Pan American Advanced Studies InstituteSimulation and Optimization of Globalized Physical Distribution Systems

Santiago, Chile

August, 2013 – Case 1

Case Study Developed By:

Dave Wheeler

Principal, Supply Chain Strategy

St Onge Company

York, PA

Case Study 1

• US based retailer with operations in the US and Mexico• Experiencing significant growth in stores, sales, and items• SKU proliferation causing issues within the DC in terms of slotting

and inventory carrying– Expected to accelerate due to industry– Extremely long tail on item pareto. (i.e. large number of items

contribute small amount to sales)• Several DCs with storage capacity constraints, while others have

excess capacity• Currently 5% of product imported from Asia, expecting to grow to

12%• Competition migrating to highly responsive supply chain• Increasing fuel cost applies pressure to freight budget

US Supply Chain Description

• 4,616 stores in 2012, growing to 5,660 in 2018• 8 Full-line distribution centers

– $4m annual fixed cost for each DC• Deliveries to stores from DCs

– via multi-stop truckloads (private fleet); ≈4 stops/load– Stores receive 1 delivery/week

• Vendor to DC shipments– 90% of shipments from vendors paid for by vendor as component of

COGs– 10% company paid, including all import

• Imports shipped from vendors mainly in China, directly to each DC in full FEUs

• US DCs currently do not ship cross-border into Mexico

Stores

+87

+168

+75

+38

+65

+74

+121

+131+72

+197

PR+7

AK+15

Stores2018 vs. Current

Current Sourcing

DCs

Imports

Supporting Data – Store Growth

4,617 4,767 4,917 5,067 5,217 5,367 5,517 5,667

4,000

4,500

5,000

5,500

6,000

6,500

Current 2012 2013 2014 2015 2016 2017 2018

Strategic Plan

Supporting Data – Stores

ST Current2018 Strat Plan

MA 77 20AZ 149 19IL 254 19CT 42 18WA 70 18CO 57 15LA 111 15UT 51 15AK 0 15WI 61 14IN 156 13KY 86 13MT 7 11

ST Current2018 Strat Plan

OR 41 11AL 94 10NV 65 10KS 37 9DE 9 8OK 78 7PR 29 7WV 30 7NE 9 6SC 80 6TN 170 6ND 0 6ID 12 5

ST Current2018 Strat Plan

MO 89 5NM 78 5MS 104 4IA 21 3ME 5 3NH 20 3AR 59 2RI 16 2SD 5 2WY 5 2VT 0 1DC 13 0NM 5 0

ST Current2018 Strat Plan

CA 526 167NY 156 91FL 250 72MD 46 64PA 124 61TX 594 51NJ 71 45MI 160 30VA 108 30GA 204 28MN 26 27NC 197 27OH 264 21

Supporting Data - DCs

DC Metrics CA GA PA TN IL TX AZ OH# Stores 577 741 533 540 553 699 429 566 Capacity 623 862 1,051 635 571 1,037 617 794 # Routes 154 183 151 116 142 161 105 128 # Deliveries/week 612 778 564 569 612 749 472 595 Miles per route 523 669 450 596 494 571 1,031 468 Deliveries per route 4.0 4.3 3.7 4.9 4.3 4.7 4.5 4.6

$/mileDELIVERY $/mile $2.33 $1.97 $2.89 $1.66 $1.74 $1.87 $1.85 $1.91

US Issues to be Addressed

• Determine if the current DC network is appropriate given the future store growth, DC capacities, increasing fuel costs

• If additional DCs are needed, determine the:– appropriate location and relative size of each additional DC – impact on the current DCs throughput, inventory, and service area– impact to DC to store freight– impact to transit time to stores – impact to DC costs (fixed and variable) – the impact to network inventory – if the changes to the network financially justified based on a reasonable

return-on-investment (ROI)

US Issues to be Addressed

• Given the migration to incremental import product– How will inventory be impacted if current direct to DC approach is

continued – What alternative import methodologies should be considered – For each methodology considered, determine the:

• impact to inventory• impact to facility costs• impact to freight• impact to store service

Mexico Supply Chain Description

• Full Line DC in Monterrey− Monterrey DC has 360 store capacity− Cross-docks located in Mexico City & Mexicali serviced from Monterrey DC− 200 fast moving/high cube items stored at DC and both cross-docks

• ≈330 stores in 2012− 220 direct from Monterrey− 70 via Mexico City cross-dock− 40 via Mexicali cross-dock

• DC to Store freight− Delivered via multi-stop common carrier truck of various size depending on

market− On average a truck load from DC to a cross dock serves 8 stores− On average a truck load from DC to stores serves 4 stores− On average a truck load from a cross dock to stores serves 3 stores− Stores receive 1 delivery per week

Mexico Supply Chain Description

• Vendor inbound freight− Majority of product ships from vendors in US to Mexico via freight forwarder

in Laredo, TX− ≈1500 loads/year; $285/load− Product stored at cross-docks ships direct from vendors; vendor paid freight

• Growth Plan− 150 stores in Mexico (75% in Mexico City region)− 46 stores in Central America

• Product imported from China utilizes US ports and ships via Laredo, TX

DCs

12012 Current Sourcing

Growth

FY12 FY13 FY14 FY15 FY16 FY17 FY18

CA 7 11 15 46

Mexico 330 370 410 440 460 480 480

0

100

200

300

400

500

600St

ores

Mexico/CA Growth

Mexico Issues to be Addressed

• Determine if the current DC network is appropriate given the future store growth, DC capacities, increasing fuel costs

• If an alternative DC configuration is to be considered, then determine the:– appropriate location and relative size of each additional DC – impact on the current DCs throughput, inventory, and service area – impact to DC to store freight – impact to transit time to stores – impact to DC costs (fixed and variable)– the impact to network inventory – if the changes to the network financially justified based on a reasonable return-on-

investment (ROI)

• If alternative DC configuration is not justified, then identify improvements to the current configuration and flow of product from vendors through the DC and cross-docks to the stores

Mexico Issues to be Addressed

• Given the migration to incremental import product • How will inventory be impacted if current direct to DC approach is continued

– What alternative import methodologies should be considered– For each methodology considered, determine the:

• impact to inventory• impact to facility costs• impact to freight• impact to store service

– Should the Mexico and US methodology be synchronized?