DOLLAR TREE CASE STUDY

Prepared For: Arnold Maltz

Prepared By: Karson Diakiw, Jake Nelson, and Varun Sharda
Date: April 16, 2008
INTRODUCTION

Dollar Tree, Inc., formerly Dollar Tree Stores, Inc., has been in a business for more than

50 years. This company is an operator of discount variety stores offering products such as house

wares, seasonal decor, candy and food, toys, health and beauty care, and many other consumer

items. And everything at dollar tree is priced at $ 1.

Growth and expansion is one of the most important aspects of a firm to remain and make its

mark in this competitive world. These are the key decisions for a firm to make because they can

help company in reducing their cost and simultaneously provide better services to its clientele.

Dollar Tree has shown a tremendous growth in past 50 years. To sustain this growth Dollar Tree

has not only had to expand their store fronts but also improve their internal operations such as

the distribution centers. Sometimes it’s a very tough decision for a company to decide whether to

expand its current unit or build an entire new unit. Dollar Tree, Inc., faced a similar problem in

2004. In order to better serve their customers, Dollar Tree must expand its current unit or build

an entire new distribution center. In order to solve this problem they had two options:

1. Expand the current Briar Creek distribution center by another 400,000-square foot.

2. Built a new distribution center with 600,000 square foot in Hartford, Connecticut.

Both of these options will serve the same purpose; i.e. they will serve the same territory

which is currently assigned to Briar Creek, currently Briar Creek DC has size of 603,000 square

feet. But the real problem for the company is to determine which option will be beneficial in a

short and long run. The objective of this case is to find out if the appropriate decision would be

to go with option 1 or with option 2.

The report is broken down into three main sections followed by our conclusion. The three main

sections are as follows.

o Outbound Transportation Costs

o DC Operations Costs

O Land, labor, and construction considerations

OUTBOUND TRANSPORTATION COSTS

Calculating transportation costs is an important factor in generating a logical solution for

:the “expand or build” decision. For transportation costs we were given

 Distance to the store from the expanded DC

 Distance to the store from the new Hartford DC
 Average deliveries to each store per year for both expanded and new DCs
 The average stores serviced per trip for both DCs
 The total number of stores serviced in a given year per DC
 The distance in miles to the stores from each DC
 The average distance in miles between each store
 The average trucking and delivery cost per mile

Given this information, we had to perform a cost analysis do help determine which project would

be the least expensive option. In order to perform this calculation, we needed to find:

 The total miles covered for each given year

 Cost per year (miles covered per year * cost per mile)

First, we looked at the outbound trucking cost for the 2005 Briar Creek Expansion

project. The trip to the first store from the distribution center was, on average, 189 miles. Once
you arrived at the first store, the distance between each store was on average 18 miles. You

serviced around 3.6 stores per trip. Since you go directly to the first store from the distribution

center, the total distance before you drive back to the DC is 46.8 miles (18*2.6). Once you finish

the deliveries, it is 189 miles back to the distribution center leaving you with 424.8 miles round

trip (189 + 46.8 + 189). Since each store is delivered to 65 times per year, so you multiply the

424.8 miles by 65, leaving you with 27,612 miles per store. However, since you service 3.6

stores per trip, instead of multiplying the miles per store times the amount of stores, you times

the miles per store by the amount of stores (536) divided by the amount of stores serviced per

trip (3.6). This leaves you with a final calculation of 4,111,120 miles per year (27,612 *536/3.6);

the only step left is to multiply the total miles driven per year by the cost per mile ($1.66) to

leave you with a total outbound transportation cost of $6,824,459/ year.

The costs for the 2006 and 2007 Briar Creek Expansion were calculated using the same

equation. The costs for the 2005, 2006, and 2007 new Hartford Distribution Center were also

calculated using the same equation, the only difference residing in fact that two outbound

transportation costs were calculated each year versus one (one for the old DC and one for the

new DC).

Table 1 below breaks down the outbound transportation cost of each project per year and

the total cost expanded over three years.

TABLE 1: OUTBOUND TRANSPORTATION COSTS

Briar Creek Expansion New Hartford Distribution Center

  Old DC New DC

2005 $6,824,459.20 $3,267,748.59 $1,680,773.71

2006 $8,086,978.06 $3,418,237.00 $2,171,464.61

 2007 $8,968,373.35 $3,525,728.74 $2,523,834.95

Sub-
Total $23,879,810.61 $10,211,714.33 $6,376,073.27

Total $23,879,810.61   $16,587,787.60

DC OPERATIONS

To conclude which option resulted in the lowest DC operating costs over the span of

three years, the fixed and variable costs of the DC must be found. Since both distribution centers

– Briar Creek and Hartford – are in the same geographical region, the variable costs per carton

handled were considered to be the same. The fixed costs for each option were found by using

fixed costs per carton handled from facilities of the same size.

The fixed costs for each option are hard to determine based on the information given. So

we took the fixed cost from facilities of equivalent size and used that facility’s fixed cost amount

to calculate the total fixed costs of the similar facility. To find the Briar Creek Expansion fixed

costs, we looked at the Joliet DC’s fixed cost per carton handled of $0.43. We use Joliet because

it is close in square footage to the expanded Briar Creek option. We are also assuming that each

DC can obtain roughly the same fixed costs if they are the same size. Since the Joliet DC is still

another 197,000 square feet larger than the expanded Briar Creek DC would be, we need to

adjust the total fixed costs from Joliet to fit the total square footage of option 1. After multiplying

the fixed cost per square foot at the Joliet DC with the total number of square feet at the

expanded Briar Creek DC, we find the total fixed costs for the Briar Creek DC per year. Since

we are concerned with costs after 3 years, we multiply this number by 3. We found that

distributions centers of the same size have roughly the same total fixed costs after multiplying

the fixed costs per carton handled by the number of cartons processed. To find the fixed costs for
option 2, we have to add the fixed costs of the old (Briar Creek) distribution center and the new

(Hartford) DC. The fixed costs for each DC will be the same because we are assuming that since

they are both in the same geographical region, both are automated, and both are the same size

that they will have the same fixed costs. We calculate this by multiplying the fixed cost per

carton handled at Briar Creek with the total cartons processed. We multiply this number by 3

years, and repeat the same numbers for the Hartford DC.

The variable costs to be incurred for each option are the same for two reasons. First, the

total cartons processed in each option are the same. Option 1 requires 23,400,462 cartons

processed in just the Briar Creek distribution center, while Option 2 requires the same amount

but it is divided between Briar Creek and Hartford. Second, the variable costs per carton handled

are the same in both distribution centers. As stated earlier, we assume both (because we lack cost

information about Hartford’s DC) operate under the same costs per carton handled because they

are both in the same geographical region. This method results in variable costs over the three

years to equal $15,620,844.77 for each option. In total, Option 1 DC operating costs are

$35,928,625.77, and option 2 DC operating costs are $39,978,021.57. The operations costs are

also displayed in more detail below in Table 2.

Based upon the calculations analyzed above, Option 1 of expanding the Briar Creek

distribution center results in the lowest DC operating costs. Other than the $8 million saved over

the three years, the option 1 also has better inventory turns and utilization than option 2. Even

though Mr. White likes to expand when utilization reaches 75%, the cost per unit and inventory

turns will be better than in option 2, which stays well below his 75% max.
TABLE 2: OPERATIONS COSTS
Option 1 - Expand Briar Creek DC: Operation Costs      
   
Fixed costs
Compare to Joilet DC
$0.43 per square foot
Find fixed costs per square
foot
$6,915,809.11 / 1,200,000 square ft
Readjust for Expanded Size
$5.7631 per square ft
$5,780,463.78
Variable costs
Variable cost/carton
$0.19
$0.19
$0.19
Total Variable costs
Total costs of DC Operation
x 16,083,277
x 1,003,000 square ft
x 3 years
Total Cartons
Handled
x 23,400,462
x 27,612,545
x 31,202,176
= $15,620,884.77
= $15,620,884.77
= $6,915,809.11  
$5.7631 per square
= foot  
= $5,780,463.78  
= $17,341,391.34  
Year
= $4,446,087.78 2005
= $5,246,383.55 2006
= $5,928,413.44 2007
 
$32,962,276.1
+ $17,341,391.34 = 1

Option 2 - Build New Hartford DC        

Total Option 2 Fixed costs = Old DC Fixed costs + New DC Fixed costs
Fixed costs
$0.20
Old DC Fixed costs
New DC Fixed costs
Total Fixed costs
Variable costs
Same as in Option 1
Total Cost of Operating
Both
 
 
x 20,348,228 = $4,069,645.60  
$12,208,936.8
= $4,069,645.60 x 3 years = 0
$12,208,936.8
= $4,069,645.60 x 3 years = 0
$24,417,873.6
= $12,208,936.80 + $12,208,936.80 = 0
 
= $15,620,844.77  
D
C =   $40,038,718.37    

Summary    
Option 1   $32,962,276.11
 Option 2   $40,038,718.37
LAND AND CONSTRUCTION COST

Land and construction cost was one of the main factors in choosing between the two

options. This costs includes both the costs of buying new land and the construction costs of

building a new distribution. Dollar Tree already owns the distribution center at Briar Creek, PA,

which was purchased sometime back in 2000. Also, the Briar Creek Distribution center was built

to be expanded. This is a significant advantage for the company and should be widely considered

in making their decision.( Annual Report 2000). If they want to build a whole new unit in

Hartford, CT they will need to incur many different costs related to construction and purchasing

a land. Furthermore, for choosing a proper site, they will need to hire a real estate agent,

although this amount would not be that big in comparison to construction and cost of land but it

carries a substantial amount of time and value.

Also, the commercial real estate land valuations will definitely be higher in a densely

populated major city in comparison to area like Briar Creek. Every state has some different rules

and regulations associated with buying and purchasing land. Expanding their current DC would

not be a time consuming task for Dollar Tree because they already understand the rules and

regulations of Briar Creek. Overall, the difference in building a new unit in Connecticut would

be much more expensive than expanding its current unit.

LABOR & GENERAL AND ADMINISTRATIVE COSTS

The size difference of the distribution center creates a disproportionate number of

employees at needed for each facility. The second option Dollar Tree has is highly comparable

to other DC’s at Savannah, GA, Briar Creek, PA, and Marietta, OK because it is relatively

similar in size. Therefore, we can compare the work force which the firm will need at the new
Hartford DC. The newest of these is the Marietta center. According to a Business Wire article,

that distribution center created 125 jobs. (Business Wire, 2002).

Option 2 to expand its Briar Creek DC by 400,000 square feet will turn its current facility

to an area of one million square feet. The nearest comparison that can be drawn is from the other

Distribution Center which in Joliet, Illinois. The Illinois distribution center is 1.2 million square

feet. According to a news release the Illinois distribution center has created 200 jobs. (IDCEO,

2003).

By comparing these employment statistics, adding 600,000 square feet will require 75

more workers, while each distribution center has 50 jobs that are not bound by capacity or area

constraint, which means the jobs must be G&A. Therefore, if Dollar Tree wants to expand its

current unit it will need to hire only 50 workers whereas if it builds and entire new Distribution

Center it will need to employ all new 125 jobs.

The cost for recruiting and training would also play a key role in determining overall

labor costs. Furthermore, the expanded distribution center will not need as much of General &

Administrative staff as compared to the Hartford DC. Overall, the labor costs would be more

expensive if Dollar Tree builds a new DC.

CONCLUSION

Based on all the information provided above, our recommendation is to expand the

current distribution center by 400,000 sq. ft. NOT to build a new distribution center in Hartford.

The only real clear advantage that Hartford had was a large reduction in transportation costs.

However, the advantage within the transportation costs was not enough to offset the other

qualitative and quantitative costs associated with building a new distribution center. Building in a
major city like Hartford is going to be significantly more than building on land in a small rural

city like Briar Creek (which Dollar Tree already owns). Besides just the cost of land, insurance,

property taxes, and city taxes will also be significantly higher in Hartford than Briar Creek. In

conclusion, the savings in transportation costs is not nearly enough to make the additional

operations costs worth building a new distribution center, therefore EXPAND.

REFERENCE PAGE

Business Wire. (2002). Dollar Tree Stores, Inc. Selects Marietta, OK For Distribution Center.

Retrieved April 16, 2008 from LexisNexis Academic Database.

Illinois Department of Commerce and Economic Opportunity. (2003). Dollar Tree Stores To Open Joliet
Distribution Facility. Retrieved April 16, 2008 from
http://www.illinoisbiz.biz/NR/rdonlyres/BB231CF6-C073-43BD-B01A-
6D77FEDECFAB/0/04032003.pdf.