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 “equivalent” cases, distributed as follows (in million cases) according to five sales regions:

Atlanta Los Angeles Dallas Chicago New York Total
0.5 0.4 0.4 1.1 0.8 3.2

One-shift production capacity in each of the three plants was as follows (in million cases):

Home City Branch No. 1 Branch No. 2 Total
1.2 0.7 1.5 3.5

Estimated freight costs ($/case) from each of the factories to each distribution center are as follows:

Home City Branch No. 1 Branch No. 2
Atlanta 0.95 0.35 0.95
Los Angeles 1.05 1.80 1.80
Dallas 0.80 1.40 1.15
Chicago 0.30 0.80 0.80
New York 0.95 0.30 0.85

Not all shipments are routed through regional warehouses, but on average the freight cost on direct shipments to outlets was quite close to the cost which would have been incurred if the shipment had been routed through the servicing warehouse.

Lockbourne followed a philosophy of decentralized management. Top executives favored this approach for a number of reasons. First, by enriching the experience of subordinate managers, it provided better training for ultimate top management responsibility. Second, 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. Under the decentralized