Executive Summary
This report focuses on the logistics and supply chain of a prime US pharmaceutical group, Westminster, which owns three companies, manufacturing and distributing differentiated products autonomously. It talks about the proposed changes in their supply chain systems, which are, creation of a consolidated warehousing system, having mixed shipments to save on costs, incorporate IT to maintain its inventory using ERP software, and have an integrated supply chain management system.
It talks about which processes within the supply chain should be centralized, and which should be de-centralized so that an efficient system is maintained.
The report concludes that the strategy of having a consolidated warehouse would work best for the company, and they should follow it, keeping the warehouse in a location which is accessible by all its manufacturing plants easily.
Table of Contents
Introduction 2
Impact of the three new alternatives on transfer and customer freight costs 3
Impact of warehouse consolidation on inventory carrying costs, customer service levels, and order fill rate 4
Effect of Third Party or private warehousing facilities on warehousing costs. Its effect on handling, storage, and fixed facility costs 5
Effect of shipping mixed shipments from consolidated distribution centres on individual company cost and performance 6
The Term Paper on Supply Chain Management 12
Supply chain management Supply chain management (SCM) is the process of organizing, operating, and controlling supply chains. The concept of supply chain management began in the early sixties; however, it has changed greatly since that time. The first stage in the development of supply chain management was called physical distribution management. (Handfield 47) This process integrated the ...
Eight supply chain processes in terms of customer classification and degree of centralization/decentralization. 7
Brief description of the logistical system design recommended for Westminster’s integrated consumer products. 8
Conclusion 9
References 10
Introduction
“Supply chain is defined as a set of three or more companies directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer.” (Mentzer, 2001)
Westminster Company is one of the largest manufacturers of consumer health products, based in US. It has three wholly-owned subsidiaries, manufacturing grocery products, Drugs, and Mass merchandise. Intense competition in the market, and concerns of having an effective supply chain, compelled it to evaluate its supply chain and logistics. The main focus of its research was the key clients of the three companies, who contributed majorly to the annual turnovers. The research gave them a good overview of their customers’ requirements, and their own company’s operations.
Due to the geographical varsity of its manufacturing plants and warehouses, it posed a critical question, how to implement a good strategy enabling them to reduce costs – transportation, storage and handling, and fixed costs. The report highlights some of these issues, like having a consolidated warehouse, and shipping mixed consignments from a consolidated distribution centre, and provides a recommended action plan.
Logistics is an important function of the business. Without a proper logistics system, all the manufacturing, marketing and other activities would fail. If the products are not in the shelves of the stores, they are as good as non-existent. Goods need to be transferred from the manufacturing plant to the storage centres, and from these to the retailers, and finally, to the customer. In this report we will see the effects of implementation of third-party logistics by Westminster and why this is a useful strategy.
Transportation, warehousing, and information systems play very significant roles in the logistics function. For supply chain in particular, logistics creates the efficient flow of goods between supply chain partners, and is responsible for the maximization of profits and competitive advantages.
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What impact would the three new alternatives have on transfer and customer freight costs? Why?
(i)
Traditional inventory replenishment procedures are replaced by POS driven information systems. This will assist Westminster Company in the production of goods according to the customer’s requirement. Demand forecasting can be erroneous, and this system will reduce the need to forecast demand. This helps prevent wastage of excess, redundant inventory, and reduces the cost of storage. Westminster should ideally implement ERP software, which will enable its customers to give the position of their inventory, accurately and timely. The software will allow real-time inventory management of all its points of sales and its various plants and warehouses. The daily sales and inventory requirements of the customers can be assessed, and accordingly, shipments can be readied. The trucks can be loaded in a manner, that they are able to cover the maximum number of customers in a single trip, distributing a considerable amount of products. Since the products are delivered according to the customer’s order, returns and rejections would be potentially eradicated. This helps prevent wastage, which can become a major cost in the long run.
The software will enable efficient information dissemination, and relevant information can reach the concerned persons immediately.
(ii)
Three deliveries per week as opposed to the earlier one delivery will increase the transportation costs, but if these deliveries can be consolidated such that one trailer can provide deliveries for all the three companies at the same time, instead of all three companies sending their own trailers individually, this will balance the increase in cost caused by three deliveries per week. Due to only one trailer moving in a day, this will further decrease the cost as economies of scale are reached.
Direct store deliveries (DSD) will give a competitive edge to the company and most of the key retailers would prefer to have that service. This would effectively reduce the customer’s freight costs, without affecting the cost of transportation for Westminster much. The customers would not need to transfer the goods from their warehouses to the various stores. Westminster’s trailer would normally need to travel a large distance to deliver the products to all its customers, so it wouldn’t really be a costly matter if they are able to deliver directly to the stores for some of its key clients.
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(iii)
Large clients often need specific requirements in their product shipments. They generally have a large shipment, and to maintain that, they need certain implementations. Bar-coding the entire stick in accordance with the international standards is a must in today’s world. With the company looking at warehouse consolidation, proper inventory management is a necessity to ensure efficient operations. Bar-coding allows easy stock-taking and SKU monitoring. RFID labels can be attached to big pallets for large clients. This allows for instant stock-taking, just by scanning the RFID label. The label has all the details about the stock within the pallet. Details include number of SKUs, number of total units, and details about the SKUs.
They should implement RFID for their own stock in their warehouse for good inventory management.
They can charge the customers for whatever value added services they provide to cover the costs. Companies are happy to pay for value added services, because they know they are only being charged for what they are getting. In the traditional pricing, there is a single, flat rate. Someone who does not avail of certain services still pays for it.
What impact would warehouse consolidation have on inventory carrying costs, customer service levels, and order fill rate?
Warehouse consolidation allows the company to have a single warehouse for all its plants, wherein the products will be categorically placed and maintained. Having a single warehouse storing the products, coupled with the strategy of inventory replenishment based on demand, leads to a significant reduction in the inventory costs of storage and handling. It reduces wastage due to expiring products, because there is never a highly excess level of inventory for a particular product.
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Inventory carrying costs consist of Capital Cost, Storage cost, Inventory service cost, and Inventory risk cost. The Capital cost component is the largest.
Consolidation results in economies of scales, by reducing the overall inventory cost. It also helps reduce the transportation, handling and operations costs. Another important cost that can be controlled with the help of consolidation is the cost of labour. Labour being a major cost, if controlled, can result in greater profits for the company. (Babel, 2005).
The products are placed in a central location, this, and the fact that there would now be three deliveries per week will definitely improve the customer service levels and order fulfilment rates. Shipments can be prepared faster, and will leave the warehouse faster. Thus, customers will be able to receive the inventory timely, leading to satisfaction.
Goods will be delivered in mixed shipments, and the trailer would be loaded fully, leading to economies of scale and scope, hence reducing the transportation costs. Customers can order goods from the different companies without affecting the freight costs. This is beneficial for both the customer, and Westminster.
How are warehousing costs affected by the decision to use third party or private warehouse facilities? What effect would this have on handling, storage, and fixed facility costs?
Warehousing costs represent a major factor of cost for Westminster Company. According to the case, the total warehousing costs for Westminster during the year were $8.5 billion for Company A, $6 billion for Company B, $ 7.4 billion for Company C, amounting to a total warehousing cost of $21.9 billion, which was roughly 38% of the total logistics costs of the company. If the company can save on these costs, and instead contract a Third Party logistics service provider, it can divert these funds to other areas of the business, like developing a strong IT infrastructure, which will help them run the ERP solution and integrate the inventories of all the members on its supply chain.
Apart from the financial gains, by using a third party logistics service provider, it can utilize its expertise. A third party service provider, whose core-competency is providing the warehousing and logistical services will be much more efficient than owning our own warehouse, but not being able to maintain it properly. Another point of contention is the labour. If outsourced, Westminster will not be responsible for the labour cost, or the availability of skilled workers. The third party will have a dedicated team of workers skilled in logistics.
The Essay on The Analysis of the Cost in Logistics Distribution of Wal-Mart Supermarket
... the enterprises’ logistics cost. In the whole logistics operation costs, transportation cost is dominant. 2. 3 Inventory decision Christ ... storage costs’ warehouses to control the costs; Conversely, If a company’s requirements of the logistics service ... to the survey, the amount of customers to Wal-Mart is nearly one ... carry out the strategies successfully, the companies must be able to response the ...
By outsourcing logistics activities Westminster can save on capital investments, thus reduce financial risks. It can also expect an excellent level of service, because of the highly competitive market, and the advent of numerous service providers. A contract will be signed before commencement, detailing all the requirements from the third party logistics service provider. This will reduce the risk of non-performance.
What effect would shipping mixed shipments from consolidated distribution centres have on individual company cost and performance?
Shipping mixed shipments from consolidated distribution centres is advantageous for the company. Its logistics cost is reduced by delivering various products on the same trailer. Instead of having three different trailers moving around the country, it can have just one trailer doing that work, thus reducing the transportation cost, and achieving economies of scale and scope.
Each company’s transportation costs will reduce considerably. At present, the transportation costs for the company are $4.2 billion for Company A, $3.2 billion for Company B, $ 2.8 billion for Company C. These can reduce by almost one-third, with the implementation of consolidated distribution centres. The various related costs will be shared within the three companies.
The companies will be able to ship more goods in lesser time than before. This will improve its financials, and the overall performance. The complete information technology infrastructure will further enhance performance by providing instant data, hence improving efficiency.
Instant demand information will allow the plants to manufacture accordingly, and prevent delayed shipments because of the manufacturing process.
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The concept of cross-docking can be followed, wherein the respective plants will send the products to a consolidated warehouse, which acts as the distribution centre. The warehouse, then delivers a mixed shipment of products to a multitude of customers.
Cross-Docking
Evaluate the eight supply chain processes in terms of customer classification and degree of centralization/decentralization of required functionality.
Eight Supply Chain Processes
Retail Segment | DPR | CRC | OF/SD | P/SDL | MC | SRC | LCS | RL |
Grocery | C | C | C | C | DC | C | DC | DC |
Drug | C | C | C | C | DC | C | DC | DC |
Mass Merchant | C | C | C | C | DC | C | DC | DC |
C = Centralised, DC = De-Centralised.
Given all available information briefly describe the logistical system design you would recommend for Westminster’s integrated consumer products.
Westminster Company should adopt a strategy of consolidating its warehouse. It helps reduce the transportation costs.
The location of the consolidated warehouse should be in a central location, accessible by all the plants feasibly. The location I have chosen is close to most of the warehouses on the east coast, and at an almost equal distance. The plants in LA will have the largest distance to travel, and the ones in Texas will be far, but not too far to make it inefficient. With the maximum products coming from the plants on the eastern area of US, the location is strategic, because it can deliver to its customers in every part easily.
The inventory must be managed properly, and a good inventory management module must be incorporated within the ERP system. An integrated system will allow it to control inventory effectively, and reduce losses and minimize wastage, and cost. The software will link all the members in the supply chain and provide real-time data of sales, inventory, and other useful information.
Having a third party logistics provider to maintain its consolidated warehouse will utilize the expertise of the third party, hence they will have a robust and efficient warehouse. Outsourcing will enhance its performance and help to achieve good results.
Conclusion
The demand planning responsiveness, customer relationship collaboration and supplier relationship collaboration needs to be centralized functions to maintain proper flow of information. Members need to have information sharing within the supply chain to make sure there is no communication gap, and every member has the relevant information. This leads to Westminster’s goal of greater profitability, and customer satisfaction.
Manufacturing customization should be decentralized to further satisfy customers in a better way. Decentralizing Life cycle support and reverse logistics will also help to achieve optimum results.
Integrating Company A, Company B, and Company C and consolidating the warehouses will be profitable for Westminster Company because it reduces the transportation and operations cost considerably. It should outsource logistics solution to a third party provider, thus allowing Westminster to focus on other critical areas of the business apart from logistics, like implementing the ERP system, developing an IT infrastructure, etc. for better management of inventory and providing value added services and customization to key customers. It will also enable them to get good skills in the field of warehouse and logistics management.
References
Babel, R. 2005, ‘Supply Chain Management’
Bowersox, D.J., Closs, D.J., & Copper, M.B., 2010, Supply Chain Logistics Management, 3rd Edition. McGraw Hill, Sydney
Mentzer, J.T., 2001, Supply Chain Management, Sage Publications, California
Vasiliauskas, A.V, & Jakubauskas, G., 2007, Principle and benefits of third party logistics approach when managing logistics supply chain, Transport Research Institute, vol XXII.
