THE LOCKBOURNE COMPANY

The company is a leading manufacturer and distributor of a line of packaged goods which it sells
nationally under the Burn-Loc Products trade name. The company operates three factories from which it
ships to regional warehouses or directly to large outlets. Last year, demand for Burn-Loc Products was
3.2 million e!ui"alent# cases, distributed as follows $in million cases% according to fi"e sales regions&
Atlanta Los Angeles Dallas Chicago New York Total
'.( '.) '.) *.* '.+ 3.2
,ne-shift production capacity in each of the three plants was as follows $in million cases%&
Hoe Cit! Branch No" # Branch No" $ Total
*.2 '.- *.( 3.)
.stimated freight costs $/0case% from each of the factories to each distribution center are as follows&
Hoe Cit! Branch No" # Branch No" $
Atlanta '.1( '.3( '.1'
Los Angeles *.'( *.+' *.+'
Dallas '.+' *.)' *.2'
Chicago '.3' '.+' '.-'
New York *.'' '.3' '.+(
3ot all shipments are routed through regional warehouses, but on a"erage the freight cost on direct
shipments to outlets was !uite close to the cost which would ha"e been incurred if the shipment had been
routed through the ser"icing warehouse.
Lockbourne followed a philosophy of decentrali4ed management. Top e5ecuti"es fa"ored this approach
for a number of reasons. 6irst, by enriching the e5perience of subordinate managers, it pro"ided better
training for ultimate top management responsibility. 7econd, it insured that operating decisions were
made by those persons most familiar with the detailed circumstances which would determine the success
or failure of the decisions. 8nder the decentrali4ed approach, subordinate managers were held
responsible for the profitability of operations under their control.
9onsistent with the policy of decentrali4ation, each of the fi"e regional warehouses was under the direct
super"ision of a regional sales manager. The warehouses were not assigned to a particular plant for
ser"icing, since demand shifts made a certain amount of fle5ibility necessary. :ather, the regional sales
manager decided upon which plant to place an order. The price paid by the warehouse was /2.2(0case
6,B the plant. This price was set to reco"er costs plus a reasonable return on in"estment for the
manufacturing di"ision. 7ince the regional warehouse was re!uired to absorb the freight costs, the
regional sales managers are e5pected to place their orders so as to minimi4e their own freight costs and
hence those of the company as a whole.
,"er a period of time, this procedure has led to increasing amounts of organi4ational friction, and early
this year some Lockbourne officials were beginning to !uestion whether the procedure was e"en
achie"ing the ob;ecti"e of minimi4ing freight costs. Because Branch 3o. 2 was not the closest plant to
any of the regional warehouses, it was ne"er deliberately selected as source by a regional sales
manager. :ather, the managers would initially order from the <ome 9ity or Branch 3o. *, whiche"er was
closer. 7ince those plants had inade!uate capacity to meet all sales demands, it was then necessary for
the plant managers to re;ect some orders. 3o consistent procedure was followed in determining which
order would be accepted, but it was largely a matter of first-come-first-ser"ed. The regional sales
managers whose orders were re;ected were then usually forced to take them to Branch 3o. 2, typically at
a considerable increase in freight cost. This aspect of the situation resulted in much grumbling by the
regional sales managers.
=oreo"er, since the orders placed with Branch 3o. 2 were not placed there in a conscious effort to
minimi4e freight costs, there appeared to be a strong possibility that the resulting o"er-all shipping
program was not optimal. 6or this reason, some e5ecuti"es felt that the practice of lea"ing shipping
decisions to the decentrali4ed ;udgments of regional sales managers should be discontinued. They
proposed instead that all orders be routed through a central office which could then determine an optimal
shipping program from an o"erall company point of "iew. The actual !uantities $in million cases% shipped
o"er each possible route last year are as follows with total shipping costs that year reaching /2,)*','''&
Hoe Cit! Branch No" # Branch No" $ Total
Atlanta '.3 '.2 %"&
Los Angeles '.* '.3 %"'
Dallas '.2 '.2 %"'
Chicago '.1 '.2 #"#
New York '.2 '.2 %"(
Total #"$ %") #"* *"$
,ther e5ecuti"es were concerned about the effect such a proposal would ha"e on the general
effecti"eness of decentrali4ed management. They also obser"ed that one result of the proposal would be
to saddle the regional sales managers with freight costs o"er which they could e5ercise no control.