S08 CASO Dollar Tree Logistics

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DOLLAR TREE LOGISTICS
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On a chilly morning in January 2005, Stephen White, Chief Logistics Officer of Dollar
Tree Stores, Incorporated (Dollar Tree) sat in his unpretentious office, which was decorated with
framed pictures of Dollar Tree distribution centers (DCs) on the walls. White reflected upon the
past year’s logistics performance for the Chesapeake, Virginia-based discount-retail company. It
was easy but mind-bending to calculate the total throughput of DCs that priced everything at
exactly one dollar. With $3.2 billion in revenue, the year 2004 had been a busy one for the
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company. Furthermore, in 2004, Dollar Tree Logistics had opened two new distribution centers:
a 660 thousand square foot, manual facility in Ridgewood, Washington and a fully automated
operation with 1.2 million square feet in Joliet, Illinois.
White looked at the Logistics Mission Statement also hanging on his office wall and read
silently: “Logistics is committed to provide exceptional service to our stores through continual
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improvements in operating costs, quality, and safety. By providing solid leadership, superior
execution of processes, acting with integrity, and demonstrating teamwork in all that we do, our
mission will be accomplished through our most valued asset, our associate.” Then he pondered
the new challenges that 2005 would present to the logistics system that he and his colleagues had
designed, and how his team would continue fulfilling their mission.
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Company Background
The Dollar retail category
Dollar stores first emerged on the U.S. retail landscape in the 1950s. Stimulated by the
dollar-day sales occasionally held by the larger department stores, creative retailers like Cal
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Turner, founder of the Dollar General and Leon Levine, founder of Family Dollar Stores,
envisioned a retail format offering year-round dollar days in small towns. Low overheads,
volume purchases, and rapid inventory turns initially produced great returns despite the low price
point. Although inflation and a need to expand selection in the face of competition had pushed
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This case was prepared by Yu Wu (MBA ’05) and modified by Angela Huang (MBA ’06), under the supervision of
Timothy M. Laseter, Assistant Professor, Darden Graduate School of Business Administration. It was written as a
basis for discussion rather than to illustrate effective or ineffective handling of an administrative situation. Some
numbers in the case have been disguised. Copyright © 2005 by the Darden School Foundation, Charlottesville, VA.
All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording or otherwise—without the permission of the Darden School
Foundation.
This document is authorized for educator review use only by Gerardo Mejia, Other (University not listed) until Mar 2021. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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the original dollar stores beyond the literal one-dollar line, the channel remained vibrant and
continued to grow.
During the 1980s and onward, tamer inflation, expanded sourcing from low-cost
producers in Asia, and consumer-packaged-goods producers’ willingness to customize product
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packages together had put new momentum into the dollar-store concept. Returning to the literal
dollar price point, many old and new contenders staked out a discount merchandise position
clearly differentiated from the ever more powerful Wal-Mart Incorporated. The newly energized
dollar channel now represented the fastest-growing retail segment in the United States.
Dollar Tree
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Dollar Tree Stores, Inc., founded in 1986 by Macon Brock Jr., H. Ray Compton, and
Douglas Perry, ranked as the clear leader in the newly invigorated dollar channel in 2004. The
three founders initially launched the new chain as an extension of K&K toys, a successful 136-
store toy company. The two businesses were managed and controlled out of the same office and
distribution center until 1991 when the toy stores were sold to KB Toys, so the founders could
concentrate their efforts on the growth of Dollar Tree Stores. In 1995, Dollar Tree Stores went
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public, was listed on the NASDAQ under the symbol DLTR, and since has grown into a large,
highly profitable retail company (Exhibit 1).
Unlike its more established competitors, Dollar General and Family Dollar Stores—
which priced at least half of their merchandise above one dollar—Dollar Tree continued to price
all goods on its shelves at exactly one dollar. Using that strategy gave it a distinctive position in
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customers’ minds allowing it to expand the number and size of it stores and generate a
compound annual growth rate (CAGR) of 19% in sales and 14% in earnings per share (EPS)
(Exhibit 2). Although smaller than the older dollar stores, peer comparisons showed much
higher growth rates and profit margins for Dollar Tree (Exhibit 3). Organic expansion drove
most of the growth, but a number of acquisitions also gave Dollar Tree footholds in particular
regions while, at the same time, it eliminated potential competitors: Dollar Bills was acquired in
1996 (adding 106 stores), Step Ahead Investments in 1998 (adding 70 new stores), Only $One in
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1999 (adding 24 stores), Dollar Express in 1999 (adding 106 stores) and Greenbacks in 2003
(adding 100 stores). By the end of 2004, Dollar Tree had over 2,600 stores located in all 48 states
of the continental United States and had generated an annual revenue of $3.2 billion.
Dollar Tree had evolved its store format as the chain grew and built a strong following
among consumers and suppliers. In the early days, the chain generally operated mall-based stores
that ranged in size from 1,500 to 2,500 square feet of selling space. The newest stores were
increasingly located in strip shopping centers close to major grocery stores to take advantage of
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the customer traffic and had expanded to a size ranging from 10,000 to 15,000 square feet of
selling space.
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The range of merchandise offered consisted of three categories:
 Consumable merchandise, which included candy and food, health and beauty care, and
house wares such as paper, plastics, and household chemicals;

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Variety merchandise, which included toys, durable house wares, gifts, party goods,
greeting cards, hardware, and other items; and
 Seasonal goods such as Easter baskets, summer toys, lawn and garden equipment,
Halloween and Christmas merchandise.
In 2004, around 40% of the goods were imports, 7% were closeout items, and the rest were
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purchased from domestic vendors. A significant part of the domestic goods was regional or
second-tier brands.
The Logistics System
As Steve White regularly pointed out to his team, the dollar retail business model
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required “turning things around fast at low cost.” To achieve this, White and his colleagues had
carefully designed and built up a well-managed logistics system centered on strategically
located, large scale, and efficient distribution centers. (Exhibit 4 provides the cost breakdown of
the logistics system). White understood that to maintain and even improve the system’s
productivity, he must avoid the trap of two opposing forces: overcapitalizing the logistics
network, versus allowing the logistics network to become a bottleneck to company growth
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because of over-conservatism.
Distribution centers
By the end of 2004, Dollar Tree operated nine distribution centers with a combined total
operating surface of 5.4 million square feet. (Exhibits 5 and 6 provide geographical and
operational information about the DCs.) In 2004, each DC, on average, served around 300 stores.
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Seven out of the nine DCs were automated. An automated DC was divided into several
“pick modules,” with each module responsible for picking the items that were stored on certain
storage racks. For example, the DC in Joliet had three pick modules, and each module had its
own power conveyor line. The power lines of all the modules would merge at a place called the
“high-speed wedge merge,” which was located close to the shipping area. Then all the items
picked would go through the scanning, identification, and control points before being directed
onto the shipping sorter lines. Finally, they would reach the correct shipping gates where workers
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floor-loaded the items into trucks for delivery to the stores (Exhibit 7).
Dollar Tree built its first automated DC in 1998. Automation worked particularly well for
Dollar Tree because of the small scale of its stores and the large number of Stock Keeping Units
(SKUs) it stocked. Normally the investment in automation would be recouped in two to three
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years. At the same time, since Dollar Tree now had around 1,000 staple SKUs that were sold in
large volume and shipped by pallet, they found that cross-docking was justified. As a result, a
small number of receiving doors in some DCs were dedicated to cross-docking.
Cost control was a significant aspect of DC management. The most important drivers of
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lowering cost, as White pointed out, were scale, utilization, and continuous operational
improvement. The continuous improvement process had enabled Dollar Tree to achieve a CAGR
of 15% in DC productivity in the last four years, measured by cartons processed per man-hour.
In terms of DC network capacity planning, Dollar Tree used a timeframe focused on

three years. New store and sales forecasts were fed into a simple model to derive a capacity
utilization forecast, and, as a rule of thumb, White would begin thinking of adding new capacity
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whenever average utilization of a facility approached 75%.
Inbound logistics
More than 40% of Dollar Tree’s goods were imports. Import volume had grown from
5,000 FEUs (Forty-Foot Equivalent Units) in 1998 to almost 20,000 FEUs in 2004, with China
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accounting for around 80% of all imports. Goods would be consolidated into full containers in
producing countries and shipped to U.S. ports. (Exhibit 8 shows the U.S. ports Dollar Tree used
to serve its DCs.) Some of the containers were shipped directly to nearby DCs, while others were
transferred at the port to trailer trucks that would transport the goods to nearby DCs.
Outbound logistics
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Once a week most Dollar Tree stores received a shipment from its responsible DC. On
average, one truck with a fifty-three foot trailer would deliver to three or four stores in close
geographic proximity during a single outbound trip. Dollar Tree utilized third-party dedicated
fleets to complete store deliveries. Each DC was served by a single trucking company that
dedicated trucks and trailers to the scheduled trips from the distribution center to Dollar Tree’s
stores. The trucking companies were paid based upon the round-trip miles and unloading
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charges, with a guaranteed minimum amount of mileage per truck per week. (Exhibit 9 provides
information of outbound trucking costs in 2004.)
Two capacity-expansion options
White was proud of the important role the logistics system had played in achieving Dollar
Tree’s success. He firmly believed that together with merchandising ability, logistic efficiency
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formed the core competency of the company. Historically, the logistics department had been in a
support mode, letting sales and merchandising take the lead. White wondered, however, if better
alignment between these two departments could help decrease further the total supply-chain cost
and increase flexibility.
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After pondering this, White looked at a report on his desk portending a future capacity
shortage of the DC in Briar Creek, PA (Exhibit 10). This DC was operating at an average
utilization of 92% and peak utilization of 124%. In 2004, the management of the DC had to rent
expensive off-site, short-term space to handle peak flow. The report proposed two possible
options for expanding the logistics network capacity:
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1. Expand the current Briar Creek DC by another 400K-square feet to increase its facility
capacity by two-thirds; or
2. Build a new DC with 600K-square feet in Hartford, CT, which would provide two
facilities to serve the territory currently assigned to Briar Creek.
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The report also contained data and information gathered to compare the two options (Exhibit
11). White knew he had to make a decision soon on which option to pursue to avoid letting
logistics capacity become a constraint for the company and cause significant negative impact on
the entire company.
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No
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Exhibit 1
Financial Statements, 2001–04
(in millions except for margin data)
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2004 2003 2002 2001
Income Statement
Net Sales 3,126.0 2,799.9 2,329.2 1,987.3
Cost of Goods Sold 1,884.2 1,787.1 1,481.2 1,271.3
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Gross Profit 1,241.8 1,012.8 848.0 716.0
S,G&A Expenses 819.0 719.2 594.0 512.1
Operating Income 293.5 293.6 253.9 203.9

Net Interest Expenses 5.3 4.8 2.4 3.6
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Tax Provision 107.9 111.2 96.8 77.2
Net Income 180.3 177.6 154.6 123.1
Margin Data (as a percentage of net sales)

Gross Profit 39.7% 36.2% 36.4% 36.0%
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S,G&A 26.2% 25.7% 25.5% 25.8%

Operating Income 9.4% 10.5% 10.9% 10.3%
Net Income 5.8% 6.3% 6.6% 6.2%
Source: Hoover’s and Dollar Tree Annual Report 2004.
No
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Exhibit 1 (continued)
Balance Sheet 2004 2003 2002 2001
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Assets
Cash and Short-term Investments 106.5 168.7 300.8 336.0
Merchandise Inventories 615.5 525.6 438.4 357.7
Other Current Assets 247.9 28.2 30.1 22.5
Net PPE 685.4 613.2 477.9 344.3
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Other Assets 137.4 144.5 56.9 55.9
Total Assets 1,792.7 1,480.3 1,304.2 1,116.4
Liabilities and Shareholders’ Equity

Account Payable 124.2 115.0 137.7 59,5
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Current Portion of Long-term Debt 19.0 25.0 25.0 25.0
Other Current Liabilities 151.2 125.1 104.4 122.1
Long-term Debt 250.0 142.6 146.6 6.0

Other Liabilities 84.0 58.1 44.7 48.5
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Total Liabilities 628.4 465.8 458.4 261.0
Total Shareholders’ Equity 1,164.2 1,014.5 845.8 855.4

Total Liabilities and Equity 1,792.6 1,480.3 1,304.2 1,116.4
No
Source: Hoover’s and Dollar Tree Annual Report 2004.

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Exhibit 2
Dollar Tree Sales and Square Footage, 1998–2004
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Sales and Earnings per Share
Billion $ $
3.5 1.8
3.0 1.6
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1.4
2.5
1.2
2.0 1.0
1.5 0.8
0.6
1.0
0.4
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0.5 0.2
0.0 0.0
1998 1999 2000 2001 2002 2003 2004
Sales EPS (RHS)
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Store Unit and Average Store Selling Square Footage
Square Feet
3000 8000
7000
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2500
6000
2000 5000
1500 4000
1000 3000
2000
500
1000
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0 0
1998 1999 2000 2001 2002 2003 2004
Store Unit Avg Store Selling Square Footage

Source: Dollar Tree annual reports.
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Exhibit 3
Competitor Comparison
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Dollar Tree Dollar General Family Dollar Stores Big Lots
Sales 2004 (billion $) 3.1 7.7 5.3 4.4
Operating Margin 9.4% 7.3% 7.8% 1.5%
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Net Profit Margin 5.8% 4.5% 5.0% 0.7%
3-year CAGR 16.3% 12.9% 13.0% 8.4%
# of Stores 2,735 7,320 5,466 1,502
Average Selling Footage 7,475 6,800 8,410* 20,601

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Net Sales per Selling 153 154 119* 144
Square Foot (dollars)
Inventory Turnover 3.1 4.0 4.0 2.8
Fiscal year ended 1/29/2005 1/28/2005 8/28/2004 1/29/2005

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Note: CAGR is compound annual growth rate

* Gross square footage
Source: Analyst reports and 2004 annual reports for the companies involved.
No
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Exhibit 4
Cost Breakdown of the Logistics System
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Inventory carrying
cost
10%
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Total Inbound cost
37%
Total DC cost
28%
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Total Outbound
cost
25%
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Note: Inbound cost includes ocean transportation cost and trucking cost on U.S. land.
Source: Case writer estimate based on Dollar Tree Annual Report 2003 and site interview.
No
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Exhibit 5
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Store Distribution and Logistics Network at End of 2004
DC1:
Chesapeake, VA
7 DC2:
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Olive Branch, MS
DC3:
Joliet, IL
6
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3
10 DC4:
Stockton, CA
1 DC5:
4
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Savannah, GA
DC6:
2 Briar Creek, PA
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5
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DC7:
Ridgefield, WA
DC8:
Marietta, OK
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DC10:
Source: Dollar Tree. Salt Lake, UT
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Exhibit 6
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Distribution Centers at End of 2004
Size Storage Cartons Average Cost structure ($/Carton handled)

Open Operation
Location ('000 capacity handled in capacity Unit cost
year manner Fixed Cost Variable Cost
No
Sqft) (Cartons) 2004 utilization ($/carton)
Chesapeake,
1998 400 Automated 1,128,720 9,287,763 65% 0.30 0.17 0.47
VA
Olive Branch,
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1999 425 Automated 1,126,438 10,284,424 71% 0.27 0.16 0.43
MS
Stockton,
2000 525 Automated 1,593,720 15,030,877 71% 0.22 0.20 0.42
CA
Savannah,
2001 603 Automated 1,697,641 16,293,251 71% 0.24 0.17 0.41
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GA
Briar Creek,
2001 603 Automated 1,697,639 20,348,228 92% 0.20 0.19 0.39
PA
Marietta,
2003 603 Automated 1,697,643 12,262,660 54% 0.32 0.16 0.48
OK
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Joliet,
2004 1,200 Automated 3,565,079 16,083,277 29% 0.43 0.18 0.61
IL
Salt Lake City,
1998 385 Manual 921,159 8,536,670 83% 0.26 0.17 0.43
UT
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Ridgefield,
2004 663 Manual 1,866,557 7,325,750 32% 0.49 0.19 0.68
WA
Source: Dollar Tree, numbers disguised.
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Automated DC: Picking Modules
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Exhibit 7
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No
Source: Dollar Tree.

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Exhibit 8
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Map of Ports as Entry Point of Imports
Portland Ridgefield
No
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Oakland ridge Briar Creek NY/NJ
Salt Lake odiet
WoJol
Stockton
Chesapeake Norfolk
Olive Branch
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LAX/LBG Marietta
Savannah Savannah
2005 Estimates (in FEUs)
Portland, OR 5,939
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Oakland, CA 2,264
Houston/Dallas, TX 1,839 Houston
Savannah, GA 5,007
Norfolk, VA 2,032
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New York, NY 3,966
Total 21,047p

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Exhibit 9
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Outbound Trucking Costs
Stores Average Stores Average Average Cost of Total

Location serviced deliveries serviced distance distance trailer trucking
No
2004 (/store/year) /truck trip DC-Store adjacent stores ($/mile) cost ($)
Chesapeake,
240 62 3.9 144 18 1.59 2,081,433
VA
Olive
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349 60 4.9 175 28 1.54 3,017,585
Branch, MS
Stockton,
207 83 2.7 189 28 1.66 4,427,815
CA
Savannah,
469 62 4.3 204 23 1.59 5,198,658
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GA
Briar Creek,
487 65 3.7 189 18 1.66 5,985,537
PA
Marietta,
317 62 3.9 250 55 1.53 5,143,318
OK
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Joliet,
447 62 4.2 185 33 1.66 5,259,257
IL
Salt Lake
126 60 2.1 350 55 1.53 4,144,225
City, UT
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Ridgefield,
101 83 2.8 150 28 1.52 1,615,556
WA
Source: Dollar Tree, numbers disguised.
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Aerial View of the Briar Creek, Pennsylvania, Distribution Center
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Exhibit 10
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No

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Exhibit 11
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Comparison of the Two Options
Option 1: Expand current Briar Creek DC Option 2: Build a new DC at Hartford, CT
DC operations: DC operations:
Storage capacity 2,970,868 Storage capacity at each DC 1,697,639
No
Expected inventory turns 14 tC Expected inventory turns at each DC 13
Expected cartons processed Expected utilization Expected cartons processed Expected utilization
2005 23,400,462 64% Old DC New DC Old DC New DC
2006 27,612,545 75% 2005 13,241,584 10,158,878 60% 46%
2007 31,202,176 85% 2006 14,300,911 13,311,634 65% 60%
2007 15,444,984 15,757,192 70% 71%
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Outbound trucking: Outbound trucking:
Distance DC-store for expanded DC 189 Distance DC-store from old Briar Creek DC 160
Average deliveries (/store/year) for expanded DC 65 Distance DC-store from new Hartford DC 95
Average deliveries (/store/year) for both DCs 65
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Average stores/trip Stores serviced Average stores/trip Stores serviced
2005 3.6 536 Old DC New DC Old DC New DC
2006 3.4 605 2005 3.7 3.5 304 232
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2007 3.3 654 2006 3.7 3.3 318 287
2007 3.7 os 3.2 328 326
Source: Dollar Tree, case writer estimate, numbers disguised.

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The Dollar retail category

The Logistics System

In terms of DC network capacity planning, Dollar Tree used a timeframe focused on

Two capacity-expansion options

Operating Income 293.5 293.6 253.9 203.9

Net Income 180.3 177.6 154.6 123.1

Margin Data (as a percentage of net sales)

S,G&A 26.2% 25.7% 25.5% 25.8%

Balance Sheet 2004 2003 2002 2001

Net PPE 685.4 613.2 477.9 344.3

Liabilities and Shareholders’ Equity

Long-term Debt 250.0 142.6 146.6 6.0

Total Liabilities 628.4 465.8 458.4 261.0

Total Shareholders’ Equity 1,164.2 1,014.5 845.8 855.4

Source: Hoover’s and Dollar Tree Annual Report 2004.

Store Unit and Average Store Selling Square Footage

Store Unit Avg Store Selling Square Footage

Sales 2004 (billion $) 3.1 7.7 5.3 4.4

Operating Margin 9.4% 7.3% 7.8% 1.5%

3-year CAGR 16.3% 12.9% 13.0% 8.4%

# of Stores 2,735 7,320 5,466 1,502

Average Selling Footage 7,475 6,800 8,410* 20,601

Inventory Turnover 3.1 4.0 4.0 2.8

Fiscal year ended 1/29/2005 1/28/2005 8/28/2004 1/29/2005

Note: CAGR is compound annual growth rate

Size Storage Cartons Average Cost structure ($/Carton handled)

Source: Dollar Tree.

Source: Dollar Tree.

Stores Average Stores Average Average Cost of Total

Source: Dollar Tree.

Option 1: Expand current Briar Creek DC Option 2: Build a new DC at Hartford, CT

Source: Dollar Tree, case writer estimate, numbers disguised.

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