Case Study Managing a Merger at Lightning Networks

After receiving regulatory approval from the European Union, Lightning

Networks, a major wireless carrier, and SatTV, the largest satellite TV
provider in Europe, completed their 50 billion euro merger in 2016. After
initial skepticism when the deal was first announced, analysts had warmed
to the idea of synergies in the merger. Lightning expected to benefit from
the large customer base of SatTV and the company announced that it
expected significant annual cost savings within three years of the merger.
Simone Durand, senior VP of supply chain at Lightning, was charged with
identifying some cost reduction opportunities. She decided to focus her
initial attention on the distribution networks the two companies used to fulfill
demand for installation and repair products. The merger offered an
opportunity to combine the two distribution networks.
The Current Distribution Network
Any new installation or repair by Lightning or SatTV required a set of

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products for the technician to complete the job. Rather than carrying these

er as
products with technicians, both companies had decided to centralize

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product inventories in a few locations. Annual product demand for the two
companies across six regions in Europe was as shown in Table 1.

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Lightning had served its product needs from three warehouses located in
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Madrid, Spain; Rotterdam, Netherlands; and Krakow, Poland. SatTV had
served its product needs from three warehouses located in Toulouse,
France; Munich, Germany; and Budapest, Hungary. Each facility was
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specialized to handle either wireless or satellite products because of the

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historical focus of the company it belonged to. The specialization, capacity,

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and annual fixed cost for each facility were as shown in Table 2. The
capacity of each warehouse is given in terms of how much annual demand
it can handle. From Table 2, observe that the Madrid warehouse can serve
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demand of up to 370,000 units. The variable cost of shipping one unit

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(either wireless or satellite) from each warehouse location to each market is

shown in Table 3.
The Network Options
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Simone had a short term and a long term decision to make. In the short
term, she had to decide whether to make all the warehouses flexible or not.
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Making all warehouses flexible required an investment equivalent to an

additional annual cost of 200,000 euro. Flexible warehouses, however,
could be used to serve demand for both wireless and satellite products.
In the longer term, Simone had to decide whether to restructure the
distribution network. She could choose to close some warehouses, leave
others open as they were, or double the capacity of some warehouses.
Doubling the capacity of a warehouse would increase its annual fixed cost
by 80%. Thus, if the capacity of the Madrid warehouse was doubled, its
annual fixed cost would be 900,000 euro.

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 Closing a warehouse would also incur some cost, thus reducing the annual
fixed cost that could be saved. Simone’s team estimated that closing a
warehouse would save 80% of the annual fixed cost. Thus, closing the
Madrid warehouse would still result in an annual cost of 100,000 euro
because only 80% of the fixed cost is saved.
Questions
1. What is the annual cost if Lightning uses the current network (with warehouses specialized as
in Table 2) optimally to meet European demand?
2. Should Simone make all warehouses flexible given the additional cost of 200,000 euro per
year?
3. What supply chain network configuration do you recommend for the long term if demand is as
in Table 1? Should any warehouses be closed? Should any warehouses see their capacity doubled?
Table 1 Annual Demand in Europe for Lightning Networks (wireless) and
SatTV (satellite)
Wireless Satellite Wireless Satellite
Zone Demand Demand Zone Demand Demand

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Northwe Middle

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st 200,000 120,000 South 120,000 120,000

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Southwe rs e Northea
st 100,000 100,000 st 150,000 110,000
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Middle Southea
North 220,000 100,000 st 90,000 100,000
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Table 2 Warehouse Specialization, Capacities, and Fixed Costs

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Locatio Specializat Capaci Fixed Cost

n ion ty (euro/year)
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370,00
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Madrid Wireless 0 600,000

Rotterd 420,00
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am Wireless 0 650,000
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310,00
Krakow Wireless 0 520,000

Toulous 280,00
e Satellite 0 475,000

290,00
Munich Satellite 0 488,000

Budape 250,00
st Satellite 0 425,000

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 Table 3 Variable Distribution Cost per Unit in Euro
Northw Southw Middle Middle Northe Southe
est est North South ast ast

Madrid 2.50 1.50 3.00 2.75 4.00 4.50

Rotterd
am 1.75 3.00 1.50 3.00 2.50 3.50

Krakow 3.25 4.00 2.50 3.00 2.00 2.50

Toulous
e 2.00 2.00 2.75 2.50 3.75 4.00

Munich 2.25 3.00 2.25 2.50 2.75 3.00

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er as
Budape

co
st 3.50 3.75 2.50 2.50 2.50 2.00

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v i y re
ed d
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sh is
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