1 1 ISyE 6203 Consolidation John H. Vande Vate Spring 2012

2 2 Challenge 2 Part A – Treat every store the same Part B – Practical distinctions among stores What’s the impact on –Gross Margin % –SPEED –ROIC

3 3 Our Company Direct TL shipments –Low transport cost gives high Gross Margin –High Cycle Stock at Stores gives low ROIC Balance Transport and Inventory –EOQ/EPQ improved ROIC dramatically with only small impact on Gross Margin –Adjusting mode to suit smaller shipments is Challenge 3 and 4 What next?

4 4 Our Company Pretty much come to the end of the possibilities for improving performance under the current rules. So, … CHANGE THE RULES Use LTL instead of FTL (Challenge 3 & 4 – Due 1/31) Change the network Consolidate flows –Recognize & exploit economies of scale in transport rates –Aggregate flows to exploit economies of scale while managing the inventory impacts. –Try to get low inventories at the stores AND larger shipments

5 5 Consolidation: An Example Truck load shipments from Green Bay and Denver to Indianapolis Assemble Products in Indianapolis and distribute by full truckload from there to stores What will happen to costs compared to direct full truck load shipments? –Transportation –Pipeline –At plants –At Indianapolis Warehouse/Cross Dock –At Stores

6 6 Indianapolis Assume 2 separate operations –Manufacturing –Assembly & Distribution Manufacturing moves finished units to Assembly as they are completed at no cost. What happens in Assembly & Distribution?

7 7 Assembly & Distribution Receiving Dock –Receives shipments from Green Bay and Denver Assembly Operations –Draws goods out of Receiving and Indianapolis Manufacturing, Assembles and sends to Shipping at rates matched to demand Shipping Operations –Accumulates finished goods –Ships when a full truck load accumulates.

8 8 Indianapolis Green Bay Denver Indianapolis Plant Indianapolis Receiving Assembly Indianapolis Shipping

9 9 Indianapolis Indianapolis Assembly draws goods out of Receiving and moves them into Shipping at a constant rate matched with demand Two Related Questions –What is in a Truck Load shipment to a Store? –What is the Cycle Stock in Indianapolis Shipping?

10 Challenge 5 Determine how many –TVs –Computers are in a full truck load shipment from Indianapolis to a store Give a brief explanation of how you calculated this Due in 10 minutes

11 Challenge 6 Assume we operate with full truck load shipments using Indianapolis in this way Adjust the financial statements to reflect changes in transportation and inventory Discuss the impacts, relate them to our initial assessment. Explain the differences. What would you do next? Due Tuesday, Feb 7 th

12 Review of EOQ Ignoring the Supplier’s Cycle Stock Considering the Supplier’s Cycle Stock If we’re the only customer The 2 disappears

13 What if? What if, say, Denver, is an arm’s length supplier – not part of our company? Should we consider his Cycle Stock or not? There’s a 40% difference. It matters.

14 Questions?

15 Next Time Location – where and how many