Question

Discussion Questions:

1. What is the purpose of a distribution center?

2. Why does Cameron have eight warehouses? Why do you think Kelly believes six warehouses is better than eight?

3. What is the cost of holding inventory at Cameron?

4. Why should the decision to invest in inventory be different from investing in capital?

5. Do you think it is prudent to evaluate the future of the Atlanta warehouse independently from consideration of the other seven warehouses in the network?

6. If you close the Atlanta warehouse, how will customer service be affected?

7. Are the potential for cost savings from closing the Atlanta warehouse worth the risks? Main Question:

8. As Tim Peterman, would you close the Atlanta warehouse? What recommendation would you make to Kelly Armstrong and why?

Cameron Power Equipment Tim Peterman, director of logistics at Cameron Power Equipment in Charlotte, North Carolina, was evaluating the future of the company’s warehouse in Atlanta, Georgia. The vice president of logistics, Kelly Armstrong, described the situation to Tim in a meeting the previous day: “Our largest competitor is able to handle its U.S. distribution with half the number of warehouses that we use. Head office is telling me we need to reduce our costs, and I think we should target closing at least two warehouses. Get back to me with a plan next week with how you want to proceed.” The lease for the Atlanta warehouse was due to expire in two months, and Tim felt it would be a logical candidate to consider for closure. It was Tuesday, April 22, and Tim wanted to prepare a recommendation to present to Kelly at their next meeting.

CAMERON POWER EQUIPMENT Established in 1922, Cameron Power Equipment (Cameron) was a leading manufacturer and distributor of outdoor power products, including lawn mowers, garden tractors, snow blowers, chain saws, and trimmers. Headquartered in the United Kingdom, Cameron had annual revenues of $2.5 billion, with operations in Europe, North America, Central and South America, Asia, and Australia. Cameron sold more than 300 different models of outdoor power equipment around the world. Its products were sold through a network of more than 10,000 power equipment retailers (also referred to as “dealers”) in the United States. The average margin on products sold by Cameron to dealers was 30 percent of full manufactured costs for products sourced from the company’s global manufacturing operations and 50 percent for parts and accessories sourced from suppliers. Company operations in the United States included its head office and distribution center (DC) in Charlotte, North Carolina, and a manufacturing facility in Columbia, South Carolina. The Columbia plant employed 1,500 people and was one of several facilities in the Cameron global manufacturing network. It produced high-quality, handheld outdoor power equipment, including blowers, trimmers, and chain saws. Direct variable manufacturing costs of Cameron products typically represented 80 percent of full cost.

THE DISTRIBUTION NETWORK The Charlotte DC was a 250,000-square-foot facility that handled approximately 30,000 stock keeping units (SKUs), including parts and accessories. The DC received goods from Cameron manufacturing facilities and suppliers, and distributed the products to its U.S. warehouse network or directly to dealers. Direct shipments to dealers from the DC were limited to full truckload shipments, typically to large dealers. Tim was responsible for managing the network of the eight warehouses that comprised the U.S. distribution network. These facilities ranged in size from 15,000 to 20,000 square feet. Warehouses handled distribution of equipment, parts, and accessories to the dealers in their regions. The power equipment industry was subject to seasonal demand, with the spring and summer representing the peak sales periods, and fast, reliable deliveries to dealers was essential. The targeted service level to dealers was 99 percent with 48-hour lead times, but actual performance was a service level that averaged 97 percent. Inventory levels at the warehouses were maintained at an average of 30 days. Tim commented on the balance between inventory holding costs and customer service: “We have found that keeping inventory levels at 30 days provides adequate customer service levels. I hired an MBA student on a summer internship last year and I asked her to evaluate our annual inventory holding costs. She provided an estimate of 16.5 percent per year, which included the cost of capital at 9.5 percent, plus 7 percent for storage and handling costs, including warehouse rent, labor, insurance, taxes, and obsolescence.”

THE ATLANTA WAREHOUSE The Atlanta warehouse was a 15,000-square-foot facility that serviced dealers in the Southeast, including Georgia, Alabama, Mississippi, Tennessee, and Louisiana. The total cost to operate the warehouse was $5,250 per month plus $6,500 per month in salaries, wages, and administrative expenses. The warehouse operated one shift, five days per week. In order to minimize transportation costs, full truckload shipments were used to ship products to the Atlanta warehouse. Although the number of shipments varied each month, on average, eight shipments were made from Charlotte and four shipments were made from the Columbia plant. Freight charges were $725 per load from Charlotte and $625 per load from Columbia. Since the Charlotte DC was not set up to support small-order fulfillment, Tim spoke to Cameron’s current transportation service provider in Atlanta, Merwin Logistics, about setting up a cross-docking shipping process. Under this arrangement, Cameron would make daily shipments to Merwin’s Atlanta terminal five days a week (Monday to Friday); where the loads would be cross-docked, consolidated, and sent to the dealers in LTL loads. Merwin quoted a fee of $7,000 per month to provide the cross-docking service and agreed to provide 200 square feet of space for transit storage at the terminal. There were no changes in the delivery costs to the dealers. In order to maintain service levels to the dealers, Tim would need to make shipments to Merwin’s terminal in Atlanta each day, which was 250 miles from the Charlotte DC. Shipments normally sent directly to Atlanta from Columbia would instead be sent to Charlotte and consolidated with other SKUs on the daily shipments. The cost to ship from Columbia to Charlotte was $260 and would continue to be made in full truckloads four times per month. Freight costs from Charlotte to Atlanta remained unchanged. The Atlanta warehouse maintained an average inventory of $400,000, valued at full cost. Tim felt that if the Atlanta warehouse was closed, they would realize a one-time systemwide reduction in inventory of approximately 50 percent of the value of inventory in the Atlanta warehouse. The hurdle rate used for capital expenditures was set at 30 percent by head office, so Cameron leased its warehouses in order to provide operating flexibility and to avoid capital outlays. Leases for the warehouses were typically signed for a three-year period, and the leases for all eight warehouses were due to expire with the next 24 months, including three that were up for renewal in the next 9 months (including Atlanta).

PHASING OUT THE ATLANTA WAREHOUSE Tim was attracted to the opportunities to eliminate the costs of operating the Atlanta warehouse and reducing inventory levels. However, the phase-out of the Atlanta warehouse did have uncertainties and potential problems. Daily shipments from Charlotte would be an additional cost and service levels would have to be maintained. In some cases, deliveries to dealers would be extended by a day, depending on time of day their order was received and the available capacity on the truck. However, Tim was hopeful that service levels could be maintained at their current level under the proposed distribution model. It was clear that Kelly Armstrong felt that costs could be reduced by closing at least two of the eight warehouses. Tim wanted to carefully analyze the situation at the Atlanta warehouse before making his recommendation about its future.

Answer 1

Answer:

1. What is the purpose of a distribution center?

A distribution center is product storage and shipping building that stores goods a company produces. Distribution centers are a key part of the distribution chain for products, order fulfilment, and storing produced goods prior to their shipment to wholesale, retail or customers. Distribution centers also make large scale shipping of products possible to retail and individuals. Well placed distribution centers can simplify and reduce the cost of getting a product to its destination, bulk shipping to the heart of a market, especially when production is not in an advantageous central location.

2. Why does Cameron have eight warehouses? Why do you think Kelly believes six warehouses is better than eight?

Cameron had annual revenues of $2.5 billion, with operations in Europe, North America, Central and South America, Asia, and Australia. Cameron sold more than 300 different models of outdoor power equipment around the world. Its products were sold through a network of more than 10,000 power equipment retailers for this huge Distribution Cameron have eight warehouses.

Cameron largest competitor is able to handle its U.S. distribution with half the number of warehouses that we use. Head office is telling me we need to reduce our costs and The lease for the Atlanta warehouse was due to expire in two months so if this renew than dc cost will be increase so think Kelly believes six warehouses is better than eight.

3. What is the cost of holding inventory at Cameron?

Cameron stated in the case that the holding inventory cost is estimated to be 7% and Atlanta warehouse maintained an average inventory of $400,000.

However Cameron only owns 50% of that inventory, Atlanta warehouse hold for $200000 of Cameron inventory.

Cameron total warehouse is 8.

=$200000*8

= $1600000

Cameron holding inventory cost is estimated to be 7%.

So Cameron holding inventory cost = $1600000*0.07 = $ 112,000/-

Cameron holding inventory cost is $ 112000/.

4. Why should the decision to invest in inventory be different from investing in capital?                                                         

Invest in inventory: It is the expenditure by producers on the purchase of Fixed Assets like plant and machinery and other capital items this all asset of company

Inventory Investment: It refers to change in stock during the year. It is closing stock less opening stock. The stock includes: raw material, semi-finished goods (work in progress) and finished goods. Also facing slow moving and dead stock issue.

5. Do you think it is prudent to evaluate the future of the Atlanta warehouse independently from consideration of the other seven warehouses in the network?

No because The lease for the Atlanta warehouse was due to expire in two months.

6. If you close the Atlanta warehouse, how will customer service be affected?

If Atlanta Warehouse closes it will take longer time for shipment to arrive Southeast, Georgia, Alabama, Mississippi, Tennessee, and Louisiana, this effect lead time may cause shipment to arrive later than excepted.

7. Are the potential for cost savings from closing the Atlanta warehouse worth the risks?

Yes if Atlanta warehouse is close than they save there warehouse cost, salaries, wages, and administrative expenses, and transportation costs so yes cost savings from closing the Atlanta warehouse worth.

8. As Tim Peterman, would you close the Atlanta warehouse? What recommendation would you make to Kelly Armstrong and why?

Yes as per all upper case study I would close the Atlanta warehouse.

My recommendation to Kelly Armstrong.

Close Atlanta warehouse for cost saving.

Find out solution for Southeast, Georgia, Alabama, Mississippi, Tennessee, and Louisiana to arrive shipment on with lead time.

Before you close warehouse find out the all possibility to affected customer service to Southeast, Georgia, Alabama, Mississippi, Tennessee, and Louisiana with solution because customer service is play very importance role in all business.