International Logistics: T&L - Essay Example

?International Logistics: T&L "Logistics is essentially the glue that joins every part of the business together" Andy Haines, Supply Chain Director -T&L “Inventory mismanagement is a common characteristic of a troubled company” Finkin, 1988: 75 Contemporary business environment is indicative of a highly competitive marketplace wherein every organization is involved in applying innovative strategies which seek to align their resources in a manner that help them gain a niche in their respective industries, and attract a larger consumer base in the process. As the number of companies offering homogenous products flood the markets, the competition to retain and /or expand consumer base intensifies even further. The growth and survival of the companies, in such an environment, hence directly depends on their internal operational processes as well as effectiveness of the same, and their efforts towards profit maximization. Inventory management, has ever since, gained widespread importance as one of the key strategic alternatives available to companies to retain and sustain their longevity in the business and prolong their competitive positioning in their respective industries (Muller, 2011; Tersine, 1994). There is a strong and direct relationship between stock management and profits; hence the issue of effective stock management has gained considerable significance and momentum as a key strategy to increase financial returns through minimal investment. The strategy applied by Tate & Lyle, of investing in warehousing facilities, contrary to popular wisdom suggesting against it, is a case in point. This paper aims to discuss the key reasons behind the company’s decision to continue to invest in warehousing facilities despite the fact that almost all the modern theories on inventory management suggest otherwise. It also discusses the various ways in which warehouses can be managed economically. Stocks act as a safety buffer between orders placed and received, and acts a safeguard for the companies to cope with unexpected demands (Waters, 2003; Voortman, 2004). Some of the other key reasons for inventory holding are listed below: Capacity planning: Holding of inventory helps companies in capacity planning and scheduling production processes, thus providing them the ability to manage and control the raw material requirements within a specified period of time. Coping with unpredictable demand: It helps them in coping with external economic conditions such as fluctuations in demand, change in consumer preferences etc. Coping with unreliability in supply network: Companies may often face situations whereby the supplier network breaks down, or the suppliers are unreliable and fail to deliver the products on time, in such a case inventory holding acts as a boon. It also safeguards them from losses in situations where there is a serious shortage in supply of required raw materials (Muller, 2003). Protection from cost inflation: Inventory holding protects the companies from sudden rise in prices of required materials, due to inflationary pressures. Furthermore it also helps the company in managing and controlling ordering costs, since buying in bulk affords them the opportunity to save the additional costs involved in repeated purchases. According to Hugos (2011) one of the key advantages of inventory holding, is cycle inventory. Transportation of products or raw materials across different locations entails delays. Hence, in order to exploit the economies of scale with regard to production, procurement as well as transportation, firms are required to reduce the time delays on account of transportation of required materials, which can be ensured only through bulk buying and storing of such materials, thus giving rise to cycle inventory. Holding of inventory safeguards the firms against market uncertainty by helping them cope with unexpected rise in demand. The benefit is calculated in terms of a trade-off between holding large amount of inventory and loss of profits due to inability of the firms to cope with unexpected demands. Safety stock helps firms against market unpredictability and ensures effective product delivery, thus retaining their customer base, but it also leads to rise in holding costs involved in storage. In case of companies such as Tate & Lyle, where the key products have relatively shorter life cycles, the cost of holding inventory for a longer duration may be higher. However, since the firm offers a large variety of products, it is imperative for firms to hold safety inventory in order to maintain profitability in the long run (Chopra and Meindl, 2004). It is on account of these reasons that Tate & Lyle, continue to invest in warehousing facilities, despite modern theories suggesting the contrary. Holding of inventories in warehouses entail high amount of costs, which if not managed effectively, may lead to huge losses for the firms. The key costs involved in management and storage of inventories include costs of goods and materials stored; the costs of space required to store such materials; costs involved to hire labour and employees to manage and safeguard the inventory; costs of deterioration and damage caused to the materials stored; as well as other uncertain causes such as thefts or robbery or destruction of goods due to damage or obsolescence (Waters, 2003). In order to ensure maximization of profits, effective management of inventory is inevitable, which can be done through strategies aimed at minimizing these costs (Barfield et al., 2003). One of the key approaches to minimizing inventory costs is to reduce fixed costs and variable costs associated with holding of inventory. The fixed costs associated with holding of inventory include purchasing or production costs, inventory holding/ carrying costs, and costs involved in ordering and setup of the same. The purchasing costs refer to the costs associated with purchasing of the required inventory. In case of firms such as Tate & Lyle such costs include costs associated with the purchasing of raw materials, payments made to the hired labour, as well as other overhead costs associated with manufacturing and purchasing. of all these costs, the costs related to manufacturing are highly likely to be minimized in the short run (Barfield et al. 2003). Controlling of other fixed costs is highly unlikely although efforts can be made to minimize the same in the long run. Furthermore the firms may implement systems such as the pull system or push system as a means of minimizing inventory costs (ibid). Another key method of reducing warehousing costs is implementing strategies aimed at reducing and/or controlling the ordering or setup costs. These are variable costs associated with ordering of materials required for production, and involve all types of clerical costs as well (Barfield et al., 2003). These costs are borne by retail as well as manufacturing firms, and are essentially incurred for purchase of raw materials (Muller, 2011). The inventory holding costs are the costs involved in storing of materials over a prolonged period of time (Muller, 2011). As stated in the previous section of this paper, holding of inventory is directly associated with the ability of a firm to maximize their profits. Hence, the effective and economical management of inventory is inevitable to achieve this key objective. However, in order to reduce costs, it is essential for the firms to ensure optimum utilization and management of their inventories. This can be done through inventory optimization models. In order to achieve this goal, it is imperative for the firms to establish and implement strategies to minimize and/or eliminate problems associated with optimizing the inventory. This can be achieved by controlling the activities which have a direct bearing on the management of inventory such as production planning, scheduling as well as transportation (Bogataj and Bogataj, 2004). The successful optimization of inventory levels across the supply chain leads to a optimization of inventory policies thus eliminating the need to hold additional inventory, reducing the investment of capital required for the same. Such integrated approach of controlling inventory further helps in minimizing costs associated with holding of inventory. There has been significant transformation with regard to theories related to inventory management and its relationship with economizing the costs. Theoretically, the key challenge faced by management is hiring optimum number of employees across all its departments, in order to ensure efficient productivity. The high number of employees in warehousing facilities account for a significant proportion of the management budget, which is required for payment of wages and salaries to the workers, thus directly impacting the profitability of firms. In case of huge multinational firms such as Tate & Lyle, this poses a significant threat to the organization’s profitability, since it owns large warehouses which require enough manpower to function effortlessly. Hiring lower than required workforce, in a bid to reduce costs, also adversely affects the firms, since it leads to additional burden on the minimal workforce thus resulting in employee burnout, and lower productivity. It also leads to lower quality and increases the costs significantly. The effective management of warehouses requires the managers to develop and implement a plan which helps in achieving the day-to-day objectives / goals. This can be done only through effective workforce management. Furthermore, more number of employees requires higher costs in training them, regarding the effective utilization of new and complex technologies, and other warehouse equipments (Gunasekaran, Marri and Menci, 1999). Tate & Lyle currently employs about 525 employees in its Silvertown branch, in UK. Historically, a large number of unskilled workers were hired by firms to manage its operations and cope with the increasing market demand. However, today, the implementation of such strategy is not advisable since the external environment has become highly competitive with the introduction of novel and innovative technologies, each passing day. The firms are now forced to hire only highly skilled labour to operate the sophisticated technology, which is now being increasingly implemented in warehouses, which requires frequent training of workers. Such special training provided to the employees adds to the overall warehousing costs. However, such costs are inevitable since there is a greater risk of damaging goods by untrained staff. The warehouses at Tate & Lyle, require hiring of larger workforce, in order to ensure effective management of the same. Another key area of concern in case of management of warehousing is the space assigned for various warehouse processes. The space requirement in warehouses must be carefully calculated in order to avoid wastage of floor space. This includes the shipping and receiving of materials, as well as the space required to stage the shipping, and accommodate the materials shipped. Furthermore floor space requirements also need to take into consideration, the space proposed to be utilized for packaging, customizing, sorting as well as other similar activities, for all work stations. The floor space needs to be utilized in the most efficient way to avoid additional costs, and its negative consequences on the firm’s profitability (Harrington, 2007). Tate & Lyle has a vast production range, hence their warehouses are required to be large in order to enable them to operate effortlessly, at their optimum capacity. Bigger warehouse spaces often adds to the overall costs of maintaining the warehouses since the floor space requirement increases, leading to a simultaneous rise in costs of infrastructure required to operate the warehouse. Theoretical approach entails that the type of systems incorporated by firms in managing their inventory, such as shelves or racks offer key benefits in terms of space saving, thus enabling the firms to derive optimum benefits from the floor space available to them. The various storage types employed by firms to store materials include bulk storage, open storage, high rack, shelf storage, and picking areas (Kappauf, lauterback and Koch, 2012). In case of Tate & Lyle, the storage space required is huge, as its key strategy is investing in inventory holding, thus requiring usage of traditional racks and aisles for storing the raw materials. Furthermore additional space is required for packaging of products, thus adding to the overall costs. However, such costs are balanced by offering a wide variety of products at reasonable prices (compared to its competitors) thus offering the benefit of greater choice to their customers. The ability to offer wider choice at reduced prices to the customer is derived from the firm’s production process which involves producing and selling of wider range of standardized products in bulk, through diverse outlets around the country. The firm is involved in manufacturing and selling of food products, which provides them an added benefit of selling its goods through diverse outlets including from its factory outlets. Such retail warehouses, which enable the firms to make direct sales to its customers, help the firm in reducing costs of rent, to sell their products in outskirts of cities (Bragg, 2011). In case of Tate & Lyle the use of retail warehousing is minimal, since they are largely involved in investing in warehousing facilities, while retail warehousing tends to eliminate the need for investing in warehouses, completely. All the operations such as sorting and packaging are carried out at its warehouses, and the packaged goods are then shipped to their respective locations i.e. departmental stores across the country. Such a strategy has proven to be highly beneficial for the company, due to its huge customer base, and bulk production which helps in reducing and managing its costs effectively. Although there have been significant development in terms of technology which affords better integration of supply chain processes; faster response times; just-in-time delivery etc., which has led to stronger and better relationships between firms and their end consumers, several firms are still struggling to cope with the changing trends, as is apparent from the fact that various multinational corporate giants, continue to use and invest in warehousing facilities. One of the key reasons behind the use of such approach is the need to meet consumer expectations and need, effectively and promptly (Cooper, Lambert and Pagh, 1997). The significance and relevance of investing in warehouses in contemporary times can be judged from the type of warehouses in use, such as component warehouses; finished goods warehouses; work-in-progress warehouses; distribution warehouses or centralized or de-centralized warehouses; as well as the benefits offered by them. The key benefits of investing in warehouses can provide useful insights into the strategy of investing in warehouses by firms, in recent times. The key benefits include - the ability to improve productivity; enhance existing knowledge base; integrating product flows and production flows; ensuring uniformity and homogeneity in the processes used and enhancing the overall efficiency. However, in contemporary times the requirements have changed drastically with the changing times. Hence the warehouses today are required to operate smaller transactions in bulk; manage and store a huge array of items due to the increase in product variety offered to consumers; offer better and increased product and service customization; provide more value added services as well as ensure shipping of increased international orders. Furthermore, the warehouses in present times are also required to process bulk orders in lesser amount of time; minimize the number of errors; and employ highly skilled personnel (Tompkins and Smith, 1998). The increasing demand for value added services and the significant transformation in the manner in which advertising and promotions affect product demand, has caused an increased pressure on the firms, to improve and enhance their product delivery methods, thus leading to a direct impact on the management and operation of warehousing facilities. Most of the companies today have largely adapted to the changing trends, yet some companies such as Tate & Lyle continue to invest in warehousing, despite the changing market trends. This strategy has proved to be highly profitable for the company, due to its ability to produce and sell in bulk, and its vast array of products, supplied to its customers globally. References: Barfield, J. T., Raiborn, C. A., Kinney, M. R., (2003). Cost accounting: Traditions and innovations, 5th ed. Mason, OH: South Western, Thompson Learning. Bogataj, M., and Bogataj, L., (2004). Combinatorial optimization of the location inventory. Bragg, S. M., (2011). Inventory best practices. John Wiley & Sons Publication. Chopra, S., Meindl, P., (2004). Supply chain management: Strategy planning and operation. 2nd Ed., Upper Saddle River, NJ: Pearson Prentice Hall. Cooper, M. C., Lambert, D. M., Pagh, J. D., (1997). 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