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THE LOCKBOURNE COMPANY The company is a leading manufacturer and distributor of a line of packaged goods which it sells nationally

under the Burn-Loc Products trade name. The company operates three factories from which it ships to regional warehouses or directly to large outlets. Last year, demand for Burn-Loc Products was 3.2 million equivalent cases, distributed as follows (in million cases) according to five sales regions: Atlanta 0.5 Los Angeles 0.4 Dallas 0.4 Chicago 1.1 New York 0.8 Total 3.2

One-shift production capacity in each of the three plants was as follows (in million cases): Home City 1.2 Branch No. 1 0.7 Branch No. 2 1.5 Total 3.4

Estimated freight costs ($/case) from each of the factories to each distribution center are as follows: Home City 0.95 1.05 0.80 0.30 0.95 Branch No. 1 0.35 1.80 1.40 0.80 0.30 Branch No. 2 0.90 1.80 1.15 0.70 0.85

Atlanta Los Angeles Dallas Chicago New York

Not all shipments are routed through regional warehouses, but on average the freight cost on direct shipments to outlets was quite close to the cost which would have been incurred if the shipment had been routed through the servicing warehouse. Lockbourne followed a philosophy of decentralized management. Top executives favored this approach for a number of reasons. First, by enriching the experience of subordinate managers, it provided better training for ultimate top management responsibility. Second, it insured that operating decisions were made by those persons most familiar with the detailed circumstances which would determine the success or failure of the decisions. Under the decentralized approach, subordinate managers were held responsible for the profitability of operations under their control. Consistent with the policy of decentralization, each of the five regional warehouses was under the direct supervision of a regional sales manager. The warehouses were not assigned to a particular plant for servicing, since demand shifts made a certain amount of flexibility necessary. Rather, the regional sales manager decided upon which plant to place an order. The price paid by the warehouse was $6.25/case FOB the plant. This price was set to recover costs plus a reasonable return on investment for the manufacturing division. Since the regional warehouse was required to absorb the freight costs, the regional sales managers are expected to place their orders so as to minimize their own freight costs and hence those of the company as a whole.

Over a period of time, this procedure has led to increasing amounts of organizational friction, and early this year some Lockbourne officials were beginning to question whether the procedure was even achieving the objective of minimizing freight costs. Because Branch No. 2 was not the closest plant to any of the regional warehouses, it was never deliberately selected as source by a regional sales manager. Rather, the managers would initially order from the Home City or Branch No. 1, whichever was closer. Since those plants had inadequate capacity to meet all sales demands, it was then necessary for the plant managers to reject some orders. No consistent procedure was followed in determining which order would be accepted, but it was largely a matter of first-come-first-served. The regional sales managers whose orders were rejected were then usually forced to take them to Branch No. 2, typically at a considerable increase in freight cost. This aspect of the situation resulted in much grumbling by the regional sales managers. Moreover, since the orders placed with Branch No. 2 were not placed there in a conscious effort to minimize freight costs, there appeared to be a strong possibility that the resulting over-all shipping program was not optimal. For this reason, some executives felt that the practice of leaving shipping decisions to the decentralized judgments of regional sales managers should be discontinued. They proposed instead that all orders be routed through a central office which could then determine an optimal shipping program from an overall company point of view. The actual quantities (in million cases) shipped over each possible route last year are as follows with total shipping costs that year reaching $2,320,000: Home City Atlanta Los Angeles Dallas Chicago New York Total 0.1 0.2 0.9 1.2 Branch No. 1 0.3 Branch No. 2 0.2 0.3 0.2 0.6 1.3 Total 0.5 0.4 0.4 1.1 0.8 3.2

0.2 0.2 0.7

Other executives were concerned about the effect such a proposal would have on the general effectiveness of decentralized management. They also observed that one result of the proposal would be to saddle the regional sales managers with freight costs over which they could exercise no control.