Brittany FrownfelterBMGT372

Case Study #2Dollar Tree Logistics

Company Overview

In 1986, Dollar Tree (then called Only $1.00) opened as an extension of a successful toy store,

K&K Toys. During that year, Macon Brock Jr., H. Ray Compton, and Douglas Perry opened five

additional stores. Dollar Tree, Inc. progressed to going public in 1995, earning a place in Fortune

500, and crossing the $4 billion threshold in 2010. Dollar Tree, Inc. now operates over 4,000

stores throughout the United States and Canada.

Unlike its main competitors, Dollar General and Family Dollar, Dollar Tree keeps all of its

merchandise priced at or below one dollar. The merchandise found in the stores includes

consumable products, variety items, and seasonal goods. These categories include such items as

candy, food, health and beauty products, toys, gifts, party goods, and house ware items. In order

to offer more merchandise to customers, Dollar Tree stores continue to expand. The stores began

primarily in indoor malls at a size between 1,500 and 2,500 sq. ft. However, Dollar Tree stores as

large as 15,000 sq. ft. can now be found in strip malls.

In order to maintain a profit when the merchandise is sold for only a dollar, Dollar Tree, Inc.

relies heavily on a high inventory turnover rate. Chief Logistics Officer, Steve White, states this

is possible through strategically located, large scale, efficient distribution centers. Dollar Tree’s

first distribution center opened in 1997 in Chesapeake, VA. The company grew to operate nine

distribution centers throughout the country by 2004. In order to keep costs under control, there is

an emphasis on scale, utilization, and continuous operational improvement within each

distribution center. When a distribution center approaches 75% utilization, White and the

logistics team begin considering adding a new distribution center.

Challenge

The distribution center in Briar Creek, PA stores and ships inventory to Dollar Tree stores across

the northeast. This distribution center has reached a utilization of 92% with a peak utilization of

124%. This over-utilization forced management to rent an expensive, off-site, short term space in

2004 to handle the peak flow. Therefore, Steve White and Dollar Tree’s logistics team

considered the following two options:

1. Expand the current Briar Creek, PA distribution center by 400,000 sq. ft. to increase

the facility by two-thirds.

2. Build a new distribution center with 600,000 sq. ft. in Hartford, CT. The two facilities

would serve the territory currently assigned to the Briar Creek, PA distribution center.

Solution

Dollar Tree, Inc. should expand its current Briar Creek, PA distribution center by 400,000 sq. ft.

to increase the facility by two-thirds. As stated previously, Dollar Tree, Inc. relies heavily on a

high inventory turnover rate. Expanding the current distribution center will produce a turnover

rate of 14. Meanwhile, building a new distribution center in Hartford, CT will produce a lower

turnover rate of 13. In addition, building a new distribution center will incur start-up and labor

costs. Rather than simply expanding an already existing distribution center, a new distribution

center will need time and money invested into searching and purchasing new land and also the

construction costs involved in building a new distribution center. A new distribution center of

600,000 sq. ft. would require more employees overall than an expansion of 400,000 sq. ft. Both

recruiting and training costs are necessary for hiring new employees. Also, a completely new

management team would be needed for the new distribution center. Overall, the labor costs

associated with building a new distribution center are greater overall than expanding an already

existing distribution center. Considering Steve White focuses on a three year time frame when

planning a new capacity, the additional costs associated with building a new distribution center

are unnecessary. Therefore, the expansion of the current Briar Creek, PA distribution center

would be a more cost efficient decision.