Case Study Originally Provided for by the University of the Philippines Circle of Industrial

Engineering Majors in its 8

th
IE Congress

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The timing of entry is indeed perfect. The economy is growing, the people have the money to spend,
and the market is very happy to find an alternative brand that is both reliable and affordable. These
provide Atlantis Motors, the maker and distributor of Bagwis Motorbikes, a very solid start.

Late 2010 when Bagwis, a brand that caters to the lower middle class and below, was introduced
in the country. Bagwis was an instant success, thanks to very excellent reviews of initial buyers and
the free word-of-mouth promotion of its highly-satisfied customers. Though the brand lags in terms
of high-end bike specifications compared to its top competitors, its focus on just the basic features
makes the brand more affordable. It seems that this strategy perfectly matches the need of its
chosen niche.

By early-2012, there were around 12 Atlantis Motors outlets in the capital and its surrounding
cities, and six stores were already active in a region south of the capital, and further expansion in
the south was being planned as well. Atlantis was still far from being the countrys number one
motorbicycle company, but it surely held a sizeable portion of the market.

With a very strong presence in the south (of the capital), the company looks now to the north,
where it is yet to put up a store. The initial southern focus is due to the strategic proximity of the
south to the capital. The capital region, the location of the companys central warehouse, can
readily serve the outlets put up in the south. This is not true about the north. The more urbanized
areas in the north were separated from the capital by vast rural mountain ranges and farmlands.
However, the growth in the northern provinces, especially those in the coastal areas, cannot be
simply ignored. Economic improvement matches that of its southern counterparts. The only barrier
to entry is the lack of a warehouse or hub that can service the outlets in these areas. As mentioned,
the warehouse located in the capital is too far from this region to effectively and actively provide
satisfactory support while controlling costs.

Of course, the idea of distributing the product in the North is always part of any strategic plans by
the company. Though the south was given first priority, the company is now keen in realizing its
plans for the northern towns. Growth lies in the north. The time is now, they believe, most especially
that the south is sufficiently covered and while good economic sentiments prevail. They dont want
to waste this opportunity.

At present (mid-2013), Atlantis Motors has 16 outlets in the capital region, and 22 more south of
the capital. Despite its overall success, Atlantis has its own fair share of losses as it was forced to
close 5 outlets in the past. The main reason that spells failure is not enough revenue (hence,
income) to cover rental, utilities, and personnel expenses. Sometimes, an outlet is too close to an
existing Atlantis outlet in another town, affecting sales. With these experiences in mind, the
company wants to plan where to locate its outlets carefully.

Atlantis expects to open 1 to 3 outlets per quarter until it meets its target of around 15 outlets in
the North within in just 1.5 years. Possible town choices should generate enough revenues to cover
costs. Thus, locations must be screened properly to avoid repeating its earlier mistakes in the
south. Revenue must be predicted accurately.

Atlantis Motors keeps relevant records of the town/cities. They want to know which among the
available information can be used to reliably forecast revenue. The information includes median
family income, population, town category, and presence of a competitor. The information for all
towns with existing and previous outlets in the south is summarized in the accompanying
spreadsheet file.

Given the low-end market of the Bagwis brand, only around 10,000 pesos per unit sold is the gross
profit. Note that this profit should further exclude cost of delivery from the warehouse to the outlet.
Personnel cost (for outlet staff and manager) per outlet is pegged at around 60,000 pesos monthly
(minimal variation exists among towns), and rent/building depreciation is on the average 18,000
pesos monthly. Utilities, taxes, and miscellaneous expenses amount to an average 8,000 pesos per
outlet monthly.

The north is practically isolated from the capital. If Atlantis decides to penetrate the north, it must
establish its own warehouse in the region. A warehouse in the region will (a) ensure reliable and
delivery of the product even during floods and storms experienced by the region during the rainy
season, (b) reduce pressure to the outlets to maintain high inventory especially that Bagwis
Motorcycles come in many varieties if a warehouse is sufficiently accessible at all times, (c) reduce
transportation cost if individual outlets are serviced by the central warehouse in the capital, and (d)
provide timely service to items under warranty that need to be delivered to a central facility for
after-sales services.

The location of the central warehouse is affected primarily by the transportation costs to and from
the location of the outlets and rental costs. Trip rates provided by a third-party logistics company
who will act as shipper from the warehouse to the different outlets are presented. Atlantis decides
to outsource shipping for the first couple of years since is not yet servicing the region and is not
familiar with the effects of the terrain/topography of the region to transportation cost. A good
estimate of the number of deliveries/trips made from the warehouse to the outlet monthly is the
0.25 multiplied by the monthly sales (in units). A minimum of 4 deliveries per month, however, is
set. The rationale behind the relationship of sales and number of deliveries considers the fact that
a number of customers ask for color variants not currently available in the outlet, requiring delivery.
Only towns categorized as an A town/city are considered as possible warehouse location.
Meanwhile, the delivery from the assembly plant to the northern warehouse should be done once
a week (four times monthly) regardless of sales. Costs are likewise shown in the spreadsheet. It is
imperative that the warehouse should likewise act as one of the 15 outlets.

Task:

1. Atlantis Motors is now pursuing its strategy in the North. Using CLRM, forecast the sales
generated in the different potential towns in the North to determine the best location of the 15
planned outlets. Assume that existing competitors in the region will not change their strategy as a
result of the action of the company. Ensure that you test your OLS model for violations and to
rectify/justify the presence of such violations.

2. Based on the figures provided and the recommendations made as to where to locate the first
15 outlets only, suggest two good locations of the Central Warehouse. Compare their
corresponding cost, and identify where to finally locate the Central Warehouse. Enumerate the
factors considered in the decision, on top of the cost estimates.