Page 159 - Operations Strategy

134 CHAPTER 4 • CAPACiTy sTRATEgy

the total operations cost of its distribution services; on the other hand it wishes to improve its
level of service to its customers. In order to explore alternatives to its existing depots it engages
a firm of consultants to evaluate two alternative proposals, which had been discussed within
the company. Option 1 would require the company to concentrate its operations in one central
depot that would serve the whole of Europe. It is likely that this would be in the Netherlands,
probably in Rotterdam. Option 2 would require the company to move in the opposite direc-
tion, in the sense that it envisages a depot to be located in each of its six sales regions in Western
Europe. These regions are the Iberian Peninsula, the UK, France and the Benelux countries,
Italy, Germany and Scandinavia. The consultants decide to simulate the alternative operations
in order to estimate (a) the cost of running the depots (this includes fixed costs such as rent
and local taxes, heating, wages, security and working capital charges for the inventory etc.),
(b) transportation costs of delivering the books to customers and (c) the average delivery time
in working days between customers requesting books and them being delivered. Table 4.2 shows
the results of this simulation.
From Table 4.2 one can see that concentrating on one large site gives substantial economies
of scale in terms of the costs of running the depot but increases transportation costs, and
(because there is further, on average, to travel) increases the average delivery time. Conversely,
moving to several smaller sites increases depot costs but reduces transportation costs as well
as improving the average delivery time. The company is faced with a dilemma. By moving to
one large site it can save €9.1 million per year (the savings on depot costs easily outweighing
the increase in transportation costs). Yet delivery times will increase on average by 1.4 days.
Alternatively, moving to six smaller sites would increase costs by €9.3 million per year, yet gives
what looks like a significant improvement in delivery time of 2.5 days. In theory, the financial
consequences of the different delivery times could be calculated, combined with the capital
costs of each option, and a financial return derived for each option. In practice, however, the
decision is probably more sensibly approached by presenting a number of questions to the
company’s managers.
● Is an increase in average delivery time from 6.3 to 7.7 days likely to result in losses of business
greater than the €9.1 million savings in moving to a large site?

table 4.2 analysis of existing operation and two options

Capacity configuration Depot costs Transport costs Average delivery time (working days)
Current three sites €55.3m €15.6m 6.3
● Toulouse
● Birmingham
● Hamburg
One large site €41.1m €20.7m 7.7
● Rotterdam
Six smaller sites €68.8m €11.4m 3.8
● Madrid
● Paris
● Stockholm
● Milan
● Berlin
● Birmingham

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