Strategic Supply Chain Management: Presto Limited - Case Study Example

Presto Case Analysis Introduction Presto Limited is currently standing at cross roads to decide how to reduce its lead time as well as the overall cost of producing the final product. The major concerns of the company are – the growing demand from the retailers to provide replenishments of products faster, rising material costs in the present setup of production and the inability of the present manufactures to reduce their lead time even in the future because of the dependence on outdated manufacturing technology. One of the options they are looking at is to shift the manufacturing base to low cost countries which they have identified as Italy, Lithuania and Mauritius. However, this further needs to be explored as the transportation costs and time would increase substantially and the cost benefit of low material or labor might just be neutralized. In our ensuing discussion, we will look at all the scenarios and understand the implications of the each option on the costs and lead time. Present scenario Currently the company is manufacturing around a million pieces in a year and the sales revenues per unit are of £6 to £8 (mostly towards the lower side). The total material cost is £0.60 per unit and the manufacturing cost currently is at £2.5. Thus, the total annual cost of manufacturing (manufacturing and material) for 1million pieces is £3,100,000. Following are the calculations of various costs in the present case scenario. The calculations are done for computing the cost of 1million pieces annually. Sales revenues have been calculated at £6 per unit as the actual price that Presto receives is towards the lower of the range mentioned earlier. Table 1 Total units sold per anum 10,00,000 Sales @ 6 pounds per unit 6,000,000.00 Inventory value @ 3months of average sale 1,500,000.00 Capital cost of inventory 375,000.00 Operational cost of inventory 100,000 Material cost 0.60 Total material cost 600,000.00 Manufacturing cost 2.50 Total Manufacturing cost 2,500,000 Manufacturing cost + Material 3,100,000 Conventional wraping costs @65% of sales volume packaging cost 0.25 Material + manuf.cost+package per unit 3.35 Material + manuf.cost + package for 1mn units 2,177,500 Hanging garments costs @35% of sales volume Packaging cost 0.20 Material + manuf.cost+package per unit 3.30 Material + manuf.cost + package for 1mn units 1,155,000 Total material, manufacturing and packaging costs 3,332,500 Units in 1 carton 100 Total cartons required for 1mn.units 10,000 Proportion of hanging garments demand 35% Requirement of conventional wrapping cartons 6,500 Requirement of hanging garments units 350,000 Conventional wraping trailers required and cost Big @ 150 and 12 units required 1,800 Small @ 120 and 4 units required 480 Total conventional wrapping cost for tranportation 2,280 Hanging garments accomodated in 1 trailer 7,500 No.of trailer trips required 46.67 Total hanging garments cost of transportation @175 per trip 8,167 Total transportation costs 10,447 Administrative costs 2,000,000 Total annual costs 5,817,947 Inventory costs have been divided into two – capital costs and operational costs. Capital costs have been calculated at 25% of the average inventory held during the year. It has been noted that the company holds inventory of 2 months of average sales volumes and at time 4 months. Thus for calculations an average of 3 months of inventory has been taken to find the capital cost of inventory. Average 3 month’s sale has been calculated to £150,000 (1mn units apportioned over the entire year) @ £6 revenue per unit. Operational cost of inventory is calculated at £0.10 per unit produced. For calculating the transportation costs, calculations have been done under two different heads. One is the cost involved in convention packing and the other is that for hanging garment style transportation. It has been observed that of the total production on 1million units 35% of the demand was for hanging garment style delivery. This means that 350,000 units were required in this style of delivery and the rest 650,000 units had the conventional packing requirement. As conventionally packed clothes can be delivered in big as well as small trailers each having different pricing, an optimum combination of the two which required minimum costs was calculated. According to this calculation the minimum cost was achieved if the 650,000 units (in cartons of 100 units each) were delivered in 12 standard 13.5m trailers and 4 haulers which had smaller dimensions and charged £120 as against £150 by 13.5m trailers. Hanging style clothes’ transportation cost is evident from the table 1. Ordering costs are part of the administrative costs of £2,000,000. For further calculations it can be safely assumed that the company orders around 4 times in a month. This is based fact that the retailers are expected to place replenishment orders every week hence we can assume that Presto will have to place order 4 times a month. Based on the above calculations, the current costs are £5,817,947. Now, let us look at the cost calculations of our shortlisted alternate manufacturing bases. Italy The following table shows the cost calculations for the two means of transport in Italy – road and rail.   Road Rail Total units sold per anum 1,000,000 1,000,000 Sales @ 6 pounds per unit 6,000,000.00 6,000,000.00 Inventory value @ 3months of average sale 1,500,000.00 1,500,000.00 Capital cost of inventory 311,250 311,250 Operational cost of inventory 100,000 100,000 Material cost 0.54 0.54 Total material cost 540,000.00 540,000.00 Manufacturing cost 2.00 2.00 Total Manufacturing cost 2,000,000 2,000,000 Manufacturing cost + Material 2,540,000 2,540,000 Conventional wraping costs @65% of sales volume packaging cost 0.25 0.25 Material + manuf.cost+package per unit 2.79 2.79 Material + manuf.cost + package for 1mn units 1,813,500 1,813,500 Hanging garments costs @35% of sales volume packaging cost 0.2 0.2 Material + manuf.cost+package per unit 2.74 2.74 Material + manuf.cost + package for 1mn units 959,000 959,000 Total material and manufacturing cost 2,772,500 2,772,500 Volume of each carton of 100 pieces (in cu.m) 0.216 0.216 Space available on big trailers in cu.m 101.79 101.79 Cartons that can be accommodated 471 471 No.of 13.5m trailers required for 6,500 units 14 14 Conventional packed Cost of 14 trailers 19,600 17,920 Hanging garments accomodated in 1 trailer 7,500 7,500 No.of trailer trips required 47 47 Hanging garments cost 70,000 70,000 Total transportation costs 89,600 87,920 Administrative costs 2,000,480 2,000,480 Total annual costs 5,273,830 5,272,150 There is a saving of £544,117 if goods are transported through road and £545,797 if rail transport is used. Some savings have come from slight decrease in manufacturing and material costs but the transportation costs have grown substantially negating the slight cost advantage. Though, the rail transport route looks more attractive, it is more unpredictable as delays can lead to transportation time of more than 3.5 days at times. One more disadvantage of rail transport is that it does not have the ability to transport hanging garments hence they will have to be carried by road only. Hence it is better to go for transportation by road if this country is chosen as manufacturing base. The manufacturers here use much more advanced technology as compared to the ones in UK or the other two countries shortlisted i.e. Lithuania and Mauritius. This can have a positive impact on lead times and hence the inventories as they have the capabilities of manufacturing products as per retailer demand. So, from a futuristic perspective Italy can be a good choice. Another factor which has a major impact on saving is the reduction in manufacturing lead time of up to 2 weeks. This can result in around 17% reduction in inventory costs as can be seen from the calculations. With an added transit cost of 3 days by road, there will not be very substantial negative impact on the inventories. One more advantage here is the quality check ability of the manufacturers. Thus, this responsibility can be given to the production units here itself and reduce the quality check resources at the UK office. Italy has an added advantage of already being a materials supplier to Presto. The reduction in material accusation cost of 10% is because of this reason. Thus, if the supplies from here are increased, it can give more cost advantages in the long run. One downside of production here is the increase order cost. However, this is not a very substantial amount to have a very high impact on the overall costs. Lithuania Lithuania has an advantage as it is the member of the European Union and thus has same advantages as Italy on account of the membership. The cost calculations for Lithuania have been done below:   Sea Road Total units sold per anum 1,000,000 1,000,000 Sales @ 6 pounds per unit 6,000,000.00 6,000,000.00 Inventory value @ 3months of average sale 1,500,000.00 1,500,000.00 Capital cost of inventory 375,000.00 375,000.00 Operational cost of inventory 100,000 100,000 Material cost 0.60 0.60 Total material cost 600,000 600,000.00 Manufacturing cost 1.50 1.50 Total Manufacturing cost 1,500,000 1,500,000 Manufacturing cost + Material 2,100,000 2,100,000 Conventional wraping costs @65% of sales volume     packaging cost 0.15 0.15 Material + manuf.cost+package per unit 2.25 2.25 Material + manuf.cost + package for 1mn units 1,462,500 1,462,500 Hanging garments costs @35% of sales volume     packaging cost 0.12 0.12 Material + manuf.cost+package per unit 2.22 2.22 Material + manuf.cost + package for 1mn units 777,000 777,000 Total material and manufacturing cost 2,239,500 2,239,500 Volume of each carton of 100 pieces for conventional packing(in cu.m) 0.216 0.216 Space available on 13.5m trailers in cu.m 101.79 101.79 Cartons that can be accommodated 471 471 No.of 13.5m trailers required for 6,500 units 14 14 Conventional packed Cost of 14 trailers 14,000 20,767 Hanging garments accomodated in 1 trailer 7,500 7,500 No.of trailer trips required 47 47 Hanging garments cost 76,767 76,767 Total transportation costs 90,767 97,533 Administrative costs 200,2400 200,2400 Total annual costs 4,807,667 4,814,433 There is a significant cost reduction in Lithuania as compared to Italy. This is mainly because of the huge savings on account of the low labor costs resulting in reduction in manufacturing and packaging costs. The cost of sea transport is much lesser than the road transport. However, the hanging garments need to be carried by road itself as there is no such facility by sea. There is also another extra transportation cost as quality check needs to be done at UK base and the materials need to be transported back for any changes. This has been accounted for in the costs. It has been noticed that 1 in every 3 lorry is affected by this additional £100 charge. Thus effectively, a charge of £33 per lorry is added to calculate transportation costs. The main problem here is the extra ordering costs. But these are not very substantial. Taking our previous calculations of 4 orders per month, the additional ordering cost as compared to the current scenario works out to be £2,400. This is not a very high impact cost. However, on the whole there isn’t any lead time gain; hence no affect on inventory. Another problem here is the inability of the manufacturers here to provide small batches of non-standard products because of the dependence on outdated technology. Mauritius Total units sold per anum 1,000,000 Sales @ 6 pounds per unit 6,000,000 Inventory value @ 3months of average sale 1,500,000 Capital cost of inventory 311,250 Operational cost of inventory 100,000 Material cost 0.6 Total material cost 600,000 Manufacturing cost 1.95 Total Manufacturing cost 1,950,000 Manufacturing cost + Material   Conventional wraping costs @65% of sales volume   packaging cost 0.15 Material + manuf.cost+package per unit 2.7 Material + manuf.cost + package for 1mn units 1,755,000 Hanging garments costs @35% of sales volume   packaging cost 0.42 Material + manuf.cost+package per unit 2.97 Material + manuf.cost + package for 1mn units 1,039,500 Total material and manufacturing cost 2,794,500 Conventional wraping costs @100% of sales volume 12,116,597 Total transportation costs 12,116,597 Administrative costs 2,004,800 Total annual costs 17,327,147 The overall costs here are the highest. This is mainly because of the high transportation costs on account of the distance. Only sea route is available for transport and it is very expensive. Following calculations show the trailer combination calculation which leads to the least cost. Calculations of cartons required Conventional packing carton size: 0.216 pieces in 1 carton : 100 Cartons required for 1mn pieces : 10,000 Carton capacities capacity standard high cube 1TEU 32.85 37.09 2TEU 66.83 75.32 Carton costs standard high cube 1TEU 1,000 1,100 2TEU 1,500 1,650 Lowest cost combination calculations at (40,13) combination of (1TEU,2TEU) for standard container Standard high cube Total 1TEU 6,083,333.33 4,533,222.22 10,616,555.56 2TEU 6,033,263.89 9,781,138.89 15,814,402.78 12,116,597.22 14,314,361.11 All the other combinations cost higher than £12,116,597.22. Besides the highest costs as compared to all other manufacturing options, Mauritian manufacturers do not give any lead time advantages. The packaging costs are higher as there is no facility of moving hanging garments by sea. This substantially increases the overall costs. Another disadvantage here is the uncertainty of the transportation time. This could increase to 5 weeks as compared to a few days in case of Italy and Lithuania. Looking at the ordering costs here, they are double than the current scenario. Though this is not a very substantial figure in the overall cost, it reflects on the obsolete technology being used here. Conclusion Mauritius does not qualify for a good option for setting up a manufacturing base for retailers in UK. However, it can be looked at for providing goods for South and South East Asian destinations. From among the remaining two countries, Lithuania looks the most attractive option in terms of cost benefits. However, there isn’t any lead time saving here and even the quality checks need to be done in UK. Though this does not add too much to the overall costs of transportation, it has a disadvantage that for drawbar trailers road transport needs to be used. But for conventionally packed material the cheaper sea can be used. For taking advantage of lead times in Italy, both Italy and Lithuania can be used in combination with manufacturing being done partly in Italy and partly in Lithuania. Lithuania can be used as a base for conventional packing and standardized products to get maximum cost advantage while hanging style garments can be manufactured in Italy to get lead time advantages as well as lower transportation cost advantage for this type of material movement. This will have a dual synergistic affect – lower quality checking costs and a lower ordering cost as compared to manufacturing completely in one country only. By moving around 50% of the production to Italy( 35% of hanging garments and rest conventional) the advantages of high technology of Italy can be used to provide non-standard products in shorter lead time while taking advantage of the lower (as compared to Lithuania) cost of transportation for hanging garments. On the other hand, the remaining 50% of the products can be based in Lithuania to take advantage of low labour costs for standardized products. References Cohen, S and Roussel, J, 2005, Strategic supply chain management: the five disciplines for top performance, McGraw-Hill Professional. Dickersbach, J.T, 2009, Supply Chain Management with APO: Structures, Modelling Approaches and Implementation of SAP SCM 2008, Springer. Fernie, J and Sparks, L, 2004, Logistics and retail management: insights into current practice and trends from leading experts, Kogan Page Publishers. Frazelle, E, 2001, Supply chain strategy: the logistics of supply chain management, McGraw-Hill Professional. 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