James Smith, vice president of distribution for TBG Hometronics Company, was preparing for the annual strategy review meeting conducted by the executive team. Smith needed to assess the companys logistics costs and profitability of its two distribution channels: eCity, a retail chain, and, Shop4Less, a mass merchandiser. A quick review of the companys prior year financials and distribution information made Smith believe that transportation costs may be too high. Furthermore, Smith wondered whether the current inventory commitment with eCity and with Shop4Less may be re-negotiated given that inventory carrying cost is approximately 20% of inventory value.

TBG Hometronics assembles and packages small electronic devices for households in two contracted manufacturing plants: Olympia, Washington and Houston, Texas. Due to capacity constraints, each contracting plant can only produce up to 3,500,000 units of products for TBG. Finished products are packaged in standard packages with 500 units per package and shipped through three TBG-owned distribution centers - the West region DC located in Sacramento, California, the Central region DC located in Topeka, Kansas, and the East region DC in Richmond, Virginia, to five regional markets in the U.S.: Northwest, Southwest, Central, North East and South East. TBG has long partnered with eCity, which has five retail stores in each regional market. To diversify its customer base, TBG developed a second distribution channel Shop4Less, which has two mega-stores in each regional market. TBG does not own warehouses in regional markets and hence outsources local stocking and delivery-to-store services to a national 3PL firm Aplus Logistics Co. According to the agreement, TBG ships products from its own regional DCs to one centralized Aplus warehouse located in each of those five markets and Aplus is responsible for local stocking and direct-to-store deliveries to eCitys stores and Shop4Lesss stores with a flat charge of $800 per trip including stocking and delivery.

Table 1 Average Distance for TBGs Distribution Points

Distance (miles)		West DC (Sacramento, CA)	East DC (Richmond, VA)	Central DC (Topeka, KS)
Plant	Olympia, WA	693	2,902	1,891
	Houston, TX	1,929	1,323	735
Market	NW Market	553	2,442	1,359
	SW Market	755	2,296	1,147
	Central Market	2,044	799	588
	NE Market	3,011	548	1,480
	SE Market	2,469	531	865

From shipment data for last year, Smith was able to put together sales break-downs by market and by distribution channel (Table 2). Smith also noted that 4,000 packages were shipped to eCity stores with 2,000 orders placed and 6,000 packages were shipped to Shop4Less with 500 orders placed. Average selling prices per unit were $25 when sold to eCity stores and $20 when sold to Shop4Less. Costs of goods sold per unit were $15 for all products.

Per agreements, TBG maintained a 60-day inventory supply for eCity stores and provided weekly direct deliveries to each retail store. TBG maintained a 30-day inventory supply for Shop4Less and shipped directly to each of its stores twice a week. All sales were made on credit with net 60 days for eCity and net 45 days for Shop4Less in terms of accounts receivables. Smith understood that TBGs average financing cost was approximately 9%. For convenience of calculation, in this exercise please assume 360 business days and 50 delivery weeks a year.

Table 2 Sales by Market and Distribution Channel (in Packages)

Sales	NW Market	SW Market	Central Market	NE Market	SE Market
Shop4Less	1100	800	1400	1600	1100
eCity	900	500	900	800	900

Since the company has been using standardized packaging for shipping all its products, the 500-unit shipping package has the same transportation characteristics (dimensions and weight). Smith noted that while transportation rates from TBGs own regional DCs to each market were $0.20 per package mile, transportation rates from TBGs plants to regional DCs differed significantly due to the competitive nature and other route-specific characteristics (see Table 3).

Table 3 Transportation Rates for Shipments from Plants to DCs

Plant to DC (per package per mile)		Manufacturing Plant
		Olympia, WA	Houston, TX
Regional DC	West DC (Sacramento, CA)	$ 0.25	$ 0.19
	East DC (Richmond, VA)	$ 0.18	$ 0.15
	Central DC (Topeka, KS)	$ 0.29	$ 0.22

Smith also broke down logistics costs by major activities (Table 4).

Order Processing	$ 1,000,000
Packaging	$ 2,500,000
Transportation (from Plants to Regional DCs)	$ 5,500,000
Local Stocking and Delivery Charges (3PL)	$ 1,800,000
Total Logistics Costs	$ 10, 800,000

1: Calculate gross profits for eCity and Shop4Less