Case_Report__Dollar_Tree Numbers.pdf

Session 2, Case 1: Dollar Tree Logistics
Part A:
Salient Points: //Important facts and figures drawn from the case
-Virginia-based discount-retail company

-$3.2 billion in revenue, the year 2004
-Opened two new DCs; a 660,000 sq foot, manual facility in Washington and a fully
automated operation with 1.2 million sq. feet in Illinois
-Dollar stores first emerged on the U.S. retail landscape in the 1950s
-Low overheads, volume purchases, and rapid inventory turns initially produced great
returns despite the low price point, The newly energized dollar channel now represented
the fastest-growing retail segment in the United States
-Dollar Tree-
-founded in 1986 by Macon Brock Jr., H. Ray Compton, and Douglas Perry
-In 1995, Dollar Tree Stores went public, was listed on the NASDAQ under the symbol DLTR,
and since has grown into a large, highly profitable retail company
compound annual growth rate (CAGR) of 19% in sales and 14% in earnings per share (EPS)
-Although smaller than the older dollar stores, peer comparisons showed much higher
growth rates and profit margins for Dollar Tree
-Dollar Bills was acquired in 1996 (adding 106 stores),
-Step Ahead Investments in 1998 (adding 70 new stores),
-Only $One in 1999 (adding 24 stores),
-Dollar Express in 1999 (adding 106 stores) and
-Greenbacks in 2003 (adding 100 stores).
-By the end of 2004, Dollar Tree had over 2,600 stores located in all 48 states of the
continental United States and had generated an annual revenue of $3.2 billion.
-The range of merchandise :
1. Consumable merchandise
2. Variety merchandise
3. Seasonal goods
-In 2004, around 40% of the goods were imports, 7% were closeout items, and the rest were
purchased from domestic vendors.
-Automation worked particularly well for Dollar Tree because of the small scale of its stores
and the large number of Stock Keeping Units (SKUs) it stocked. Normally the investment in
automation would be recouped in two to three years.
-The most important drivers of lowering cost, as White pointed out, were scale, utilization,
and continuous operational improvement.
-CAGR of 15% in DC productivity in the last four years, measured by cartons processed per
man-hour.
-In terms of DC network capacity planning, Dollar Tree used a timeframe focused on three
years. As a rule of thumb, White would begin thinking of adding new capacity whenever
average utilization of a facility approached 75%.
11thwas
This study source March, 2020
downloaded Supply
by 100000776548627 from Chain on
CourseHero.com Network
06-09-2024Design
15:25:14 GMT -05:00 Rohit Kamath
https://www.coursehero.com/file/57088086/Case-Report-Dollar-Tree-Logistics-Rohit-Kamathpdf/
-White looked at a report on his desk portending a future capacity shortage of the DC in
Briar Creek, PA (Exhibit 10). This DC was operating at an average utilization of 92% and peak
utilization of 124%. In 2004,
Options:
1. Expand the current Briar Creek DC by another 400K-square feet to increase its facility capacity by
two-thirds; or
2. Build a new DC with 600K-square feet in Hartford, CT, which would provide two facilities to serve
the territory currently assigned to Briar Creek.
From the dollar tree case’s Exhibit 5, we can find that there were a lot of stores located in
New Hampshire, Massachusetts and Vermont. It takes at least 6 hours to drive from Briar
Creek PA to them. Building a new DC in Hartford will decrease the time by half, definitely
improve the service level in the northeastern area.
Part B:
Assignment questions:
a) What are the components of the cost structure of the Dollar Tree logistics system?
Figure 1. Cost Breakdown of the Logistics System

The cost components are:
1. Total DC cost
2. Total Inbound costs
3. Total Outbound costs; and
4. Inventory Carrying costs
b) How important is economy of scale for the DCs? Compute the utilization curve for the Briar
Creek DC and the scale curve for all the automated DCs?
11thwas
downloaded Supply
06-09-2024Design
With low margins, it is extremely crucial for Dollar Tree to leverage economies of scale.
From the Exhibit 6, we can see that in 2001, the capacity utilization of the DC in Briar Creek
is 92%, fixed cost (per carton handled) is 0.20, variable cost (per carton handled) is 0.19 and
unit cost (per carton) is 0.39. So we can calculate the fixed cost/unit at 100% capacity
utilization is 0.20*20,348,228/20,348,228/92%=0.184. The fixed cost/unit at 60% capacity
utilization is 0.184/60%=0.307. Since the average unit cost = Variable unit cost+ (Fixed cost
/Unit quantity). So the unit cost at 60% and 100% utilization are 0.497 and 0.374.
Average capacity Fixed Cost($/carton) Variable Cost($/carton) Unit Cost($/carton)

utilization
60% 0.307 0.19 0.497
92% 0.20 0.19 0.39
100% 0.184 0.19 0.374
c) What other operations-strategy opportunities should Dollar Tree consider to further decrease
total supply-chain costs?
• Selection of reliable suppliers for high volumes, low costs

• Lean Six Sigma tools to avoid waste
• SKU rationalization to reduce holding costs, production costs
• SC Network design to maybe lease warehousing capacity during high season
The article below captures how Dollar Tree could move into the segment of products that
are sold for more than $1 to compete with some of its competitors.
https://www.babson.edu/academics/executive-education/babson-insight/strategy-and-
innovation/the-high-price-of-dollar-stores/
d) Which of the two options for DC capacity expansion, using the scale and utilization curves, do
you recommend? Why?
Using the scale and utilization curve, the fixed and variable DC costs are computed for the 2 options
for the period of 3 years. The computation of sensitivity of the cost to the forecast of sales growth is
currently work in progress.
Expansion
Fixed costs
$0.43 per square foot x 1,60,83,277 = $6,915,809.11
fixed costs per square foot
$6,915,809.11 by 1,200,000 square ft = $5.7631 per square foot
Expanded Size
$5.7631 per square ft x 1,003,000 square ft = $5,780,463.78
$5,780,463.78 x 3 years = $17,341,391.34
Variable Cost
Variable cost/carton Cartons Year
11thwas
downloaded Supply
06-09-2024Design
$0.19 x 2,34,00,462 = $4,446,087.78 2005

$0.19 x 2,76,12,545 = $5,246,383.55 2006
$0.19 x 3,12,02,176 = $5,928,413.44 2007
Total Variable costs = $15,620,700
Total cost = $15,620,700 + $17,341,391 $33 Million
New DC
Total Option 2 Fixed costs = Old DC Fixed costs + New DC Fixed costs
Fixed costs
$0.20 x 2,03,48,228 = $4,069,645.60

Old DC Fixed costs = $4,069,645.60 x 3 years $12,208,936.80
New DC Fixed costs = $4,069,645.60 x 3 years $12,208,936.80
Total Fixed costs = $12,208,936.80 + $12,208,936.80 $24,417,873.60
Variable costs
As seen above = $15,620,700
Total cost = $40 Million
Since the case did not provide the labour and construction cost, the assumption made was
that option 2 would cost more than option 1 because Hartford is the capital of Connecticut.
Also, the difference in transportation cost when computed over 3 years, would not create a
difference of that’d outweigh the DC costs.
Transportation Costs:
Option1 Option 2
Briar Creek Hartford
2005 $7 million $3.3 million $1.7 million
Total $23 million $10.2 million $6.4 million
Total $23 million $16.6 million
Therefore, the strategy to expand would be the right decision for Dollar Tree Logistics.
11thwas
downloaded Supply
06-09-2024Design
Powered by TCPDF (www.tcpdf.org)

Case_Report__Dollar_Tree Numbers.pdf

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Case_Report__Dollar_Tree Numbers.pdf

Uploaded by

Copyright:

Available Formats

Session 2, Case 1: Dollar Tree Logistics

-Virginia-based discount-retail company

Figure 1. Cost Breakdown of the Logistics System

Average capacity Fixed Cost($/carton) Variable Cost($/carton) Unit Cost($/carton)

• Selection of reliable suppliers for high volumes, low costs

$0.19 x 2,34,00,462 = $4,446,087.78 2005

Total cost = $15,620,700 + $17,341,391 $33 Million

$0.20 x 2,03,48,228 = $4,069,645.60

You might also like