Design and Operation of Logistics Systems - Assignment Example

?COVER PAGE Design and Operation of Logistics Systems – Gerrard Laboratories Logistics and distribution have been unique management functions ofmany sub-functions and sub-systems. Recognition of their importance in industry and economy has been late due to the very nature of distribution functions. A distribution centre has been defined as “post production warehouse for finished goods held for distribution”. In the context of Gerrard Laboratories, Frazelle (2002)) and Ballou (2004)) definitions seem to be more relevant for distribution services that “accumulate and consolidate products from various points of manufacture within a single firm, or from several firms, for combined shipment to common customers”. Savings in logistics cost accrue from reduced inventory levels, making it possible to close facilities, thus, promoting centralisation of distribution. It further reduces the need to keep stock at many warehouses, thus, bringing a shift in the role of such facilities from stock keeping to distribution (Higginson & Bookbinder 2005). Management of Gerrard Laboratories was also thinking on the same lines by planning to close Cologne facility not just because it could serve the Cologne warehouse customers from the Brussels plant at Belgium but because the competitor company was serving the European market with fewer warehouses than Gerrard Laboratories. Serving the Cologne customer base from the Brussels plant, the largest and the oldest one, from the management and manufacturing perspective seemed more pertinent as the Brussels manufacturing plant had been producing 25 items out of the total 35 products. The given situation indicates that it is more practical to serve the Cologne area from the Brussels plant. From sales operations perspective also, Gerrard’s 90% customers had been retailers; only 10% formed the industrial customers. Further, there was no seasonal change in the demand of the company products. Hence, it is expected that Gerrard should manage distribution to hospital customers satisfactorily from the Brussels plant. Another aim of distribution centres has been to attend to customer needs, which a great number of researchers have analysed. Increased communication and transportation have further minimised the requirement of warehouses and distribution centres (Higginson & Bookbinder 2005). Examining Gerrard on the communication and transportation parameters for client servicing, Gerrard has been handling its logistics functions on traditional practices. Other than its own 4 plants and 14 warehouses, it had been sharing warehousing space of 23 other grocery products and services companies, not wholly occupying the total offered space. So far the practice of one-shot billing system with variable cost of manufacturing coming to 80% of the total cost could be a reasonable ratio but annual or maximum period of 2 years for contract renewal with the warehousing service providers could be the deterrent; it carried the impending risk of increased inventory cost annually. That’s why Gerrard senior management had been focussing more on closing the Cologne facility (Case Study). Financially, it would be a good decision to close the Cologne warehouse as shipments from Netherland to Brussels would not be charged with any additional freight rate. The new weighted-average rates for taking the goods from Brussels plant to the Cologne customers through another trucking company are quite competitive as the trucking company has expressed its desire for reducing the rates for less-than truck loads (LTL). It has offered 100 square meters of its Cologne terminal space for transit storage without charging extra, which is a big plus-point. The local delivery rates for TL per case would come to €0.58 and for LTL only marginally higher. Rate for at least 40% shipped goods would be highly competitive. Gerrard would be in a position to save revenue on this count and also by getting goods delivered via the Netherland without incurring extra cost in comparison to goods delivered via the Cologne facility (Case Study). The minus point while continuing the Cologne facility by renewing the contract could be the probability of fixing of throughput rate to 25 cents per case and additional penalty on less than 12-times stock turning per annum. Crucial decision influencing factors could be decrease in savings if the Cologne facility is continued, as the throughput rate of 25 cents added to the manufacturing cost of about €18 per case with the risk of penalty for the reduced stock turns in a year and the variable cost of marketing averaging €1.66 per case has to be added to the manufacturing cost, which would further reduce the margins to the company. From incremental analysis perspective the scenario is not appealing enough as renegotiation for the Cologne facility would incur additional costs, thus reducing the margins. On the other hand, discontinuing with the Cologne facility would reduce the system inventory in monetary terms by €135,000 per year of Brussels based goods finding their way to the Cologne market area in the radius of 80 Km. served via Netherland to Brussels for a limited number of goods and the rest of the 25 products from Brussels via trucking contract to the final destination, offering leverage of extra space and reduced cost per case for TL and LTL subsequently (Case Study). Based on the above analysis, closing of Cologne warehouse is recommended only when customer servicing is of optimum level, which is near to 98% for hospital customers and 97% for consumer products. It also has the interference of inventory carrying costs and actual service requirements. Another factor that could prove to be an obstacle in customer service is related to industrial customers such as hospitals whose inventory systems as noticed in the case study had not been performing optimally. Things could take a wrong turn if hospital clients although forming only 10% of the total customers are not provided excellent delivery within the right time of two days (Case Study). Regarding sales volume, any change in quantity of goods delivered can tilt the balance in favour of the previous option of continuing with the Cologne facility. For that a comparison per case shipment cost has to be made from both the options with the given data of 15,000 cases per month to be shipped. Analysing the cost at Cologne from Netherland to Brussels of one/third goods at 55 cents per case and the rest of the two/thirds goods at 65 cents seems more remunerative in comparison to opting for Brussels plant delivery ranging between €0.58 to €0.68 but one can not ignore the fact that delivering most of the goods from the manufacturing plant itself where Smith himself would be at the helm of different department affairs and in a better position to leverage by ensuring timely delivery of goods to the hospital customers of Cologne area, should tilt the balance in favour of closing the Cologne facility. Further, the difference between the cost structures is not that big to create worries. Main issue is any depreciation in customer servicing, particularly industrial customers but that too could be managed with extra delivery care taken as they form just 10% of the total sales. One cannot ignore the offer of the new trucking company of providing free space at its Cologne facility for transit storage and offering competitive rates on LTL shipments (Case Study). Further, one more consideration on sales volume can affect decision making. It is possible to manage 10% industrial customers but if the percentage of hospital customers increases to in-between 20-40%, Gerrard Laboratories should not compromise with any delay to goods delivery. It could ill-afford sacrificing them and should think twice before closing the Cologne facility. Any manufacturing company should show a preference for wholesale buyers. Serving them from the Brussels plant could prove dearly on the revenue stream. Future holds the answer to such issues. Promises of the trucking company have not been tested and are a matter of the future for the actual and timely services realisations (Case Study). Latest research also values customer reaction to the service and cost levels. Nurturing a relation between the two parameters helps a company to measure the nexus between service and revenue, thus enabling logistics to get competitive leverage in functions management. There needs to be a positive relationship between strategy pursued and effectiveness of measures (Kiefer and Novack 1998). A number of methodologies have been used including AHP and Data Envelopment Analysis (DEA) to derive comparative efficiencies of DCs of a Korean telecommunications company (Higginson & Bookbinder 2005). For taking any decision on distribution centres, data gathering is very crucial for conducting logistics strategy modeling job, needing major variables and relevant data such as variables and data. Variables should include location and strength of each plant, DC or transshipment depot; cost deriving activities for storage, major transport and local delivery; demand locations and amounts. Data should be gathered on customer location and demand; DC location and throughput; primary transport costs (fixed and variable); local delivery costs (fixed and variable) and stock keeping costs. It won’t be easy to capture quantitative data, so gathering other data regarding customer types and specialist customers should be collected. Exact quantitative comparisons can not be made in such a case scenario in tonnage distributed yearly to each customer type but certain values can be derived (Rushton et al. 2006). For conducting any analysis based on quantitative data and deriving conclusions on closing of a distribution facility, data should be accurate to state actual costs saved to the business. Customer service analysis is very crucial input on any logistics network shrinkage planning. It needs to be analysed what impact the closure of a DC have on the logistics arrangement; how it will affect customer interests (Rushton et al. 2006). A case study analysis (Chan, Kumar and Choy 2006) can help in taking a decision on location closing. Some of the preferred criteria as taken from the analysis of Alpha, a company, and previous research conducted on selection of a facility for warehousing in the DC context include: 1. Site characteristics 2. Cost expected 3. Traffic access 4. Market opportunity 5. Quality of living 6. Local incentives For closing a distribution centre facility, the company needs to consider how alternative facility would provide smooth flow from the alternative facility to the customers in an optimum cost efficient logistics solution to close one of its distribution services but before that it needs to analyse the trade-offs and measure the loss to customer loyalty in the absence of the distribution facility. Cost trade-off analysis is very difficult to conduct in the absence of company provided data, as models to be used for accruing information on cost saving are complex such as linear programming; certain solutions could be optimum from local considerations and perspectives but not comprehensively in the larger interests of the company (Rushton et al. 2006). Whether a distribution centre is required to be continued or closed depends on their evaluation as based on forecasted demand, production capabilities of plants and storage limits of the warehouses plus production and transportation costs for each location, if gets reduced helps to take a decision on the continued operation or closing of a distribution centre. A linear programming model can be formulated with the given data to help take a decision as given in Table 1 and 2 showing production cost and freight (CFR) between points (Bravo et al. 2007: 45). Table 1 Production and Freight Costs to CDC PRODUCTION COSTS + FREIGHT COSTS to CDC CDD1 CDC2 CDC3 CDC4 CDC5 CDC6 Cap Tons Plant 1 $475 $603 $622 $585 $616 $562 9.900 Plant 2 $780 $647 $907 $746 $743 $796 $4.000 Plant 3 $785 $740 $664 $762 $732 $790 6.300 Cap Tons 5.800 7.400 3.700 1.500 1.000 500 Table 2 Freight Costs from warehouses to markets MARKET 1 MARKET 2 MARKET 3 MARKET 4 MARKET 5 MARKET 6 CDC1 $96 $110 $128 $159 $141 $87 CDC2 $133 $99 $43 $70 $96 $40 CDC3 $121 $98 $44 $110 $68 $126 CDC4 $110 $37 $99 -- $48 -- CDC5 -- -- -- -- $71 -- CDC6 -- -- -- -- -- $49 DEMAND 4.000 5.000 6.000 1.000 900 450 (Bravo et al. 2007: 46). Based on the figures given in the tables 1 & 2, a linear programming model includes Xij: Number of tons delivers from production plant i to the warehouse j. i = 1 to 3; j = 1 to 6 Yij: Number of tons delivers from warehouse i to the market j. i = 1 to 6; j = 1 to 6 Considering the limitations related to production capacity, warehouse capacity, products demand, flow keeping of the warehouse and negativity, the answer to the problem could be achieved as given in the outcomes below in Tables 3 and 4. Table 3 Quantity sent from plants to distribution centers QUANTITY (TONS) SENT FROM THE PLANTS TO THE DISTRIBUTION CENTERS CDC1 CDC2 CDC3 CDC4 CDC5 CDC6 Total Plant 1 5800 2600 0 1500 0 0 9900 Plant 2 0 4000 0 0 0 0 4000 Plant 3 0 450 2100 0 900 0 3450 Total 5800 7050 2100 1500 900 0 Table 4 Quantity sent from CDD’s to markets TONS SENT FROM CDD?S TO MARKETS MARKET 1 MARKET 2 MARKET 3 MARKET 4 MARKET 5 MARKET 6 TOTAL CDC1 4000 1800 0 0 0 0 5800 CDC2 0 0 5600 1000 0 450 7050 CDC3 0 1700 400 0 0 0 2100 CDC4 0 1500 0 - 0 - 1500 CDC5 - - - - 900 - 900 CDC6 - - - - - 0 0 TOTAL 4000 5000 6000 1000 900 450 (Bravo et al. 2007: 48) The outcomes as we see in table 4 indicate that the distribution centres situated in Markets 5 and 6 serve only one market, which could be high on cost to the company. These centres require incessant monitoring for the specific case in the coming months to examine the chances of their functioning or catered by other CDSCs. The outcomes indicate that Markets 5 and 6 needs to be closed and substituted by CDCs functioning from locations elsewhere (Bravo et al. 2007). According to Towill (2005), by finding a decoupling point (DCP) in the supply chain accurately can offer immense opportunities but if the DCP is positioned wrong, all the efficiencies of the manufacturing process becomes a risky proposition. Pipeline strategies related to manufacturing and logistics play a crucial role for zeroing on performance parameters, which should be the Market Winner (MW) and Market Qualifiers (MQ). MW and MQ keep on changing as at some point of time in a product life cycle, trends could compel customers to pay increased price. With the growth in sales, availability of the product could be the primary parameter but in the last stage when stock and volumes are optimum, price could be the leading MQ resulting in big discount offering. Analysing the case of Gerrard Laboratories, as its director of distribution services, Charles Smith has to take a crucial decision on closing one of its 37 warehouses, the Cologne warehouse in Germany and serve the customers straight from the plant warehouse at Brussels, Belgium, the decision could be very difficult to take. Being a manufacturing company catering processed food items of 35 types, out of which its 25 products are being manufactured at the Brussels plant, the decision to continue supply from this facility seems initially correct because of its nearness but one should not ignore the physical boundaries between the two locations. Further, analysing the sales potential, Gerrard Laboratories is serving to industrial clients i.e. hospitals only 10%; rest of the 90% sales are to retailers. Smith role as director of distribution indirectly links to performance of logistics functions, which are looked after by plant managers reporting to director of manufacturing. The company is almost near to its aim of providing 100% service level to hospitals and other customers but before taking a final decision on closing the Cologne warehouse, it needs to analyse the previous data on inventory carrying cost. The figure of 37% inventory carrying costs seems quite exaggerated to Smith as a latest distribution analysis has derived a holding carrying cost ate of 17%. A linear programming model could have helped Gerrard Laboratories but in the absence of previous years’ data, which has been a major hurdle in the decision making, Smith should go with the management decision on closing the Cologne warehouse and serving the clients from Brussels plant warehouse, as financial implications of inventory carrying costs have been analysed realistically by an aide of Smith on ICC rate of 17% to be more nearer. Providing optimum service level is not possible without analysing realistically the distribution costs including ICC and service needs. The other crucial factor to reduce lead time to the delivery is installation of latest communications tools, which Gerrard Laboratories should install as soon as possible to reduce the delivery lead time especially for delivery to hospitals. References: Bravo, Brayan., Cortes, Krizztie., Aguilar, Melyna., Granados, Sofia., Amaya-Leal, Johanna., 2007. Competitiveness in the supply chain management: An overview in an oils' and greases' manufacturer. Ingenieria y Desarrollo, no. 22, p. 38-53. Available from: Academic Search Complete [Accessed 5 February 2011]. Chan, F. T. S., Kumar, N., Choy, K. L., 2007. Decision-making approach for the distribution centre location problem in a supply chain network using the fuzzy-based hierarchical concept. Proceedings of the Institution of Mechanical Engineers -- Part B -- Engineering Manufacture, 221(4), pp. 725-739. Available from: Academic Search Complete [Accessed 5 February 2011]. Higginson, James K., Bookbinder, James H. ‘Chapter 3: distribution centres in supply chains operations’ Ed. A. Langevin and D. Riopel. (Springer, 2005). Available from: http://uploading.com/files/FF7C7TL1/Handbook_Logistics_Distribution_Management.rar.html [Accessed 5 February 2011]. Kiefer, Allen W., Novack, Robert A., 1999. An empirical analysis of warehouse measurement systems in the context of supply chain implementation. Transportation Journal, 38 (3), pp.18-27. Available from: Academic Search Complete [Accessed 5 February 2011]. Rushton, Alan., Croucher, Phil., Baker, Peter., 2006. The handbook of logistics and distribution management. The Chartered Institute of Logistics and Transport (UK). Kogan Page, London and Philadelphia. Available from: http://uploading.com/files/FF7C7TL1/Handbook_Logistics_Distribution_Management.rar.html [Accessed 6 February 2011]. Towill, Denis R., 2005. Decoupling for supply chain competitiveness. Manufacturing Engineer, 84 (1), pp.36-39, Available from: Academic Search Complete [Accessed 5 February 2011]. Read More