Professional Documents
Culture Documents
Westminster Company is one of the world's largest manufacturers of consumer health products;
its distinctive name and company logo are recognized throughout the world. Originally founded
as a family-owned pharmaceutical supply business in 1923, the company's corporate headquarters are still located in a scenic town of 60,000 people in the northeast United States. Westrninster also maintains regional offices in Europe, Latin America, and the Pacific Rim to support
overseas manufacturing and distribution.
Westminster's domestic operations consist of three separate sales divisions-each of which
manufacture and distribute its own product line. Decentralized divisional management is a
proud historical tradition at Westminster. According to President Jonathan Beamer. it is a
process that requires and encourages responsibility and self-ownership of the work process and
provides the key component of corporate success. Westminster's products are marketed through
a network of diverse retailers and wholesalers. Trade Class as a percent of sales is 37 percent
grocery, 3 1 percent drug, 2 1 percent mass merchandise, and I I percent miscellaneous.
Westminster Today
Pressure from domestic and global competitors, as well as large domestic Westminster customers, has recently forced the company to reevaluate its current distribution practices. In particular, attention has focused on the changes which will be required to effectively compete in the
marketplace of the twenty-first century.
Westminster just concluded several months of extensive research which focused on customers'
primary logistics concerns for the future. The research findings addressed a variety of issues, but
two key topics were identified: customer composition and customer service requirements.
The most significant trend with regard to customer composition over the past decade has
been the evolution of the company customer base into either very large or very small accounts.
This development is expected to continue at a comparable pace in the foreseeable future; however, the major shift in the mix of accounts is not expected to dramatically alter the historical
composition of product sales. Approximately 50 percent of domestic consumer sales volume is
concentrated within 10 percent of Westminster's customers. What may affect the composition
of product sales to large retail accounts is the rapid growth of private-label nonprescription
drugs and consumer health products. Cost-efficient private-label manufacturers offer large retail
accounts higher profit margins, willingness to quickly change or customize products, and the
ability to appeal to increasingly price-conscious consumers. Specifically, the private-label health
and beauty aids business totaled sales of $3 billion in 2000.
Research findings have confirmed top management's belief that these large accounts generally possess an intense commitment to increasing their firm's logistics efficiency. To maintain
and increase the percentage of sales volume Westminster derives from these important customer
accounts, the company has identified several key customer service concerns. These concerns
specifically address the second issue of customer service requirements. Company research has
also concluded that the formulation of supply chain partnerships between Westminster and its
large customers has now become a competitive necessity. In many instances, powerful retailers
now demand such arrangements and oftentimes have the leverage to dictate the conditions of the
arrangements. Westminster will have to maintain considerable flexibility to accommodate different solutions for a variety of large, powerful customers. Ideally, Westminster would like to
establish a position of leadership within these partnership arrangements where practical.
Westminster is well aware that successful retailers and wholesalers are heavily focusing
strategic effort on more timely, efficient, and accurate inventory positioning. Many large firms
have identified supply chain management techniques as a primary tool in achieving successful
inventory management and improving overall financial performance. "I visualize three impor-
tant changes for our operations with rezard to large accounts," says Alex Coldfield, Westminster vice president of logistics. "First, traditional inventory replenishment procedures will be replaced by POS driven information systems. Customers will transmit daily or biweekly product
sales movement to us in order to ensure timely inventory replenishment and allow production to
be scheduled according to sales-driven forecasts rather than marketing forecasts. We will also
establish and utilize customer support 'work-teams' that operate on-site with key customer accounts to better manage ordering and distribution. Second, order cycle times will have to be reduced from current levels. Large accounts will increasingly demand two rather than one delivery per week. In addition, many large accounts want to simplify their manufacturing contacts
and are questioning why we cannot provide consolidated order shipment from our three consumer product divisions when cost reductions are achievable. The demand for direct store delivery (DSD) may also significantly increase. Third, products will increasingly have to meet
specific customer requirements, such as assembly of individual store shipments, and customized
inner packs and display units. Bar codes will have to utilize industry standards such a s
UCC 128. Invoicing and payment, particularly with regard to promotional allowances and discounts, will become paperless transactions conducted via EDI. Our pricing will evolve to reflect
services provided, rather than purely traditional logistical order fulfillment, transportation, and
handling."
For the balance of Westminster's customers, distribution service will be provided much as it
is today. Although other customers may not be willing or able to initiate such close working relationships, they wilI be entitled to a high standard of basic service that provides timely and consistent performance. For these accounts, purchase price will remain the priority, although there
will be some increased pressure for improved order fill rates and decreased cycle times. Traditional purchase order invoicing and payment will also remain the rule.
In response to the issues raised by company research, CEO Wilson McKee directed the company's executive management committee to organize a logistics taskforce. The taskforce, which
includes top-level managers from each division's functional departments, has been directed to
identify potential changes within the three domestic sales divisions' networks that will achieve
improved distribution performance and responsiveness.
TABLE
1 Westminster Company Facility Locations
Division A
Manufacturing Plants
Los Angeles, CA
Percentage of Total
Pounds Produced
Distribution
Centers
Percentage of Total
Pounds Shipped
53%
Newark. NJ
28%
24
23
Atlanta, GA
Dallas. TX
4I
Atlanta. GA
Jacksonville, FL
31
Division B
Manufacturing Plants
Percentage of Total
Pounds Produced
Distribution
Centers
Percentage of Total
Pounds Shipped
Philadelphia, PA
39%
Philadelphia. PA
78%
Newark. NJ
Atlanta, GA
37
24
Los Angeles, CA
22
Division C
Manufacturing Plants
Percentage of TotaI
Pounds Produced
Distribution
Centers
Percentage of TotaI
Pounds Shipped
Chicago, lL
Houston, TX
75%
Newark, NJ
384
10
Chicago, IL
54
Trenton. NJ
15
Lor Angeles, CA
TAB=
Characteristics
Total Demand (000,o(K)Ibs)
150
475
Sales ($000,000)
Division B
72
60
920
27 1
Cases (000,000)
13.2
Shipments (000)
Lines Ordered (000)
80
88
1,060
683
6.5
Total SKUs
1,260
8.5
10.8
430
TABLE
3 Shipment Profiles
Shipment size
Package delivery
< 500 Ib
Percent of Weight
6
8
13
18
22
> l0,ooO lb
32
Division C
Percent of Shipments
9.8
73
310
7.2
720
TABLE
4 Westminster 2000 Distribution Costs ($000,000)
Division B
Division A
Division C
Transportation
Transfer freight
Custo~ncrfreight
Total Transportation Costs
Warehousing
Storage &handling
Fixcd
Total Warehousing Costs
Total Distribution Costs
Average Numher Days Transit
Tirnc (DC to customer)
TABLE
5 Hourly Wage Rate for U.S. Cities
City
City
Chicago, IL
Laredo, TX
Seattle, WA
El Paso, TX
Bufhlo, NY
Dallas, TX
Syracuse, NY
Detroit. MI
Pittsburgh, PA
Los Angeles. CA
Atlanta, GA
Minneapolis, MN
Houston, TX
Dcnver, CO
Phoenix, AZ
Kansas City, MO
Mcrnphis, TN
Philadelphia, PA
Ncw York, NY
San Francisco, CA
territories that contain the strongest demand for Westminster products. Demand patterns for
consumer products follow major population centers and are generally consistent across the
country for all three divisions. Several distribution centers are located near manufacturing plants
to reduce transportation costs.
Table 4 lists the current system's transportation and warehousing costs for each of the three
divisions. Freight rate classification for product shipments is different for each of the three divisions. Division A freight has a rating of class 60; Division B freight has a rating of class 70; and
Division C freight has a rating of 200. Transfer freight costs are based on TL rates from the
manufacturing plants to the distribution centers. Customer freight costs are based on LTL shipments from distribution centers to retail and wholesale customers. Average transit time (in nun)ber of days) from the distribution centers to the customer is the shipment time from the point an
order leaves the distribution center's loading dock until it reaches a customer. Any potential systems redesign must consider the effect of labor costs. Table 5 lists average hourly wage compensation for a number of major U.S. cities.
Questions
I . What effects would the two new alternatives have on transfer and customer freight
2.
3.
4.
5.
6.
costs? Why'?
What effects would warehouse consolidation have on inventory carrying costs,
customer service levels, and order fill rate?
How are warehousing costs affected by the decision to use public or private warehouse
facilities? What effect would this have on handling, storage, and fixcd facility costs?
What effect would shipping mixed shipments liom consolidated distribution centers
have on shipment profiles?
What factors should be taken into consideration when determining the appropriate
number of warehouses?
What selection criteria should be used when evaluating a service provider's (public or
third-party warehouse, or third-party transportation provider) ability to meet critical
logistical requirements?