CASE STUDY

Managing a Merger at Lightning Networks

After receiving regulatory approval from the European Union, Lightning Networks, a major wireless
carrier, and SatTV, the largest satellite TV provider in Europe, completed their 50 billion euro merger in
2016. After initial skepticism when the deal was first announced, analysts had warmed to the idea of
synergies in the merger. Lightning expected to benefit from the large customer base of SatTV and the
company announced that it expected significant annual cost savings within three years of the merger.
Simone Durand, senior VPO of supply chain at Lightning, was charged with identifying some cost
reduction opportunities. She decided to focus her initial attention on the distribution networks the two
companies used to fulfill demand for installation and repair products. The merger offered an
opportunity to combine the two distribution networks.

The Current Distribution Network

TABLE 5-16 Annual Demand in Europe for Lightning Networks (wireless) and SatTV (satellite)

Zone Wireless Demand Satellite Demand

Southwest 100,000 100,000

Middle North 220,000 100,000

Middle South 120,000 120,000

Northeast 150,000 110,000

Southeast 90,000 100,000

Any new installation or repair by Lightning or SatTV required a set of products for the technician to
complete the job. Rather than carrying these products with technicians, both companies had decided to
centralize product inventories in a few locations. Annual product demand for the two companies across
six regions in Europe was as shown in Table 5-16.
TABLE 5-17 Warehouse Specialization, Capacities, and Fixed Costs

Location Specialization Capacity Fixed Cost (euro/year)

Rotterdam Wireless 420,000 650,000

Krakow Wireless 310,000 520,000

Toulouse Satellite 280,000 475,000

Munich Satellite 290,000 488,000

Budapest Satellite 250,000 425,000

TABLE 5-18 Variable Distribution Cost per Unit in Euro

Location Northwest Southwest Middle Middle Northeast Southeast

Rotterdam 1.75 3.00 1.50 3.00 2.50 3.50

Krakow 3.25 4.00 2.50 3.00 2.00 2.50

Toulouse 2.00 2.00 2.75 2.50 3.75 4.00

Munich 2.25 3.00 2.25 2.50 2.75 3.00

Budapest 3.50 3.75 2.50 2.50 2.50 2.00

Lightning had served its product needs from three warehouses located in Madrid, Spain; Rotterdam,
Netherlands; and Krakow, Poland. SatTV had served its products needs from three warehouses located
in Toulouse, France; Munich, Germany; and Budapest, Hungary. Each facility was specialized to handle
either wireless or satellite products because of the historical focus of the company it belonged to. The
specialization, capacity, and annual fixed cost for each facility were as shown in Table 5-17. The capacity
of each warehouse is given in terms of how much annual demand it can handle. From Table 5-17,
observe that the Madrid warehouse can serve demand of up to 370,000 units. The variable cost of
shipping one unit (either wireless or satellite) from each warehouse location to each market is shown in
Table 5-18.
The Network Options

Simone had a short term and a long term decision to make. In the short term, she had to decide
whether to make all the warehouses flexible or not. Making all warehouses flexible required an
investment equivalent to an additional annual cost of 200,000 euro. Flexible warehouses, however,
could be used to serve demand for both wireless and satellite products.

In the longer term, Simone had to decide whether to restructure the distribution network. She could
choose to close some warehouses, leave others open as they were, or double the capacity of some
warehouses. Doubling the capacity of a warehouse would increase its annual fixed cost by 80 percent.
Thus, if the capacity of the Madrid warehouse was doubled, its annual fixed cost would be 900,000 euro.

Closing a warehouse would also incur some cost, thus reducing the annual fixed cost that would be
saved. Simone’s team estimated that closing a warehouse would save 80 percent of the annual fixed
cost. Thus, closing the Madrid warehouse would still result in an annual cost of 100,000 euro because
only 80 percent of the fixed cost is saved.

Study Questions

1. What is the annual cost if Lightning uses the current network (with warehouses specialized as in Table
5-17) optionally to meet European demand?

2. Should Simone make all warehouses flexible given the additional cost of 200,000 euro per year?

3. What supply chain network configuration do you recommend for the long term if demand is as in
Table 5-16? Should any warehouses be closed? Should any warehouses see their capacity doubled?

4. What supply chain network configuration do you recommend for the long term if the Northeast and
Southeast demand is expected to increase by 30 percent while all other demands remain as in Table 5-
16? Should any warehouses be closed? Should any warehouses see their capacity doubled?