Dollar Tree Logistics Case Study

Introduction

Dollar Tree Stores, Inc. is a leading discount retail chain that has achieved remarkable success by

offering a diverse range of merchandise priced at exactly $1 across its over 2,600 stores in the

continental United States. The company's rapid expansion which has been fueled by organic

growth and strategic acquisitions, has been supported by its distinctive $1 pricing strategy and a

well-designed logistics network. Dollar Tree's ability to provide exceptional value to cost-

conscious consumers has been a key driver of its success, capturing a significant share of the

rapidly growing dollar store market segment. This case study aims to analyze the logistics

operations of Dollar Tree and evaluate the proposed options for expanding the company's

distribution center (DC) capacity to accommodate future growth while minimizing total supply

chain costs. The primary objective is to determine the most efficient and cost-effective approach

to enhancing the logistics network, considering factors such as economies of scale, transportation

costs, and inventory management. Maintaining a lean and responsive supply chain is critical for

Dollar Tree to sustain its competitive advantage and continue delivering on its promise of

offering a compelling merchandise assortment at the $1 price point.

Question 1: Address at least 3 of the following objectives and explain them

a. Demonstrate basic trade-offs in distribution-network design - the case highlights the

fundamental trade-off in distribution network design between economies of scale

achieved through larger, automated DCs and the associated transportation costs resulting

from the distance between DCs and stores. Dollar Tree's logistics network aims to strike a
 balance between these two factors, leveraging the cost efficiencies of large-scale

automated facilities while minimizing outbound transportation expenses.

b. Apply scale-curve analysis - the case provides data on the utilization curve for the Briar

Creek DC and the scale curve for all automated DCs (Exhibit 6). These curves

demonstrate the significant economies of scale achievable through larger, automated

facilities. As the throughput volume (cartons processed) increases, the unit cost per carton

handled decreases due to fixed cost dilution and operational efficiencies. Analyzing these

curves is crucial in evaluating the capacity expansion options and their associated cost

implications.

c. Reinforce inventory "big picture" thinking - the case emphasizes the importance of

inventory turns and the need for a well-designed logistics network to support Dollar

Tree's growth and distinctive $1 pricing strategy. With over 1,000 staple SKUs sold in

large volumes, efficient inventory management is critical. The case highlights the

company's focus on achieving high inventory turns (e.g., 14 turns for the expanded Briar

Creek DC) and cross-docking opportunities for high-volume, palletized SKUs.

Question 2: What are the components of the cost structure of the Dollar Tree logistics

system?

The cost structure of Dollar Tree's logistics system comprises four main components as follows:

i. Inbound transportation (37% of total logistics costs): This includes the cost of ocean

transportation for imported goods and trucking costs for domestic transportation.

ii. Outbound transportation (25%): This covers the cost of delivering merchandise from DCs

to stores, including dedicated trucking fleets and associated expenses such as mileage and

unloading charges.
 iii. Distribution center (DC) costs (28%): These are the operational costs associated with

running the DCs, including fixed costs (e.g., facility costs, automation investments) and

variable costs (e.g., labor, utilities).

iv. Inventory carrying costs (10%): These costs are related to holding and maintaining

inventory, influenced by factors such as inventory levels, inventory turns, and the cost of

capital.

By understanding and optimizing these cost components, Dollar Tree can enhance the efficiency

and profitability of its logistics operations, supporting its growth and competitive positioning in

the discount retail market.

Question 3: 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.

The utilization curve for Option 1, Figure 1, shows the capacity utilization percentage at the

Briar Creek DC before and after the proposed 400K sq.ft expansion. In 2004, utilization peaked

at 92%, indicating severe capacity constraints. The expansion provides relief in 2005-2006, with

utilization dropping below 70%. However, by 2007, utilization is projected to rise back above

80%, nearing maximum desired levels once again.

 Utilization %: Option 1
100%
90%
80%
70%
Utillization %

60%
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006 2007 2008
Year

Figure 1 Utilization% Briar Creek

For Option 2, in 2005, utilization is well-balanced between the two facilities. However, by 2007,

Briar Creek is expected to operate near 70% utilization, while Hartford approaches the maximum

desired level of around 70-75% utilization.

Old Briar Creek DC: 60% in 2005, 65% in 2006, 70% in 2007

New Hartford DC: 46% in 2005, 60% in 2006, 71% in 2007

In 2005, utilization is well-balanced between the two facilities. However, by 2007, Briar Creek is

expected to operate near its maximum desired level of 70%, while Hartford approaches 71%

utilization.
 Expected Utilization %: Option 2
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003 2004 2005 2006 2007 2008

Figure 2 Expected Utilization %, Hartford

The scale curve, Figure 3 and data from Exhibit 6 demonstrate the significant economies of scale

achievable through larger, automated facilities. As the throughput volume (cartons processed)

increases, the unit cost per carton handled decreases due to fixed cost dilution and operational

efficiencies. For example, the Stockton DC with 525K sq.ft has a unit cost of $0.42 per carton at

71% utilization, while the smaller Olive Branch DC with 425K sq.ft has a higher unit cost of

$0.43 per carton at the same utilization level.

 Scale Curve, all automated DCs
0.7

0.6

0.5
Unit Cost ($)

0.4

0.3

0.2

0.1

0
0 1 2 3 4 5 6 7 8

Figure 3 Scale Curve

Question 4: What other operations-strategy opportunities should Dollar Tree consider to

further decrease total supply-chain costs?

In addition to the distribution center capacity expansion analysis, Dollar Tree should consider the

following operations-strategy opportunities to further reduce its total supply chain costs:

i. Network Optimization - conduct a comprehensive network optimization study to

determine the optimal number, size, and location of distribution centers. This could

identify opportunities to consolidate facilities, rebalance territories, or open new strategic

locations to minimize overall transportation and facility costs.

ii. Transportation Mode Selection - evaluate alternative transportation modes like

intermodal rail for inbound shipments from ports to reduce costs compared to over-the-
 road trucking for longer hauls. For outbound, explore direct store delivery options instead

of running through DCs for high-velocity items.

iii. Inventory Management - implement inventory optimization techniques like multi-echelon

inventory planning to better balance inventory levels across the network based on

demand patterns and inventory costs. Vendor-managed inventory could also reduce

carrying costs.

iv. Postponement/Delay Differentiation - delay final packaging and configuration activities

for imported goods until a later distribution stage closer to stores to reduce inventory

holding and obsolescence costs.

v. Omnichannel Fulfillment - assess opportunities for ship-from-store, in-store pickups, and

last-mile delivery options as part of an integrated omnichannel strategy to better meet

evolving customer expectations.

vi. Collaborative Relationships - establish collaborative relationships and gain/share insights

with suppliers, carriers, and other partners to improve end-to-end supply chain visibility

and identify mutually beneficial process improvements.

By considering these operations strategies in conjunction with its distribution network design,

Dollar Tree can unlock further supply chain cost savings to maintain its competitive pricing

advantage.

Question 5: 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 analyses, I would recommend Option 2 Building the new

600K sq.ft distribution center in Hartford, CT to supplement the existing Briar Creek facility.
While the Briar Creek expansion in Option 1 provides short-term relief, utilization is projected to

rise back above 80% by 2007 based on the utilization curve. This indicates insufficient capacity

in the long run.

In contrast, Option 2 offers a better balance in utilization between the two facilities in 2007, with

Briar Creek at 70% and Hartford around 70-75%. This aligns well with the scale curve

implications - having two optimally-sized DCs at those throughput levels is likely to provide

lower overall unit costs compared to an expanded 1 million sq.ft Briar Creek operating at very

high utilization.

Furthermore, the two-node network in Option 2 offers more flexibility and scalability to handle

future growth versus being constrained by a single large facility. While the upfront capital costs

may be higher for the new Hartford DC, the enhanced economies of scale, improved utilization

balance, and strategic flexibility of Option 2 are likely to offset those costs through lower long-

term operating expenses. Therefore, considering the utilization projections, scale curve

economies, and strategic factors, I would recommend pursuing Option 2, Building the new

Hartford DC to create an optimized two-node distribution network serving the Northeast region.

Question 6: What do you recommend? (vote in your group and explain it)

a. Based on the analysis and recommendations, I would pursue Option 2, Building the new

600K sq.ft. distribution center in Hartford, CT.

b. This recommendation does not appear to conflict with the quantified benefits. The scale

and utilization curve analyses suggest that Option 2 offers better economies of scale and a

more optimal balance of capacity utilization across the two facilities in the long run.
 c. While the upfront capital investment is likely higher for the new Hartford DC in Option

2, the long-term operating costs are expected to be lower due to the economies of scale

achieved by having two right-sized distribution nodes. Additionally, the two-node

network provides more flexibility and scalability to handle future growth compared to

being constrained by a single large facility in Option 1.

Question 7: What are the cost elements and drivers? (What percent each, explain it)

Based on the information provided in the case study and Exhibit 4, the key cost elements and

drivers for Dollar Tree's logistics system are:

a. Inbound transportation (37% of total logistics costs)

 Import volume and sourcing locations (e.g., significant portion from China)

 Transportation modes used (ocean, rail, trucking)

 Fuel costs and carrier rates

 Port selection and inland transportation costs

b. DC facility costs (28% of total logistics costs)

 Number, size, and level of automation of the DCs

 Labor costs (wages, benefits)

 Facility operating expenses (utilities, maintenance)

 Capacity utilization levels (higher utilization leads to lower per-unit costs)

 Productivity improvements and operational efficiency gains

c. Outbound transportation (25% of total logistics costs)

 Number of stores served and geographic distribution

  Average distance between DCs and stores

 Trucking rates and fuel costs

 Utilization of outbound trucks (stores serviced per trip)

 Use of dedicated or common carrier fleets

d. Inventory carrying costs (10% of total logistics costs)

 Average inventory levels and inventory turns

 Cost of capital and opportunity cost

 Inventory shrinkage and obsolescence risks

 Storage and handling costs

While the case does not explicitly quantify the percentage contribution of each cost element, it

provides a breakdown showing inbound transportation as the largest component at 37%,

followed by DC facility costs at 28%, outbound transportation at 25%, and inventory carrying

costs at 10%.

The key drivers influencing these cost elements are related to factors such as network design

(number and location of DCs), transportation modes and rates, facility size and automation

levels, inventory management practices, and overall operational efficiency.

Conclusion

Dollar Tree's logistics operations play a critical role in supporting the company's distinctive $1

pricing strategy and enabling its rapid growth. Through the analysis of the distribution center

capacity expansion options, it becomes evident that economies of scale and network optimization

are crucial for minimizing total supply chain costs. The recommended approach, Option 2,

involves building a new 600K sq.ft. distribution center in Hartford, CT, to complement the
existing Briar Creek facility. This two-node network offers a balanced utilization of capacity

across the facilities, aligning with the scale curve analysis that demonstrates significant cost

savings through right-sized, automated distribution centers. Furthermore, the two-node network

provides greater flexibility and scalability to accommodate future growth, mitigating the risk of

capacity constraints that could arise from relying on a single large facility. While the upfront

capital investment for the new Hartford DC is higher, the long-term operating cost savings and

strategic advantages of Option 2 are expected to offset this initial outlay. Moving forward, Dollar

Tree should continue to evaluate opportunities for further supply chain optimization, including

network redesign, transportation mode selection, inventory management strategies, and

collaborative partnerships with suppliers and carriers. Maintaining a lean and responsive logistics

network will be critical to sustaining Dollar Tree's competitive advantage and delivering

exceptional value to cost-conscious consumers through its $1 pricing model.