Running Head: MICHAEL’S HARDWARE 1

Case on

Designing the Distribution Network for Michael’s Hardware

By:

Date
MICHAEL’S HARDWARE 2

Introduction

The study improvises supply chain improvements by critical analysis of transportation

and inventory cost management. Michael’s hardware had 32 stores each in Arizona and Illinois

where they source products from various suppliers in Midwest. At Illinois, it was the first

location of company and 8 suppliers are provided products. It has strong sales structure with

50,000 units/suppliers/annually and 400,000 units/store/annually. On the other hand, Arizona

operations were started five years ago that plays a dominant growth in company success. Every

store of Arizona sold 10,000 unit/year and 80,000 units/store/annually.

Transportation modes

The truck transportation mode is available containing less than truckload (LTL) and full

truckload (TL). Moreover, there are various options are available for transportation such as direct

shipping networks. In direct shipping network, one or two suppliers ship goods to multiple buyer

locations. Secondly, direct shipping with milk runs where each source of supplier ships goods to

multiple buyer location. Lastly, cross-docking is a practice of logistics of unloading material

from truck to outbound truck with no storage in between. Cross-docking reduces cost of

inventory and safety stocks [ CITATION Ind12 \l 1033 ].

Alternatives to Illinois and Arizona

First of all, Illinois can make a direct shipment model with trucks. However, the available

alternatives include run milk with both large and small trucks. In addition, the direct shipping

model can be taken with larger trucks. On the other hand, Arizona can make less than truckload

(LTL). For Arizona State, the available alternatives include cross-docking facility, run milk with

small trucks, and direct shipping model with small trucks [ CITATION Mar181 \l 1033 ].
MICHAEL’S HARDWARE 3

Annual distribution cost

Item numbers Illinois Arizona

Number of Units Sold per Supplier 50,000 10,000
Number of Units Sold per Store 400,000 80,000
Total number of units Annually (32*400,000)12800000 (32*80,000)2560000
Modes of Transportation Direct Shipping Model LTL shipping
Capacity of transportation 10,000 500
Cost per truck
$450.00
Cost per unit -
$0.50
Holding cost per unit
$1.00 $1.00
Cost of transportation
$576,000.00 $1,280,000.00
Cost of Inventory
$5,000.00 $250.00
Total Cost
$581,000.00 $1,280,250.00

Structuring distribution from suppliers in Illinois and saving expectations

Item numbers Initial 1st Alternative 2nd

Alternative
Number of Units 50,000 50,000 50,000
Sold per Supplier
Number of Units 400,000 400,000 400,000
Sold per Store
Total number of (32*400,000)128000 (32*400,000)128000 (32*400,000)12800000
units Annually 00 00
Modes of Direct Ship with Direct ship with a Run milk Run milk
Transportation small trucks large truck with large with small
trucks trucks
Capacity of 10,000 40,000 40,000 10,000
transportation
Cost per truck $450 $1,150 $1,000 $400
Cost per unit
Holding cost of $1 $1 $1 $1
per unit
Delivery Cost $150 $50
Inventory cost $5,000 $20,000 $20,000 $5,000
MICHAEL’S HARDWARE 4

Transportation $576,000 $368,000 $321,200 $512,400

cost
Total Cost $581,000 $388,000 $341,200 $517,400
Expected Saving - $193,000 $239,800 $63,600

Structuring distribution from suppliers in Arizona and saving expectations

Item numbers Initial 1st 2nd 3rd Alternative

Alternative Alternative

Number of Units 10,000 10,000 10,000 10,000 10,000

Sold per Supplier
Number of Units 80,000 80,000 80,000 80,000 80,000
Sold per Store
Total units sold 2,560,000 2,560,000 2,560,000 2,560,000 2,560,000
annually
Modes of available LTL Direct ship Run milk Cross- Cross-
transportation shipping with a small with a small docking docking from
truck truck from stores
suppliers
Capacity of 500 10,000 10,000 40,000 10,000
Transportation
Cost per truck $2,050 $2,000 $4,150 $250
Per unit cost $0.5 $0.1 $0.1
Cost of holding $1 $1 $1 $1 $1
Delivery cost $50
Transportation cost $1,280,00 $524,800 $512,400 $265,600 $64,000
0
Inventory cost $250 $5000 $5,000 $20,000 $5,000
$285,600 $69,000
Total cost $1,280,25 $529,800 $517,400 $354,600
0
Expected Savings - $750,450 $762,850 $925,650

Required Changes in the distribution network

By considering Tables 2 and 3, the best option for Michael’s hardware is to continue with

direct shipping to manage cost-effectively but they should introduce milk runs to grow markets
MICHAEL’S HARDWARE 5

promptly. The centralized option is not feasible for the company due to number of suppliers and

stores which may create delays in deliveries to reach point of destination [ CITATION Sun13 \l

1033 ].

Conclusion

Thus, to sum all discussions regarding distribution network analysis of Michael’s

analysis, the best option for both states is to continue with the direct shipping model of small and

large trucks. By considering transportation and inventory the annual distribution cost of current

distribution network for Illinois is $581,000.00 and Arizona is $1,280,250. The detailed analysis

has been constructed to understand and select best choice of distribution network.
MICHAEL’S HARDWARE 6

References

Chopra, S., & Meindl, P. (2013). Supply Chain Management. Pearson.

Marion, G. (2018). Introduction to Supply Chain Management. Retrieved from

https://www.thebalancesmb.com/logistics-4161402

Sukati, I., Hamid, A. B., Baharun, R., & Yusoff, R. M. (2012). The Study of Supply Chain

Management Strategy and Practices on Supply Chain Performance. Procedia - Social

and Behavioral Sciences, 40, 225-233.