Case 2: Medical Supply Chain Case 2: Medical Supply Chain

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Brief overview: This case requires the candidate to perform evaluations and recommendations about two supply chain distribution plans. This will involve an understanding of supply chain costs and intense quantitative analysis.

The Problem and Background

Scott Yarborough, the CEO of Chicago Scientific (a producer of non-invasive medical devices for cardiology, gynecology, oncology, etc.) wants you to establish the distribution network for entry into the European market based on the promising sales projections from marketing.

Chicago Scientific currently has manufacturing centers in Lake Forest, IL and Raleigh, NC and serves the U.S. market. The plant in Raleigh has ample capacity for the projected sales in Europe.

Scott has asked you to advise him on establishing a supply chain structure for the European Market. You have to look at the most appropriate distribution method for the European sales.

Note to interviewer: There are 3 questions in this case.

Your task – 1

What are the different factors you would consider in establishing a supply chain structure?

Expected Response

  • Transportation costs (both inbound and outbound)
  • Warehousing and operating costs
  • Inventory costs
  • Service levels for customers

Continue with Problem and Background

Scott is considering two options.

Option 1

The first option is to have a one-hub distribution center (DC) in Berlin, Germany and 20 satellite warehouses in relevant European cities served that directly serve the customers.

Option 2

The second option is to have four DCs in Berlin, Germany; Paris, France; Gothenburg, Sweden; and Milan, Italy with no satellite warehouses. The Berlin DC will serve the demand in Polish cities and the Paris DC will serve the demand in English cities.

Preferred Service Levels

In the U.S., Chicago Scientific has next day delivery to its customers and wants to establish similar criteria in Europe, if feasible. Scott indicated that service levels and cost are the key criteria in determining how to set up the European Supply Chain.

Your task – 2

Recommend which option Scott should go with.

Note to interviewer: The data below is given to the candidate as requested. Instruct the candidate to focus the analysis initially on Transportation costs, Warehousing costs and Service Levels. The inventory costs can be provided directly if there is not enough time left.

Transportation Cost

All inbound transportation is by air and would take an average of three days from NC with same cost to all European cities. The distribution between countries would be through ground transportation. Transportation cost are given in Table 1.

Table 1 - 2006 European Sale Estimates and transportation cost


Package Volumes (000 pkg)

2003 Sale Projections

(€ In MM)

Avg. Pan European transportation cost from Berlin DC (€/Pkg) for the 1 DC Model

Cost of shipping from satellite to customer

(€/Pkg) for the 1 DC Model

Avg. cost fro Distribution center to customer in option 2



 20 pkg






 15 pkg






 5 pkg

 € 5





 10 pkg






 4 pkg

 € 4





 12 pkg






DC and Satellite Warehouse Cost

DC and satellite warehouse operating costs are on average €30 per square meter including lease, utilities, labor and depreciation. The capital cost for a DC is, on average, €60 per square meter including building, equipment and initial shipment of inventory (not safety stock investment). Chicago Scientific wants to own the DCs and lease public facilities for the satellite warehouses. You can ignore the markup for the public warehouse services. The minimum size for a distribution center is 1,000 m2 ,and space requirements are calculated at 0.1 m2 per unit of package.

Service levels

Service levels are dependent upon the % of demand that could be delivered the next day, the 2nd day, the 3rd day, etc. The service level for option one is 100% next day delivery. With option two, however, 50% is next day, 30% is 2nd day and 20% is third day delivery

Inventory details (only if time permits, otherwise provide cost directly)

For option 1, initial inventory levels will be set at 100 days in the Berlin DC and 30 days in each of the satellite warehouses to meet projected customer demand.

For option 2, initial inventory levels will be set at 150 days in each of the DCs to meet demand for the countries and cities served.

Expected Analysis

Refer to the detailed analysis at the end of this case:

  • The distribution network in option one is more expensive than in option two when just considering transportation and warehousing costs. Higher service levels could be achieved with option one compared to option two. Consequently, the low service level and similar cost base make option two less favorable. Another consideration is that option two has a higher capital investment requirement due to more days of inventory. Also, consider that the inventory holding costs will be less with option 1.

Hence option 1 is the recommended option.

Other points that the candidate should draw upon:

  • Candidates should present the tradeoff between distribution costs and customer service levels to evaluate the performance of the supply chain


  Service Levels

  • Inventory holding costs
  • Transportation costs (network optimization, air vs. ground)
  • Warehousing costs (own vs. lease, high inventory levels, shrinkage)
  • Ordering costs
  • Shortage penalties and lost demand
  • Fill-rate percentages (% of demand satisfied on time)
  • Cycle service level (% of time demand satisfied completely)
  • Response time for customer demands
  • Recognize that in this case the benefit of a high service level is much more critical than inventory cost due to the high margins in the medical industry
  • Since the total distribution costs are directly correlated with the average aggregate inventory levels on hand, candidates should also comment about reducing inventory levels:

–    Smaller batch sizes and order quantities

–    Risk pooling and postponement

–    Package to order

–    Product mix management

–    Implementation costs and risks (exp. obsolescence)

Your task – 3

What additional considerations should you factor in while establishing a distribution network?

Expected Response

  • Additional considerations for the distribution network:

–   Top-line impacts of two options and the amount of capital tied up

–   A hybrid option for reaching optimum cost levels

–   Delivery frequency and inventory levels

–   Reducing safety stock levels

–   Flexibility against future demand fluctuations

–   Build a qualitative weight scale between service levels and costs

  • Candidates would also consider the aspects of distribution at an international level (tariffs, value-added tax) as well as the expiration date pressures on inventory, and future growth outside EU countries (i.e., options with scalability potential).