Southern DC Lease Renewal at Northline Beverages
Northline Beverages operates three bottling plants and five regional distribution centres. Plant capacity is 1.8 million cases per month; current demand is 1.55 million, but demand has shifted 18% south over three years. The southern DC is leased, has 240,000 sq ft, and expires in nine months. Its throughput is 190,000 cases per month, and 62% of its volume goes to customers within 150 km. The nearest alternative DC is 410 km away and has 90,000 cases per month of free capacity. Adding a second shift there would cost $0.11 per case. Keeping the southern DC would cost $0.18 per case after a rent increase. A southern cross-dock option costs $0.07 per case but adds 1.2 days to lead time for 35% of orders, which carry a 48-hour service commitment. Transport is 38% of landed cost. Management wants a five-year network decision.
1. Calculate the annual variable cost of retaining the southern DC versus moving its full volume to the alternative DC. What costs are missing from that comparison, and why do they matter?
Read the worked answer
Annual southern volume = 190,000 cases/month x 12 = 2,280,000 cases.
- Retain: 2,280,000 x $0.18 = $410,400 per year.
- Move: 2,280,000 x $0.11 = $250,800 per year.
- Apparent saving from moving = $159,600 per year.
That comparison is incomplete. Transport is 38% of landed cost, and the alternative DC is 410 km from the southern customer base. The setup gives no per-case freight rate, so the extra line-haul cannot be calculated from the data. A correct comparison needs the marginal freight per case, lease-exit costs, any capital for the second shift, inventory carrying cost from longer replenishment lanes, and the cost of service failure on the 35% of orders with a 48-hour commitment. It also needs a capacity check: 190,000 cases/month cannot fit into 90,000 cases/month of free capacity, so the second shift is required for at least 100,000 cases/month. The $159,600 is therefore a variable-cost signal, not a decision. If additional freight exceeds about $0.07 per case across the moved volume, the apparent saving disappears.
2. The 35% of southern orders with a 48-hour commitment are the highest-margin accounts. Evaluate the cross-dock option against retaining the DC for those accounts.
Read the worked answer
Cross-dock costs $0.07 per case versus $0.18 to retain, a saving of $0.11 per case. Across 2.28 million cases, that is $250,800 per year. But the cross-dock adds 1.2 days to lead time, and 35% of volume, or 798,000 cases per year, is covered by a 48-hour commitment. For those orders the cross-dock may breach the promise unless forward stock is held.
A break-even test helps: $250,800 / 798,000 affected cases = $0.314 per affected case. If expediting, lost margin, or service penalties exceed about 31 cents per affected case, cross-docking all volume is worse than retaining the DC. That threshold is plausible for high-margin accounts.
The better judgement is segmentation, not a binary choice. Cross-dock the 65% of volume that can tolerate 1.2 extra days, saving about $163,000 per year, and keep a small forward-stock area or dedicated daily shuttle for the 35% high-margin segment. The forward area can be smaller than today's 240,000 sq ft, which reduces the rent exposure while protecting the service promise.
3. Recommend a five-year network decision. State the conditions under which you would reverse it.
Read the worked answer
Recommendation: do not renew the full southern DC. Phase a hybrid network:
- Move the 90,000 cases/month that fit the alternative DC's free capacity immediately.
- Add the second shift for the remaining southern volume, but keep a small leased forward warehouse or cross-dock in the south sized for the 35% 48-hour segment.
- Negotiate a short-term, flexible southern lease, ideally 24-36 months with a break clause, rather than a five-year commitment.
- Contract a dedicated daily shuttle for the high-margin segment and measure on-time delivery separately from the cross-docked volume.
The economics work only if the added line-haul plus forward-warehouse cost is below the $0.18 per case retained-DC cost. The decision should be reversed if the alternative DC cannot sustain the second shift, if freight rates rise enough that landed cost exceeds the retained-DC option, or if the high-margin segment grows beyond the practical size of the forward area. A five-year decision should preserve a trigger: review at 12 months against service, freight per case, and southern demand share.