Pan American Advanced Studies Institute Simulation and Optimization of Globalized Physical Distribution Systems Santiago, Chile August, 2013 – Case 1 Case Study Developed By: Dave Wheeler Principal, Supply Chain Strategy St Onge Company York, PA

Case Study 1 US based retailer with operations in the US and Mexico Experiencing significant growth in stores, sales, and items SKU proliferation causing issues within the DC in terms of slotting and inventory carrying –Expected to accelerate due to industry –Extremely long tail on item pareto. (i.e. large number of items contribute small amount to sales) Several DCs with storage capacity constraints, while others have excess capacity Currently 5% of product imported from Asia, expecting to grow to 12% Competition migrating to highly responsive supply chain Increasing fuel cost applies pressure to freight budget

US Supply Chain Description 4,616 stores in 2012, growing to 5,660 in Full-line distribution centers –$4m annual fixed cost for each DC Deliveries to stores from DCs –via multi-stop truckloads (private fleet); ≈4 stops/load –Stores receive 1 delivery/week Vendor to DC shipments –90% of shipments from vendors paid for by vendor as component of COGs –10% company paid, including all import Imports shipped from vendors mainly in China, directly to each DC in full FEUs US DCs currently do not ship cross-border into Mexico

Stores

DCs

Imports

Supporting Data – Store Growth

Supporting Data – Stores STCurrent 2018 Strat Plan MA7720 AZ14919 IL25419 CT4218 WA7018 CO5715 LA11115 UT5115 AK015 WI6114 IN15613 KY8613 MT711 STCurrent 2018 Strat Plan OR4111 AL9410 NV6510 KS379 DE98 OK787 PR297 WV307 NE96 SC806 TN1706 ND06 ID125 STCurrent 2018 Strat Plan MO895 NM785 MS1044 IA213 ME53 NH203 AR592 RI162 SD52 WY52 VT01 DC130 NM50 STCurrent 2018 Strat Plan CA NY15691 FL25072 MD4664 PA12461 TX59451 NJ7145 MI16030 VA10830 GA20428 MN2627 NC19727 OH26421

Supporting Data - DCs DC Metrics CAGAPATNILTXAZOH # Stores Capacity , , # Routes # Deliveries/week Miles per route , Deliveries per route $/mile DELIVERY $/mile$2.33$1.97$2.89$1.66$1.74$1.87$1.85$1.91

US Issues to be Addressed Determine if the current DC network is appropriate given the future store growth, DC capacities, increasing fuel costs If additional DCs are needed, determine the: –appropriate location and relative size of each additional DC –impact on the current DCs throughput, inventory, and service area –impact to DC to store freight –impact to transit time to stores –impact to DC costs (fixed and variable) –the impact to network inventory –if the changes to the network financially justified based on a reasonable return-on-investment (ROI)

US Issues to be Addressed Given the migration to incremental import product –How will inventory be impacted if current direct to DC approach is continued –What alternative import methodologies should be considered –For each methodology considered, determine the: impact to inventory impact to facility costs impact to freight impact to store service

Mexico Supply Chain Description Full Line DC in Monterrey −Monterrey DC has 360 store capacity −Cross-docks located in Mexico City & Mexicali serviced from Monterrey DC −200 fast moving/high cube items stored at DC and both cross-docks ≈330 stores in 2012 −220 direct from Monterrey −70 via Mexico City cross-dock −40 via Mexicali cross-dock DC to Store freight −Delivered via multi-stop common carrier truck of various size depending on market −On average a truck load from DC to a cross dock serves 8 stores −On average a truck load from DC to stores serves 4 stores −On average a truck load from a cross dock to stores serves 3 stores −Stores receive 1 delivery per week

Mexico Supply Chain Description Vendor inbound freight −Majority of product ships from vendors in US to Mexico via freight forwarder in Laredo, TX −≈1500 loads/year; $285/load −Product stored at cross-docks ships direct from vendors; vendor paid freight Growth Plan −150 stores in Mexico (75% in Mexico City region) −46 stores in Central America Product imported from China utilizes US ports and ships via Laredo, TX

DCs

Growth

Mexico Issues to be Addressed Determine if the current DC network is appropriate given the future store growth, DC capacities, increasing fuel costs If an alternative DC configuration is to be considered, then determine the: –appropriate location and relative size of each additional DC –impact on the current DCs throughput, inventory, and service area –impact to DC to store freight –impact to transit time to stores –impact to DC costs (fixed and variable) –the impact to network inventory –if the changes to the network financially justified based on a reasonable return-on- investment (ROI) If alternative DC configuration is not justified, then identify improvements to the current configuration and flow of product from vendors through the DC and cross-docks to the stores

Mexico Issues to be Addressed Given the migration to incremental import product How will inventory be impacted if current direct to DC approach is continued –What alternative import methodologies should be considered –For each methodology considered, determine the: impact to inventory impact to facility costs impact to freight impact to store service –Should the Mexico and US methodology be synchronized?