Westminster customer composition and customer service

Executive Summary

This report focuses on the business issue of world’s biggest pharmaceutical company- Westminster. The report emphasizes the two important aspects of customer composition and customer service requirements, which requires to be assessed in improving the supply chain practices. Further, Westminster needs to reevaluate the existing supply chain practices to provide accurate, timelier and efficient inventory delivery. The report analyze each of the three proposed alternatives and discusses about the effect of warehouse consolidation on inventory carrying costs, customer service levels and order fill rate. Enforcing a third party warehouse rather than a private warehouse has also been examined. An extensive analysis is also done about the proposed logistical system design and how that enhances the company cost and performance.

The recommendation that Westminster should execute is to redesign and upgrade its warehouse network to take full benefit of economies of scale and enhance performance. With this new and restored design there would be only five distribution centers all over the United States to distribute the products of Westminster. The section of network design emphasizes the shutting down of three distribution centers namely that of Company A and C at New Jersey and the DC of Company C at Los Angeles. On the basis of the assumptions given in the report, the total savings Westminster makes is $ 3,321,000. The individual company savings for Company A are $1,043,000, for Company B $802,000, and for Company C $1,476,000. The suggested implementation also results in a better product availability and efficient service. The overall advantages which spruce up are abundant- inventory carrying costs, reduction in transportation costs, storage costs, handling costs, fixed facility costs. Moreover, the inventory turnover and stronger customer relationship would slightly improve which would make Westminster a dominant player in the health care industry.

Introduction

Westminster Company is one of the leading manufacturers of consumer health care products in the world. Its domestic operations consist of three separate, but wholly owned companies that manufacture and distribute unique product lines to a network of diverse retailers and wholesalers. To meet the challenges put forward by the domestic and global competitors and to strive in the marketplace, Westminster is reconsidering the prevailing supply chain activities primarily in terms of customer composition, locations of warehouse and customer service requirements. Three ways have been suggested by the management to improvise the performance of the supply chain. Firstly, the anticipatory business model would be replaced with a responsive one, in order to eliminate the forecasting process and to assure timely inventory replenishment. Secondly, to consolidate the shipments from each of the three companies in a consolidated warehouse to improve the order cycle time and costs. Thirdly, to enhance the customer service by providing value added services. These three alternatives have been critically handled in the report and a set of recommendations has been put forward in terms of logistical design (Case Study).

Analysis of the Proposed Alternatives

The impact/effect that each alternative would have on transfer and customer freight costs is discussed below:

Point of Sale (POS) driven information systems- POS applications provide accurate inventory control at the store level by tracking each stock keeping unit sold and is used to aid inventory replenishment (Bowersox et al 2007 ,p.105). These information systems are used to avoid over replenishment of inventory at the retail stores because there is no forecasting method used. Forward buying would also be reduced to a great extent because the manufacturer precisely knows the quantities that are currently available at the retailer. This reduction in forward buying minimizes the bull whip effect- the amplification of demand order variabilities as they move up the supply chain. By implementing POS, there would be frequent orders of the same products by a customer. This frequent ordering leads to small quantity loads in a truck and hence the shipment would be less than truckload. Consequently, the customer freight costs would increase. The transfer freight cost would still remain the same because of the utilization of economies of scale by full truckload shipments. (Lee et al 1997, p. 97-100).

Shipment Consolidation- In this a lot of small orders or shipments are integrated in such a manner that huge load can be transmitted on the same carriage. In the case of full vehicles transportation economies are easy accomplish. The transportation economies are easier to accomplish in the case of full vehicles. The prime/main motivation back of this consolidation program is to get full advantage of the per unit freight costs decrease due to economies of scale related with transportation. (Cetinkaya et al 2000, p. 218). The customer freight rates decreases when the shipments are consolidated due to negotiation leverage for better freight costs. (Melachrinoudis et al 2007, p.211). Freight rates are dependent on the distance as well. For a lower freight cost, the location of a consolidated warehouse should be close to the target market. The transfer freight costs may increase because of the increased distance between the manufacturing plant and the consolidated warehouse as compared to each plant supplying to each regional warehouse. Moreover, one big advantage of having a shipment consolidation in a consolidated warehouse is the tremendous decrease in the emergency deliveries (e.g. air freight is expensive). The reason underlying is that a centralized warehouse can hold a greater product range in stock than a regional warehouse. Thus, the transportation costs decreases dramatically when consolidation is implemented (Kohn et al 2008).

Value added Services- for providing better customer service; Westminster Company would employ bar code and electronic scanning systems such as RFID on unit loads and cartons. These systems replace error prone and time- consuming paper based information collection and exchange processes. RFID being an auto identification system would help in tracing and classifying the container or its contents as it goes through the facilities. Hence, time gets saved in the entire supply chain thereby reducing the order cycle time (Bowersox et al 2007, p.104-108). Modifying the package according to the customer’s needs and requirements may create favorable circumstances to negotiate for a lower freight allocation for a particular product. There could be an increase in the packaging cost, but this might be offset by a substantial reduction in the transportation cost. Therefore, the freight cost would reduce if the presumption holds true (Bowersox et al 2007, p.208)

Impacts of Warehouse Consolidation

A consolidated warehouse is situated at a central location generally called as a central warehouse (can be one or few). This warehouse receives inbound shipments from the three manufacturing plants of Westminster, then these shipments are sorted, arranged together into larger shipments on the basis of the customer requirements and then this consolidated shipment is dispatched to the customer. In the case of a traditional warehouse, each warehouse is situated in regional location from where only a unique product line is shipped out to the end customer (Kohn et al 2008, p.233).

Inventory carrying costs indicate/s the cost of holding products in the inventory. It is expressed as a percentage of product value per unit time. This estimate indicates the opportunity cost of money and the cost of material handling, insurance, taxes, storage space, capital and obsolescence. There would be a decrease (refer appendix 1) in Inventory carrying cost would with warehouse consolidation because there would be meager inventories to be stored in the central warehouse as compared to a regional warehouse. Furthermore, consolidation makes Just-In-Time (JIT) feasible that is an extensively recognized means of reducing inventories and thus the costs (Cetinkaya et al 2000). Moreover, the inventory carrying costs change/s with the interest rates, hence they adhere to fluctuate (Blumenfeld et al 1987, p.37).

However, there is one intrinsic risk in warehouse consolidation. Since goods are assembled and grouped in order to enhance fill rates, the level of customer service might get affected in a negative manner resulting in longer lead times. Since there are fewer warehouses to serve markets, the accessibility of consolidated warehouses to large segments of customer bases is very important. Also, to offset distances between consolidated warehouses and customers, direct shipment from master stocking locations to the end customers could be a good option (Melachrinoudis et al 2007, p.211). However, there are many companies which have been able to improve on time delivery while simultaneously cutting down on transportation costs. One such example is the company named Stora Enso which improved its customer service level and on-time delivery due to improved control of the system, particularly through consolidation (Kohn et al 2008, p. 240)

An important service measure is the order fill rate (ie order fulfillment reliability), probability of filling an entire customer order immediately from the shelf or within a specified time (Song 1998, p.831). The order fill rate would improve because the frequency of the orders is high with a consolidated warehouse and hence the availability of products increases for the end customer (Bowersox et al 2007, p. 379).

Public or Private Warehouse

Public or third party (3P) warehouses can be hired for short- term or long- term. No requirement of capital investment requirement is the advantage of arranging for one. Further, due to the leverage of combined needs of users there is a possibility to share scale economies. A Public warehouses offer storage, handling and transportation. In this clients are charged with a fee for storage and in and out handling. In the case of handling, the amount is based on the cases of pounds transferred. In the case of storage, the amount is based on the cases or weight in storage over time. The handling and storage costs are calculated on the basis of deliveries being shipped from the manufacturer to the third party warehouse (Bowersox et al 2007, p.223).

A private warehouse is owned by the company itself. The primary advantages of a private warehouse are flexibility, control, cost, stability and receptiveness (Bowersox et al 2007, p.223-224). Private warehousing is regarded reasonable and less costly due to the lower fixed and variable costs included than for hire companies, employing a 3P provider would lead to decrease in the overall handling, storage and the fixed facility costs due to economies of scale involved. Furthermore, the coordination work done by third party reduces the administrative costs. Thereupon, it would decrease the warehousing costs (storage and handling costs+ fixed costs) and result in lower transportation costs by providing consolidation of multiple client freight.

Centralization/Decentralization

Centralization and Decentralization basically refer to the extent of decision making authority, which is given to the supply chain members. Centralization means the practice and process of delegating decision making authority to the higher levels of organizational hierarchy, here, the information and ideas flow from bottom to the top of the organization whereas decentralization means the process and practice of delegating decision making authority to the lower levels of an organizational hierarchy (12Manage 2010). The lower levels in a supply chain are closer to the customer.

The eight supply chain processes have been examined in the context of centralization/ decentralization and customer classification.

Retail Segment

Eight Supply Chain Processes

DPR

CRC

OF/SD

P/SDL

MC

SRC

LCS

RL

Grocery

D

D

D

C

C

C

C

C

Drug

D

D

D

C

C

D

C

C

Mass Merchant

D

D

D

D

D

D

C

D

C- Centralized D- Decentralized

Besides supplier relationship collaboration, drug segments and grocery would be the same. As the pharmacists are well acquainted about the demand and the viewpoints of drug products users they are given more decision making authority. They also have a good knowledge and understanding of the drug compositions and the customer’s feedback can be communicated to the suppliers.

In the case of mass merchants, who are the wholesalers, centralization/ decentralization classification would be unlike in few of the supply chain processes as compared to the smaller retailers. Because of high volume purchases, mass merchants have a higher bargaining power of suppliers. Since there are various products contending for shelf space so the distributors are required to fulfill the orders with a 100% fill rate. Mass merchants are specific about the fill rates and if it doesn’t meet then no back-ordering would be allowed (McDermott 1995). Thus, OF/SD and SRC would be decentralized.

Moreover, to build loyalty mass merchants demand customization in responsiveness, receptiveness manufacturing, and product/ service development launch. The mass merchants command how and when promotion on a brand should occur. Hence, it is decentralized for mass merchants in terms of MC.

Mass merchants have more collaboration with customers (CRC), being more brand loyal and stocking a range of products, than the smaller retailers to aid planning and operations.

Logistical System Design

Presently, Westminster’s outbound distribution activities are hold up by a ‘single echelon’ warehouse network, where all the products transmits from the manufacturing plant through regional distribution centers to the final customer. To take benefit of economies of scale and to enhance performance, Westminster is required to redesign its warehouse network. This includes consolidation and phase-out of some of its existing warehouses. It has been observed by Ballou (2004) that restructuring a warehouse network could generate an annual saving of 5-10% of total logistics cost. A survey conducted by Speh (1999) showed that there is a significant increase in the inventory turns each year (Melachrinoudis et al 2007, p.211).

Westminster plans to provide mixed shipment to its customers thrice a week to the large accounts. Some of the existing DC’s, such as the one in Los Angeles of Company C and the one in Newark of Company A may be redundant with their nearest warehouses due to close geographical proximity. However, when considering any of the facts, a thorough analysis needs to be made. For example, a regional warehouse that provides faster delivery options may turn out to be more costly because of its higher inventory taxes due to the variation of the local tax from one state to another. On the other hand, a warehouse which has the lowest cost and provides the best tax packages may be distant from the customers and the major highways. Hence, a decision aid tool such as mixed integer linear programming needs to be done to find out the optimal location, number and size of warehouses in the redesigned network under capacity limits and service requirements. However, at this stage an assumption would be made based on the data available.

In the Northeast (NE) United States, the DC’s at Newark for Company C and Company A have been consolidated with its nearest neighbor at Philadelphia for Company B. This DC will operate at full capacity. New Jersey distribution centre would be closed. It is better to maintain one DC at Philadelphia operating at double capacity rather than having two underutilized DC’s within a 100 mile radius. Due to a high demand in the NE part of US, the DC at Georgia is kept open to serve some customers in the surrounding areas such as Florida, Mississippi, Kentucky, Carolina and Albama. The DC at Georgia and Texas has not been consolidated due to 850 miles distance between them. Here, a vital factor taken into consideration in the analysis is that when a warehouse is consolidated, there are no savings on capacity costs but only on fixed costs. Thus, when warehouse capacity becomes more expensive and fixed costs remain unaffected, closings are favored to consolidations in order to save on capacity costs.

The DC at Chicago and Texas would remain open, serve the central United States and operate at near capacity. To serve the Western United States, the DC’s at Los Angeles for Company B and Company C would be consolidated at Company B. The DC of Company C at LA would be closed.

Hence, under the latest arrangement three DC’s would be closed and there would be two consolidations. Thus, five DC’s would operate in United States for the distribution of Westminster products. This configuration brings about appalling annual savings and good customer service.

Company Cost and Performance

As shown in the tables below, the costs are calculated for each company prior and post consolidation. An assumption is made hereof to the calculation of the post consolidation figures. The inbound shipping costs would increase marginally due to the longer distance shipping to the consolidated warehouses. The outbound shipping costs would decrease due to the economies of scale resulting from consolidated shipment. The assumptions which have been made are:

Increase in inbound shipping costs by 3%.

Decrease in outbound shipping costs by 6%.

Decrease in fixed warehousing costs by 25%.

The graphs indicate the savings which each company makes post consolidation.

Savings for Company A=$ 1,043,000.

Savings for Company B=$ 802,000.

Savings for Company C=$ 1,476,000.

The total savings calculated post consolidation for Westminster is $ 3,321,000.This shows that there is a tremendous savings of $ 3,321,000 for the Company. Moreover, it results to an increase in customer service and availability

(Melachrinoudis et al 2007)

 

Company A(prior consolidation)

Company A(post consolidation)

Inbound Shipping Costs($)

4200000

4326000

Outbound Shipping Costs($)

9900000

9306000

Fixed Warehousing Costs($)

2300000

1725000

 

Company B(prior consolidation)

Company B(post consolidation)

Inbound Shipping Costs($)

3200000

3296000

Outbound Shipping Costs($)

8300000

7802000

Fixed Warehousing Costs($)

1600000

1200000

 

Company C(prior consolidation)

Company C (post consolidation)

Inbound Shipping Costs($)

2800000

2884000

Outbound Shipping Costs ($)

8500000

7990000

Fixed Warehousing Costs($)

4200000

3150000

According to Sterling and Lambert ‘cost and customer service appear to be the two most common criteria used to both design and evaluate the effectiveness of logistical systems’. The main dimensions of logistics performance analysis are costs and customer service-short and long -term, where in costs denotes the input and customer service represents the eventual output. Westminster should acknowledge its logistics cost against its service performance as part of its logistics strategy development process. The cost savings have been calculated above and the evaluation of each performance measure , i.e., transportation costs, warehousing costs, inventory carrying costs, administrative costs, and order fill rate have already been reviewed in the report. These results show that consolidation enhances the functioning of Westminster. (Mentzer et al 1991, p.39-40).

Conclusion

It is apparent that all three new alternatives that Westminster has proposed for its huge accounts bring about enormous cost savings and advance performance of the complete supply chain to a considerable extent. The alterations to its operations are crucial because the mass merchants account for 35% of the total corporate sales volume and are the rapid growing division of trade as well. Moreover, Westminster should redesign its warehouse network for effectiveness of its activities. As per the earlier calculations, the total savings which result due to warehouse consolidation and shipment consolidation is $ 3,321,000. Therefore, by executing the proposed alternatives and consolidating its warehouses Westminster is at an upper hand.

Appendix

Figure 1.

(Kohn et al 2008, p.236)