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What does your analysis of the data in Exhibit 3




1. What does your analysis of the data in Exhibit 3 suggest that Brad Twiddy might want to consider with respect to options for TSC?s supply chain?;2. What criteria would you use to evaluate the options?;3. As Brad Twiddy, what options would you recommend to Greg and what would be your schedule to evaluate these options and implement your plan?;POSSIBLE DISCUSSION QUESTIONS (These are some issues you may want to address in answering the above questions);1. Based on $72 million in sales last year (2006), what is the breakdown of year round, seasonal and;highly season SKUs?;2. How quickly does TSC need distribution capacity? How much do they need and where?;3. What happens if direct shipments do not increase by 20 per cent? If growth is faster or slower than 20;per cent per year?;4. What are the advantages of handling all distribution out of London? What are the disadvantages?;Attachment Preview;TSCstores.pdf;S;w;909D05;TSC STORES: SUPPLY CHAIN MANAGEMENT FOR PROFITABLE;GROWTH;Professor P. Fraser Johnson wrote this case solely to provide material for class discussion. The authors do not intend to illustrate;either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other;identifying information to protect confidentiality.;Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of;this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to;reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of;Western Ontario, London, Ontario, Canada, N6A 3K7, phone (519) 661-3208, fax (519) 661-3882, e-mail;Copyright 2008, Ivey Management Services;Version: 2009-02-17;On Thursday May 10, 2007, Greg Hicks, chief operating officer at TSC Stores in London, Ontario, was;meeting with Brad Twiddy, director of distribution, to discuss the status of a major corporate supply chain;initiative Project 275. As the two concluded their meeting, Greg commented;Our corporate objective is to double the number of stores over the next three years, and I;want to make sure that our supply chain is capable of supporting the business plan. Your;preliminary analysis suggests that constraints in distribution might impede our ability to;achieve corporate growth objectives. Brad, I know you have a lot going on right now, but I;need you and your team to finalize your analysis, give me some viable alternatives and a;plan to deal with this issue by the end of the month. We have a board meeting coming up;next month, and I have to provide an update on Project 275, and our strategy for the;distribution center is a major component.;TSC STORES;TSC was a small niche retailer that operated 37 stores in Central Canada, 35 in Ontario and two in;Manitoba (see Exhibit 1). No company quite matched the product mix that made TSC Stores unique a;cross between a country general store and a do-it-yourself center. TSC retail stores were a place for;consumers everyday repair and maintenance needs, for around the house or on the farm, with a broad;selection of work wear, tools, welding supplies, tractor parts and pet and horse supplies. The companys;target market was 45 year-olds to 65 year-olds who owned their own home or farm and had a country;lifestyle. Consequently, most store locations had traditionally been in cities that provided access to rural;and suburban home owners and small farms.;Started in 1966 as a subsidiary of Tractor Supply Company in the United States, TSC was purchased by a;private investor in 1987. In May 2005, Birch Hill Equity, a private equity firm, purchased TSC, which was;Page 2;9B09D005;a 24-store chain at that time. David Roussy and Greg Hicks joined the company a year later as the chief;executive officer and chief operating officer, respectively.;The corporate objective was to transform TSC from a niche player with only 24 stores in 2005 to a national;retailer with 200 to 300 stores. Growth objectives called for 75 stores by 2010 and a major refurbishment;plan for the existing retail outlets, resulting in an annual growth rate of approximately 20 per cent for 20072010. It was expected that by the end of 2008, the 42-year-old company would have an average store age;of 2.6 years.;PROJECT 275;When David Roussy and Greg Hicks joined TSC in 2006, they were asked by the board of directors to;prepare a business plan that would simultaneously achieve growth in sales, EBITDA (earnings before;interest, taxes, depreciation and amortization) and RONA (return on net assets). Greg commented on the;operational challenges at TSC in 2006 when he joined the company;We had a significant amount of stock-outs in both the stores and the distribution;center (DC). Our service level at the DC to the stores was about 65 per cent, and we;wanted to see this number at 92 per cent. At the same time, we had too much;inventory in the enterprise, with inventory turns running at approximately two times;per year. High inventory levels were tying up working capital and significantly;affecting our ability to grow our store count.;The underlying problems were a combination of several factors, which Project 275;was designed to address. For example, we had insufficient tools and processes for;effective inventory management discipline. Much of our inventory management issues;were a direct result of both poor replenishment logic and a lack of inventory integrity.;Right now we have nine high level projects underway in areas such as replenishment;methodology, promotional forecasting, systems upgrades and markdown management.;The objective is to move our inventory turns from 2.0 to 2.75, reduce our store hole1;counts from 450 to 275 and increase our enterprise service level by 27.5 per cent from;64.5 per cent to 92 per cent hence Project 275. Meeting our target will reduce bank;debt and associated expenses substantially, free up working capital to take advantage;of supplier payment discounts and provide the flexibility to open new stores.;A major component of Project 275 is DC storage and throughput capacity. Our supply;chain handled approximately 1,700 full trailer loads of product last year, roughly;three-quarters of which is handled by our London DC while the rest is shipped directly;from suppliers to our stores. We need to have the capability to efficiently and;effectively move inventory through our supply chain. This involves managing data;and information, replenishment processes and capacity planning.;As part of the Project 275 initiative, Greg had asked that replenishment formulas take into account stockkeeping unit (SKU) profitability targets, specifically gross margin return on investment (GMROI). He;remarked: We are rewriting our replenish algorithms at the DC to reflect our GMROI objectives. Floor;plans at the stores are being re-evaluated based on gross margin return on space.;1;A store hole is a term used to describe a stock keeping unit (SKU) that is in a stock-out position at the store;Page 3;9B09D005;THE TSC SUPPLY CHAIN;TSC purchased approximately 23,000 different SKUs from 650 suppliers. Although the company currently;dealt mainly with domestic suppliers, a corporate global sourcing initiative was exploring opportunities to;purchase products directly from suppliers outside North America. Greg Hicks commented;We will gradually increase purchases from international suppliers, starting this year;and my expectation is that approximately one-third of our purchases will originate;from outside North America within three years. Right now most of our efforts are on;opportunities in Asia. Since TSC does not have a great deal of experience in this area;we will need to develop the sourcing and logistical capabilities to support a global;supply chain.;The London DC was 74,000 square feet with an additional 22,000-square-foot yard area. Approximately;75 per cent of SKUs were shipped to the DC, which consolidated full truckload shipments to the stores.;The remaining 25 per cent of the SKUs, representing approximately 24 per cent of the total value of;purchases, were shipped by suppliers directly to the stores.;The DC had three main areas, pick and pack, high cube and the yard (see Exhibit 2). The pick and pack;area occupied approximately 27,000 square feet and accounted for about 25 per cent of total shipment;dollars. It was set up to handle product sent out by open case and had an average cube of 0.07 cubic feet;per SKU. The pick and pack area had 13,365 slots for inventory storage and a capacity of 75,000 cubic;feet. In contrast, the high cube area handled inventory shipped in large cubes, an average of 0.86 cubic feet;per SKU. The average cost in the high cube area was $20 per cubic foot versus $50 in the pick and pack;area. The high cube area had 4,647 slots and a capacity of 210,000 cubic feet. Approximately 40 per cent;of total shipment dollars went through the high cube area.;Large cube product that could be stored outside was held in the yard. The average cube size in the yard was;4.4 cubic feet per SKU with an average cost per cubic foot of $10. Approximately 10 per cent of total;shipment dollars were from the yard, which had 600 skid locations and a capacity of 130,000 cubic feet.;Supply Chain Planning;A month ago, Brad Twiddy had been asked by Greg Hicks to link the companys financial plan to its;supply chain strategy. Greg worried about the ability of TSCs supply chain to handle the growth planned;for the next three years, saying, I want to ensure that our supply chain can support the companys strategy;and financial plan. My major concern is that we wont have enough capacity to handle the increased;inventory volumes in our DC.;Brad and his team focused their analysis on SKU segmentation and DC capacity (see Exhibits 3 and 4). He;commented on the approach taken in the analysis;First, I wanted to understand what volumes we were handling and to get a rough idea;about the impact of seasonality. I analysed our total product purchases last year, of $72;million, and segmented the SKUs into three categories: year round, with a fairly consistent;pattern on a month-by-month basis, seasonal, for SKUs with approximately 70 per cent of;total product annual sales occurring in any consecutive, six-month period, and highly;seasonal, for SKUs with 70 per cent of total product annual sales occurring in any;Page 4;9B09D005;consecutive, four-month period (see Exhibit 3). Roughly two-thirds of our sales last year;were in the year-round category, while about one-fifth were highly seasonal.;Not surprisingly, we found that a small number of SKUs drive a significant amount of;cube volume in the four walls of the DC 15 per cent of our SKUs represent 80 per cent;of cube and a small number, only eight per cent of the SKUs, represents about 70 per cent;of cube.;The forecasted DC cubic monthly inventory volume was based on our financial plan;which included our plans for expansion, expected average store sales and inventory levels.;Normal lead times were built in for deliveries and stocking at the stores, typically ranging;from one to two months. We assumed a 20 per cent increase of direct shipments from;suppliers to stores, and we used an average inventory turns of 13 times at the DC. This is a;very sensitive metric, since we do not have trailer storage capacity at the yard and our;inventory needs to be stored before consolidation and shipment to the stores.;The analysis (see Exhibit 4) suggests that we do not have ample capacity at the DC to;support our requirements under the base financial plan. However the capacity problems;are concentrated in the yard, starting in the spring next year. We start to run into problems;in the high cube area the following year.;ALTERNATIVES;As Brad looked at the SKU segmentation and DC capacity analysis reports on his desk, it struck him that;the future success of the company would depend on its ability to develop appropriate supply chain;capabilities that would support the corporate business plan and achieve the ambitious objectives of Project;275. Although the analysis indicated that the most immediate concerns involved capacity in the yard and;high cube areas, Greg was expecting Brad to develop a long-term strategy for TSCs supply chain. As a;first step, and in preparation for the board meeting on June 15th, Greg wanted a comprehensive list of;options and a timeline for finalizing the supply chain strategy. Brad shared his views;The decisions that we make over the next couple of months will set the foundation of our;supply chain infrastructure. We need a supply chain strategy that will support corporate;growth and cost objectives, including the program objectives for Project 275 and the;global sourcing initiative. I want to be proactive in setting up a structure and organization;that will meet our requirements through 2010 and position us for future profitable growth.;As a starting point, we need to evaluate which activities should be controlled internally;and what we might consider outsourcing to a third-party logistics (3PL) company. One;option, for example, is to simply contract with a 3PL to handle the overflow from the;London DC. However, as I look at our rapidly growing volumes and the changing;complexity of our supply chain over the next three to five years, I dont see this approach;as a viable long-term strategy. There are several options that need to be considered;including expanding the current DC, establishing another DC in a different market or;perhaps setting up a hybrid DC that would handle either pick and pack or high cube SKUs;only.;Page 5;9B09D005;Brad took a quick look at the SKU segmentation analysis as he sat at his desk, preparing for the meeting;with Greg at the end of the month. The preliminary SKU analysis indicated that TSC would need more DC;capacity by first quarter 2008, which gave Brad only six to eight months to evaluate options and implement;a plan. Greg and the board would want to know the process and schedule that Brad intended to follow to;deal with the evolving capacity demands in distribution.;Source:;Page 6;STORE LOCATIONS;Exhibit 1;9B09D005;So;Page 7;DISTRIBUTION CENTER;Exhibit 2;9B09D005;Page 8;9B09D005;Exhibit 3;SKU SEGMENTATION;Year Round;Pick & Pack;High Cube;Yard;Direct;Total;# SKU;11,634;2,692;266;5,203;19,795;% SKU;Seasonal;Pick & Pack;High Cube;Yard;Direct;Total;# SKU;1,035;323;63;270;1,691;% SKU;Highly Seasonal;Pick & Pack;High Cube;Yard;Direct;Total;# SKU;% SKU;Total;Pick & Pack;High Cube;Yard;Direct;Total;# SKU;13,143;3,498;371;5,883;22,895;Source: Company Records;474;483;42;410;1,409;59;14;1;26;100%;61;19;4;16;100%;34;34;3;29;100%;% SKU;57;15;2;26;100%;% Cube;% Cost;13;58;29;100%;% Cube;31;35;8;26;100%;% Cost;9;49;42;100%;% Cube;25;41;15;19;100%;% Cost;2;29;69;100%;% Cube;11;51;19;19;100%;% Cost;8;45;47;100%;26;39;11;24;100%;Page 9;9B09D005;Exhibit 4;DC CAPACITY ANALYSIS;(In 000s);2007;Cubic;Inventory;January;February;March;April;May;June;July;August;September;October;November;December;217;204;238;281;224;194;240;284;260;352;280;217;2008;Cubic;Inventory;2009;Cubic;Inventory;261;250;288;365;302;258;320;382;337;443;340;258;315;292;385;442;345;298;360;420;385;523;400;317;2010;Cubic;Inventory;413;385;452;500;431;331;460;545;496;636;440;350;Exhibit 5;PICK & PACK CAPACITY ANALYSIS;(In 000s);2007;Cubic;Inventory;January;February;March;April;May;June;July;August;September;October;November;December;54;27;31;20;20;21;29;40;34;49;36;39;2008;Cubic;Inventory;52;33;38;26;27;28;38;53;44;62;44;47;2009;Cubic;Inventory;47;38;50;31;31;33;43;59;50;73;52;57;2010;Cubic;Inventory;62;50;59;35;39;36;55;76;65;89;57;63;Page 10;9B09D005;Exhibit 6;HIGH CUBE CAPACITY ANALYSIS;(In 000s);2007;Cubic;Inventory;January;February;March;April;May;June;July;August;September;October;November;December;87;108;138;121;94;93;108;131;119;180;162;113;2008;Cubic;Inventory;2009;Cubic;Inventory;117;133;167;157;127;124;144;176;155;226;197;134;158;155;223;190;145;143;162;193;177;267;232;165;2010;Cubic;Inventory;207;204;262;215;181;159;207;251;228;325;255;182;Exhibit 7;YARD CAPACITY ANALYSIS;(In 000s);2007;Cubic;Inventory;January;February;March;April;May;June;July;August;September;October;November;December;76;69;69;140;110;79;103;114;106;123;81;65;2008;Cubic;Inventory;91;85;84;183;148;106;138;153;138;155;99;78;2009;Cubic;Inventory;110;99;112;221;169;122;155;168;158;183;116;95;2010;Cubic;Inventory;145;131;131;250;211;136;198;218;203;223;128;105


Paper#34178 | Written in 18-Jul-2015

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