• Cameron Power Equipment

  Tim Peterman, director of logistics at Cameron Power Equipment in Charlotte, North Carolina, was

  evaluating the future of the company's warehouse in Atlanta, Georgia. The vice president of logistics, Kelly

  Armstrong, described the situation to Tim in a meeting the previous day: "Our largest competitor is able

  to handle its U.S. distribution with half the number of warehouses that we use. Head office is telling me

  we need to reduce our costs, and I think we should target closing at least two warehouses. Get back to me

  with a plan next week with how you want to proceed."

  The lease for the Atlanta warehouse was due to expire in two months, and Tim felt it would be a logical

  candidate to consider for closure. It was Tuesday, April 22, and Tim wanted to prepare a recommendation

  to present to Kelly at their next meeting.

  About the Company

  Established in 1922, Cameron Power Equipment (Cameron) was a leading manufacturer and distributor

  of outdoor power products, including lawn mowers, garden tractors, snow blowers, chain saws, and

  trimmers. Headquartered in the United Kingdom, Cameron had annual revenues of $2.5 billion, with

  operations in Europe, North America, Central and South America, Asia, and Australia. Cameron sold more

  than 300 different models of outdoor power equipment around the world. Its products were sold through

  a network of more than 10,000 power equipment retailers (also referred to as "dealers") in the United

  States. The average margin on products sold by Cameron to dealers was 30 percent of full manufactured

  costs for products sourced from the company's global manufacturing operations and 50 percent for parts

  and accessories sourced from suppliers.

  Company operations in the United States included its head office and distribution center (DC) in Charlotte,

  North Carolina, and a manufacturing facility in Columbia, South Carolina. The Columbia plant employed

  1,500 people and was one of several facilities in the Cameron global manufacturing network. It produced

  high-quality, handheld outdoor power equipment, including blowers, trimmers, and chain saws. Direct

  variable manufacturing costs of Cameron products typically represented 80 percent of full cost.

  The Distribution Network

  The Charlotte DC was a 250,000-square-foot facility that handled approximately 30,000 stock keeping

  units (SKUs), including parts and accessories. The DC received goods from Cameron manufacturing

  facilities and suppliers, and distributed the products to its U.S. warehouse network or directly to dealers.

  Direct shipments to dealers from the DC were limited to full truckload shipments, typically to large dealers.

  Tim was responsible for managing the network of the eight warehouses that comprised the U.S.

  distribution network. These facilities ranged in size from 15,000 to 20,000 square feet.

  Warehouses handled distribution of equipment, parts, and accessories to the dealers in their regions. The

  power equipment industry was subject to seasonal demand, with the spring and summer representing

  the peak sales periods, and fast, reliable deliveries to dealers was essential. The targeted service level to

  dealers was 99 percent with 48-hour lead times, but actual performance was a service level that averaged

  97 percent.

  Inventory levels at the warehouses were maintained at an average of 30 days. Tim commented on the

  balance between inventory holding costs and customer service: "We have found that keeping inventory

  levels at 30 days provides adequate customer service levels. I hired an MBA student on a summer internship

  last year and I asked her to evaluate our annual inventory holding costs. She provided an estimate of 16.5

• percent per year, which included the cost of capital at 9.5 percent, plus 7 percent for storage and handling

  costs, including warehouse rent, labor, insurance, taxes, and obsolescence."

  The Atlanta Warehouse

  The Atlanta warehouse was a 15,000-square-foot facility that serviced dealers in the Southeast, including

  Georgia, Alabama, Mississippi, Tennessee, and Louisiana. The total cost to operate the warehouse was

  $5,250 per month plus $6,500 per month in salaries, wages, and administrative expenses. The warehouse

  operated one shift, five days per week.

  In order to minimize transportation costs, full truckload shipments were used to ship products to the

  Atlanta warehouse. Although the number of shipments varied each month, on average, eight shipments

  were made from Charlotte and four shipments were made from the Columbia plant. Freight charges were

  $725 per load from and $625 per load from Columbia.

  Since the DC was not set up to support small-order fulfillment, Tim spoke to Cameron's current

  transportation service provider in Atlanta, Merwin Logistics, about setting up a cross-docking shipping

  process. Under this arrangement, Cameron would make daily shipments to Merwin's Atlanta terminal five

  days a week (Monday to Friday); where the loads would be cross-docked, consolidated, and sent to the

  dealers in LTL loads. Merwin quoted a fee of $7,000 per month to provide the cross-docking service and

  agreed to provide 200 square feet of space for transit storage at the terminal. There were no changes in

  the delivery costs to the dealers.

  In order to maintain service levels to the dealers, Tim would need to make shipments to Melvin's terminal

  in Atlanta each day, which was 250 miles from the Charlotte DC. Shipments normally sent directly to

  Atlanta from Columbia would instead be sent to Charlotte and consolidated with other SKUs on the daily

  shipments. The cost to ship from Columbia to was $260 and would continue to be made in full truckloads

  four times per month. Freight costs from Charlotte to Atlanta remained unchanged.

  The Atlanta warehouse maintained an average inventory of $400,000, valued at full cost. Tim felt that if

  the Atlanta warehouse was closed, they would realize a one-time systemwide reduction in inventory of

  approximately 50 percent of the value of inventory in the Atlanta warehouse.

  The hurdle rate used for capital expenditures was set at 30 percent by head office, so Cameron leased its

  warehouses in order to provide operating flexibility and to avoid capital outlays. Leases for the

  warehouses were typically signed for a three-year period, and the leases for all eight warehouses were

  due to expire with the next 24 months, including three that were up for renewal in the next 9 months

  (including Atlanta).

  Phasing Out the Atlanta Warehouse

  Tim was attracted to the opportunities to eliminate the costs of operating the Atlanta warehouse and

  reducing inventory levels. However, the phase-out of the Atlanta warehouse did have uncertainties and

  potential problems. Daily shipments from Charlotte would be an additional cost and service levels would

  have to be maintained. In some cases, deliveries to dealers would be extended by a day, depending on

  time of day their order was received and the available capacity on the truck. However, Tim was hopeful

  that service levels could be maintained at their current level under the proposed distribution model.

  It was clear that Kelly Armstrong felt that costs could be reduced by closing at least two of the eight

  warehouses. Tim wanted to carefully analyze the situation at the Atlanta warehouse before making his

  recommendation about its future.

• Answer the following below

• TABLE OF CONTENTS

  Content/Topic Page 1

  Executive Summary 2

  Introduction 3

  Immediate Issue 4

  Basic Issue 5

  Assumptions 6

  Analysis 7

  Potential Recommendation 8

  Final Recommendation 9

  Implementation Timeline