Introduction

In early March, Mary Brown, supervisor of purchasing and transportation at Kitchen Products (KP) in Michigan, had to decide on the future transportation needs of the company. Increased sales would place significant demands on the company's resources, including transportation. As a result, Mary had been asked by the plant manager - Jim Wilson, to develop a suitable transportation strategy by March 15.

Background

Kitchen Products manufactured kitchen and bathroom cabinets and mirrors. KP competed in the upper end of the market, manufacturing high-quality products. Based on current sales forecasts, management expected KP to triple its output over the next 12 months.

Most of the big players in the industry had a linear relationship between transportation expenses and revenue. It was estimated that an average relationship would be 10:1 and varied depending on the distance the product was shipped.

Kitchen Products was a subsidiary of ABC Holdings (ABC), a financial holding company, who had two manufacturing operations in Canada and four in the United States. The Michigan plant was intended to meet market demand in the northeastern states.

Michigan plant operations ordered supplies and services based on confirmed customer orders and promised delivery dates. The plan produced approximately 50,000 units last year.

Approximately nine years prior, the Michigan plant had an exclusive third-party contract with a transportation company that provided on-site support. However, at that time, the company was faced with intense competitive pressures and looked for other, more cost-effective alternatives. As a result, Kitchen Products negotiated with Northern Leasing Company (NLC) to lease three trucks and to provide transportation services through a separate trucking services company. Under the arrangement with NLC, Kitchen Products contacted the trucking services company when shipments required delivery. Although only three trucks were officially leased by Kitchen Products, but the trucking services company was flexible in providing more trucks and drivers when necessary.

Regular weekly deliveries were made to customers in the Northern states. The routes for each truck were specified with one customer typically being visited twice per week. Occasionally, three visits per week were necessary when extra orders were placed and all units could not be filled in the first two shipments.

Payment to the trucking services company was made on a per mile basis, whereas Kitchen Products customers were charged $15 per unit for delivery, regardless of the size and number of units delivered or ordered. Payment to the leasing company was $1.50/mile whether the trailer was full or half-empty. Last year, KP spent approximately $300,000 on trucking services company fees and paid approximately $220,000 to NLC as part of the lease arrangement.

When the quantity to be delivered was not large enough for a whole trailer or delivery dates did not fit with the pre-planned route, KP would hire the services of other common carrier truck lines. In these situations, KP was charged based on weight or square footage. These shipments took longer for delivery because common carriers typically made a number of stops for other companies also sharing the trailer before reaching Kitchen Products final destination. Last year, Kitchen Products spent about $120,000 on LTL loads.

Because of the forecast increase for the coming 12 months, Mary was concerned that the company might not be able to meet the future market requirements with the existing three trucks. She felt that a number of possible alternatives existed. First, she could continue with the current approach and use common carriers to handle the additional volume. A second alternative was to lease an additional truck from Northern. Finally, she could restructure the existing arrangement and negotiate a contract with a carrier to provide on-site service.

Mary knew she had to develop a plan to support the projected growth at the Michigan plant for the March 15 meeting with Jim Wilson.

Question

What role could a Distribution Centre ( s ) play in this case? Explain what DC options are available for Jim Wilson to consider.