BathKing Industries (BKI) is a manufacturer of bathroom accessories that sells their products primarily to the large home center chain stores; Home Depot, Lowe’s, and their smaller competitors. Chip Norek, the president of the company, has a decision to make with respect to BKI’s distribution system. A small chain customer has recently requested that BKI reduce cycle time by shipping orders directly to their stores. Presently, BKI’s national distribution center processes and ships a weekly order for each of the chain store’s three regional distribution centers via national truckload carriers. From there, the product is transferred to individual stores by the chain’s private fleet. The new system would entail each store ordering separately and BKI processing and delivering each order to the store within five business days.
Joe Rutner, the direct of logistics, has determined that the new system would result in higher order processing and freight costs. Norek wasn’t happy with this news and feared that other retailers might make similar requests in the future, so he asked Rutner to develop a plan to satisfy customers without drastically cutting BKI’s margins. Rutner developed a potential six-facility regional distribution center network for BKI, with the distribution centers being located in high-demand areas within each region. Rutner outlined the positives of this proposal, including faster order processing, lower freight costs, and a decrease in inventory. Norek is skeptical of the plan, but a decision must be made.
1) Analyze the logistics service and cost constraints imposed on BKI by the chain store’s request. In order to satisfy the request, BKI will be forced to process smaller, case-quantity orders for each store versus pallet-quantity orders from the RDC’s. Because the company only distributes products by the pallet at this time, the new system will require significant changes to the order processing and fulfillment processes that are currently in place. In addition, they will have to use more costly less-than-truckload service for delivery due to reduced transportation efficiencies. The current system only has three delivery points, meaning BKI can ship a large volume of products on a given truckload. If they begin delivering directly to stores, they will have a much larger number of delivery points and be forced to ship a much smaller number of products on a given truckload. The aforementioned constraints will increase both order processing costs and freight costs.
2) What is your opinion of Joe Rutner’s proposal for establishing a series of company-owned RDCs? I do not agree with the establishment of RDCs, although there are benefits to the proposed system. A decentralized inventory positioning strategy like the one Rutner has proposed may help to reduce customer delivery costs and order cycle time. Also, because product is positioned closer to demand points, it can be readily dispatched to meet customer requirements. However, I believe the costs of such a system outweigh the benefits in BKI’s case. More facilities stocking products can lead to higher handling costs, the risk of product damage, product pilferage, and additional costs of operating/leasing the facilities. In addition, average inventory levels may rise because each facility will have to hold its own level of safety stock. The main reason for my disagreement with Rutner’s proposal lies in the following excerpt from the case: “The company is straining to produce enough product to meet retailer demand.”
If BKI is struggling to produce enough product, the last thing they should do is move toward a decentralized distribution system. This will require them to forecast and maintain levels of inventory at multiple locations, inevitably resulting in surpluses in some regions and shortages in another. If they could produce enough product to maintain adequate levels of safety stock at each location I would support the decentralized approach; however, this is obviously not the case. The drawback with the current centralized system is the long distance to customers, which may be to blame for the long cycle times stores are currently experiencing. However, BKI realizes benefits from centralization including greater control over inventory and reduced demand variability due to risk pooling. This approach supports higher in-stock availability, though there is a need for less safety stock.
3) If BKI moves forward with the RDC plan, what facility ownership structure do you recommend? Why? If BKI decides to move forward with the RDC plan, I recommend the utilization of contract facilities. With this ownership structure, an external company would provide a combination of distribution services that BKI has traditionally provided. BKI would be able to buy the services on an as-needed basis, alleviating capital investment in private distribution facilities. In addition, short-term commitments for capacity maintain maximum distribution network flexibility.
If demand shifts to another region, BKI would not be locked into a long-term lease or facility ownership. Under this ownership structure, the company would not have to manage personnel issues associated with owning and operating the facility. In this case, distribution would become a variable cost activity that is run by experts, allowing BKI to focus on its normal business activities. Because the company does not necessarily have a great deal of experience or expertise in the distribution and warehousing sector, I believe the utilization of contract facilities to be the best course of action.
4) Develop a process map depicting the product and information flows in Rutner’s proposal.
*Based on the information given in the case, I assumed that the national distribution center would no longer operate under the proposed system.