 4 zones. So each zone contains approximately 12 states. As states above, there are 8 manufacturing plants. So we can assume that each zone consists of 2 manufacturing plants. 17 warehouses is distributed with 3 zones contain 4 warehouses each and 1 zone with 5 warehouses. Each manufacturing plant is connected by 2 warehouses and each warehouse serve 3 states. Each state contains about 11 retail zones (550 zones ÷ 50 states). As a result, one warehouse has to serve 33 retail zones! So it is difficult to serve all 3 states (33 retail zones) from only one warehouse with high satisfaction level of customer service. We as the consultant has suggested two-tier distribution network that include primary and secondary warehouse. •The primary warehouse will receive products from the plants and transfer inventory to secondary warehouse. •The secondary warehouse will serve the retail outlet.
Bis Corporation can establish 34 secondary warehouses (each primary warehouse contains 2 secondary warehouses). So the total of warehouses are 51 (17 primary warehouses + 34 secondary warehouses). So on average, each state will get one warehouse. The primary warehouse is relatively small, it can potentially allow for...
2. Does the model used in this process truly represent Bis' logistics network? How can the Bis Corporation validate this model? What is the impact of aggregating customers and products on model accuracy?
3. What is the optimal inventory positioning strategy within the network?? Should each facility keep stock of all SKUs?
4. Should Bis manufacturing strategy change to one in which each specialty specializes in a few products. What is the impact of transportation cost on the manufacturing strategy?