Dollar Tree Logistics Case Study Report

Introduction

Dollar Tree, which was founded in 1986, now operates more than 2,600 stores across the
United States and is a leading player in the dollar store segment. To appeal to a broad customer
base seeking value for money, the company has built its success because of offering a wide range
of products at a fixed price of one dollar. Dollar Tree's highly efficient and cost-effective
logistics system is a key factor in maintaining this price strategy and ensuring profitability.

This logistics system is crucial to the management of a complex flow of goods between
suppliers, distribution centres and final stores in order to optimise levels of inventories and
reduce transport costs. Distribution network design, economies of scale and the identification of
areas for improvement will be covered by Dollar Tree's strategic logistics decisions that are
aimed at reducing costs associated with supply chain operations.

It is crucial to understand these logistics strategies, not just for Dollar Tree's present
position on the market but also in order to find out how similar retailers can apply them with a
view to achieving efficiencies. Therefore, the case study gives valuable information on the
logistics mechanisms that make it possible for a large retailer to succeed in this highly contested
segment of dollar stores.

Thesis Statement:

The report aims to analyse Dollar Tree's logistics system to address core objectives, e.g.
distribution network design trade-offs, the importance of economies of scale, and finding
Strategic Opportunities for reducing supply chain costs It will also carry out an analysis of
options to expand capacity at Distribution Center (DC) and make recommendations based on
both quantitative as well as Qualitative analyses. This report seeks to provide a comprehensive
understanding of Dollar Tree's ability to further improve its logistics efficiency in order to
maintain its competitive advantage.
2. Cost Structure Components: Dollar Tree's logistics system involves several key cost
components:

Inbound Transportation:

The costs associated with the import of goods from suppliers, in particular from Asia,
and their transport to the United States ports and distribution centres are included in the cost of
inbound transport. The main components include the cost of shipping, which ranges from $1,000
to $4,000 per container because of long distances and customs duties that add 10 % to the price
of a product. Port handling fees range from $200 to $400 per container, and transportation to
DCs, often via trucking or rail, averages around $2.00 per mile. In addition, in order to protect
goods during transit, insurance costs approximately 0.5% of the value of the consignment.
Inbound transportation accounts for 20-30% of total logistics expenses, which, for Dollar Tree's
annual logistics costs of $500 million, translates to $100 million to $150 million.

DC Facility Costs:

The cost of DC facilities includes the operation and maintenance of distribution centres
where products are stored or processed. Leasing or rent, which ranges from $5 to $10 per square
foot per year, translating to $2.5 million to $5 million per year for a 500,000 square foot DC, is a
key component. The electricity, water, and heating, ventilation, and air conditioning utilities are
estimated at $500,000 to $1 million per DC, while maintenance costs range from $200,000 to
$400,000 per year. Labor costs for warehouse workers, at about $15 to $20 per hour, amount to
$3 million to $4 million annually for a DC with 100 workers. In addition, the initial costs of
equipment and technology, such as forklifts and systems, can be several million dollars, with
ongoing maintenance costs. The cost of DC facilities accounts for 25 to 35 % of the total
logistics costs, which amounts to $125 million to $175 million on a $500 million budget.

Outbound Transportation:

Outbound transportation costs cover the transportation of goods from DCs to retail
stores. The main elements are the cost of shipping, which ranges from $2.00 to $2.50 per mile
depending on current prices and variable fuel costs. The wages of drivers are between $45,000
and $60,000 a year, while the maintenance cost for delivery trucks is several thousand dollars.
There are also costs related to the optimisation of delivery routes and schedules. Inbound
transport accounts for 40 % of overall logistics costs, meaning that it represents between $150
million and $200 million in the $500 million logistic budget.

Inventory Carrying Cost:

The carrying costs of the inventories include storage, insurance and opportunity cost.
The main components are storage costs for rent and utilities specific to the storage of the
inventory, which run into millions of dollars per year, and insurance costs of about 0.5% of the
value of the inventory. The annual depreciation and obsolescence rate is estimated at 10 % of the
inventory value, while the opportunity cost, which represents the cost of capital tied up in the
inventory, is around 5 %. In addition, the expenses related to inventory management shall be
included. Inventory carrying costs represent 15-25% of total logistics expenses, which for a $500
million budget translates to $75 million to $125 million.

4. Operations-Strategy Opportunities for Dollar Tree to Reduce Supply-Chain Costs:

Technology Investments:
In order to predict demand accurately, optimise stock levels and reduce excess
inventories, Dollar Tree can invest in advanced inventory management systems using artificial
intelligence and machine learning. According to industry reports, the adoption of these systems
could lead to an annual saving of up to $200 million.

Supplier Consolidation:

Dollar Tree can obtain better prices and shipping discounts through consolidating its
supplier base. As a result of reductions in procurement and inbound transport costs, this
consolidation could save between $25 million and $50 million annually.

Cross-Docking Expansion:

Storage times and handling costs can be reduced by expanding crossdocking practice.
This would allow Dollar Tree to save between $31.25 million and $43.75 million per year by
reducing warehousing costs, based on the current cost situation.

7. Cost Elements and Drivers: Cost elements within a supply chain, comprising inbound
transportation, DC facility costs, outbound transportation, and inventory carrying costs, each
play a crucial role in shaping overall expenses.
Inbound Transportation (20-30%):

The cost of transporting raw materials or goods from suppliers to production and
distribution centres shall be included in this measure. This is usually 20% of overall supply chain
costs. The main drivers are the rates of shipping and import volumes. Fluctuations in freight rates
due to fuel prices and geopolitics, impact costs are likely to result in economies of scale with a
lower per unit cost of transport while the increasing import volumes can bring about savings.

DC Facility Cost (25-35%):

These costs are typically 25 % to 35 % of the overall cost of a supply chain and include
operations and maintenance of warehouses or distribution centres. These costs are driven by
factors such as the size of the facility, its location and labour costs. The increase in rent, utilities,
and maintenance costs is due to larger facilities, higher labour costs, and prime locations.

Outbound Transportation (30-40%):

Covering the costs of delivering finished products to end customers or retail outlets,
outbound transportation typically accounts for 30-40% of total supply chain costs. The main
drivers of this are delivery distances, transport modes and fuel costs. Transport costs are directly
affected by longer distances and fluctuations in fuel prices.

Inventory Carrying Cost (15-25%):

These expenses represent 15 to 25 % of total supply chain costs for storage and
management of stocks in warehouses or distribution centres. These costs are influenced by the
level of inventories, turnover rates and storage costs. Higher inventory levels require more
storage space, increasing the cost of holding, while faster turnover rates reduce the cost of
holding, but may increase the costs of ordering and setting up.

Finally, effective supply chain management requires an understanding and

management of these cost elements and their drivers. Businesses can reduce costs, increase
efficiency and preserve their competitiveness on the market by optimising transport, operation of
facilities and inventory management. In order to achieve long term success, continuous
monitoring and adaptation to changing market conditions are essential.
References
Harvard Business School. (n.d.). Dollar Tree Logistics Case Study. . (n.d.). Harvard Business
Publishing. . Retrieved from https://hbsp.harvard.edu/import/1169913
Bowersox, D. J. ( 2013). Supply Chain Logistics Management. McGraw-Hill Education.
Chopra, S. &. ( 2016). Supply Chain Management: Strategy, Planning, and Operation. Pearson
Education.
Coyle, J. J. (2016). Supply Chain Management: A Logistics Perspective. Cengage Learning.