Logistics Management

Case study

Giles Laboratories

Prof. Mller
WS 07/08

Maurice Tabandite Burak Trker Philipp Wotke

Matrikelnummer: 298 478 Matrikelnummer: 298 487 Matrikelnummer: 292 414

Table of contents

1. INTRODUCTION..........................................................................................................3 1.1. 1.2. 2.1. 2.2. 2.3. 3.1. 3.2. 3.3. DESCRIPTION OF THE PRESENT SITUATION ................................................................3 CHALLENGES AND FUTURE PLAN ..............................................................................3 SCENARIO ONE: MAINTAIN COLUMBUS PUBLIC WAREHOUSE .......................................5 SCENARIO TWO: PHASE-OUT PLAN ...........................................................................6 COMPARISON OF THE FINANCIAL IMPACTS .................................................................7 FREIGHT RATES ......................................................................................................7 WAREHOUSING RATES.............................................................................................8 ADDITIONAL PERSONNEL .........................................................................................9

2. . FINANCIAL IMPLICATIONS OF TWO POSSIBLE SCENARIOS.............................5

3. EFFECTS OF PARAMETRICAL VARIATION.............................................................7

4. FAVORITE SCENARIOS REFERRING TO TRANSPORTATION AND WAREHOUSING MANAGEMENT...................................................................................10 4.1. 4.2. 4.3. 5.1. 5.2. 5.3. 6.1. 6.2. TRANSPORTATION MANAGEMENT ...........................................................................10 WAREHOUSE MANAGEMENT ..................................................................................10 CONCLUSION ACCORDING TO THE DIFFERENT OBJECTIVES .......................................10 CUSTOMER SERVICE LEVEL - OBJECTIVE OF AN INTEGRATED LOGISTICS SYSTEM ........11 INFLUENCE OF CUSTOMER SERVICE LEVEL TO THE FUTURE PLAN ...............................12 DEVELOPMENT OF AN ALTERNATIVE DISTRIBUTION PLAN ...........................................12 CURRENT CARRIER PLAN - INFORMATION PROCESSING .............................................13 FUTURE CARRIER PLAN INFORMATION PROCESSING ..............................................14

5. CUSTOMER SERVICE CONSIDERATIONS.............................................................11

6. CARRIER PLAN ANALYSIS - INFORMATION PROCESSING ................................13

7. FURTHER ROOM FOR IMPROVEMENT..................................................................15 8. CONCLUSIONS.........................................................................................................15 9. LIST OF FIGURES.....................................................................................................16 10. LIST OF TABLES ......................................................................................................16
11. ATTACHMENT ................................................................................................................................................... 16

1. Introduction
1.1. Description of the present situation Giles Laboratory is a daughter-company of the worldwide operating Thunder

Pharmaceutical Group. The core business of Giles Laboratory is to produce and sale nutrient and dietary food. Giles-plants has four production facilities, the biggest one situated in Indianapolis. Giles main market is the USA and enjoys 40 % of the market. Customers are consumer outlets (90 % revenue) and to a certain extent medical practitioners and hospitals (10 % revenue).

Vice President

Comptroller

Director of Distribution

Manufacturing Manager Plant Manager 1- 4

Distribution Manager Operations Planning Manager Purchasing Manager Production Planning Manager

Plant shipping

Plant receiving

Figure 1: Giles organization structure Figure 1 shows the organizational structure of Giles. Distribution, controlling and manufacturing department are at the same organizational level. The manager of the distribution is responsible for all logistics functions, except plant shipping and receiving. 1.2. Challenges and future plan Giles runs 41 warehouses, four plant warehouses and 37 field warehouses. The plant warehouses supply the field warehouses and customers located near the plants. Thurber Pharmaceuticals wants Giles to reduce the number of the field warehouses. Furthermore the company needs more direct transport relations between warehouses and its

customers. Analyzing the warehousing situation of the strongest competitor, it became evident that the market-coverage warehouse proportion had to be improved.

Michigan plant / warehouse

Indianapolis plant / warehouse

Columbus warehouse

Wholesaler

Columbus Customers

Columbus Columbus Columbus Customers Customers Customers

Customers > 40 miles radius

Customers < 40 miles radius

Figure 2: Current distribution plan In 1996 the distribution manager developed a phase out plan. The plan contained phasing out Columbus warehouse and serving Columbus customers by the plant warehouses in Michigan and Indianapolis. The current distribution plan foresees that the plant warehouses in Michigan and Indianapolis deliver Columbus directly (Fig. 2). Phasing-out Columbus means that Indianapolis and Michigan plant warehouse have to take over the field warehouses function (Fig. 3).

Michigan plant / warehouse

Indianapolis plant / warehouse

Columbus Columbus Columbus Customers Customers Customers

Figure 3: Phase-out plan 4

2. . Financial implications of two possible scenarios

2.1. Scenario one: Maintain Columbus public warehouse
Maintain Columbus Transport-costs Michigan Indianapolis Handling-costs in Michigan in Indianapolis in Columbus Inventory cc Michigan Indianapolis Setfree-capital Inventory cc after s.c. one-time-reduction Variable costs Total costs $28.500 $10.500 $18.000 $69.300 $8.100 $16.200 $45.000 $227.934 $99.600 $199.200 $0 $227.934 $298.800 $624.534

One possibility of managing the field-warehouse-issue around

Columbus is to renegotiate its contract (cp. Tab. 1). The transportation-costs for 5000 cases that are shipped monthly from Michigan to Columbus at a freight-rate of $0,70/ctw add to $10.500 per year. $18.000 are needed to ship 120.000 cases per year (=10.000 cases per month) from Indianapolis to

Table 1: Total costs overview New Columbus of $0,60/ctw - in total $28.500 per year.

Columbus based on a freight-rate

The handling-costs are 1.5% of the manufactured cost of average inventory. That means handling costs of $8.100 for the yearly transferred 60.000 cases from the Michigan and $16.200 for the rest of 120.000 cases shipped from Indianapolis to Columbus. The costs for transit storage that are fixed on a throughput-rate of $0,25 per case have to be added. These transit storage costs mount up to $45.000 per year. Therefore, the total handlingcosts add up to $69.300 per year. These costs plus the inventory carrying costs and the variable costs are defined as the total costs. The inventory carrying costs are based on a percentage of the manufacturing costs of shipped cases. An analysis figured out the percentage of inventory value that is the basis for the calculation of the ICC. The ICC can be calculated by multiplying the average of the yearly amount of transported cases by the manufacturing costs per case and the given percentage of inventory value (=14,07%). This results in an inventory carrying cost of about $227.934. Variable costs per cases are stated as $1,66 per case. For the total number of 180.000 shipped cases the variable costs sum up to $298.800 per year. The Addition of all given costs that include costs for transportation and handling, inventory carrying costs and variable costs lead to the total costs that come up in case of maintaining the public warehouse amounting to $624.534. 5

2.2. Scenario two: Phase-out plan

Phase-out-plan (1st year) Transport-costs Michigan Indianapolis Handling-costs in Michigan in Indianapolis in Columbus Inventory cc Michigan Indianapolis Setfree-capital Inventory cc after s.c. one-time-reduction Variable costs Total costs $71.925 $10.500 $61.425 $24.300 $8.100 $16.200 $0 $227.934 $99.600 $199.200 $0 $227.934 -$135.000 $298.800 $487.959

Phase-out-plan (2nd year) $71.925 $10.500 $61.425 $24.300 $8.100 $16.200 $0 $227.934 $99.600 $199.200 -$18.371 $209.563 $0 $298.800 $604.588

Table 2: Total costs overview Phase-out plan The redirection of the cases that were formerly shipped from Michigan to Columbus has no financial impact to the transportation costs. That means $10.500 per year for shipping from Michigan to Indianapolis. The freight-rates from Indianapolis to Columbus can be averaged to $1,37/ctw according to the given chart of percentaged total weight shipments and the appendant costs. The change of freight-rate-costs and yearly shipment size results in increasing transportation addressed from Indianapolis to the customers. These costs would then mount to $61.425. The total transportation-costs in case of the phasingout plan would then be $71.925. The handling-costs are the same as in scenario 1 (Michigan: $8.100; Indianapolis: $16.200). In case of phasing out the Columbus warehouse the inventory carrying costs would not change in the first year. These costs would also be to the amount of $227.934. According to the assumption that this one-time-reduction only takes place in the first year after closing the Columbus warehouse, there would also be a change of the total inventory carrying costs taking place in the second year. The difference of $18.371 in comparison to the first year is based on the reduction of the total variable costs that need to be paid. This difference is calculated with the given percentage in the tune of 17,01% and the average yearly inventory amounting to $135.000. For the second year the inventory carrying costs would then be at an amount of $209.563. The variable costs are calculated in the same way like in scenario 1 and are accounted for $298.800. 6

The total cost for the phase-out-plan would add up to $487.959 for the first year and $604.588 for the following years. 2.3. Comparison of the financial impacts As it is shown, maintaining the Columbus warehouse results in lower transportation costs but also in higher handling costs. In case of phasing out the Columbus warehouse the cost-distribution concerning transportation and handling conduct the other way round. There is no change in inventory carrying costs in the first year for both scenarios. But due to the reduction of variable costs there can be a change of ICC discovered for the phaseout-plan from the second year on. Therefore, phasing out the Columbus public field warehouse is to recommend.

3. Effects of parametrical variation

3.1. Freight rates Fig. 4 shows the devolution of the total costs over the freight-rate-variation parametrical with
$640.000,00

Freight-rate-Variation (Variation of Phase-Out-Plan)

Phase Out-Plan New Columbus (const.)

phase-out-

plan-costs versus constant

total costs

BEP at 153%
$620.000,00

New-Columbus-costs

The

total costs of the phase-outplan would subtend

$600.000,00

the calculated total costsstraight-line renegotiated of the

$580.000,00
80% 90%

actual freight-rate
100% 110% 120% 130% 140% 150% 160% 170% 180%

Columbus

freight-rate-variation

contract if freight-rates had a rise of about 53% in

Figure 4: Financial impact of freight-rate-variation concerning the Phase-out-plan

reference to the actual freight-rate of $1,37/ctw.

The variation of the freightFreight-rate-Variation (Variation of New Columbus)

Phase Out-Plan (const.) $640.000,00 New Columbus

rates

concerning

New

Columbus in comparison to the total costs within the phase-out-plan is shown in

total costs

$620.000,00

Fig. 5. There is a BEP at a

BEP at 30%

reduction of about 70% down to 30% of the actual combined freight-rate of This is about an

$600.000,00

$580.000,00
10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110%

$0,63/ctw.

freight-rate-variation

unrealistic scenario due to the Figure 5: Financial impacts of freight rate variation concerning New Columbus heavy reduction that is

needed to reach the BEP.

3.2. Warehousing rates The warehousing-rate

Warehousing-rate-Variation (Variation of New Columbus)
Phase Out-Plan (const.) $660.000 New Columbus

includes the throughput-rate postulated in the New-

Columbus-scenario. Therefore, the analysis of

total costs

$640.000

this special variation factor can only be done for one future scenario. Fig. 6

BEP at 96,5% $620.000 actual warehousing-rate $600.000

50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

shows the comparison of the total costs with flexible warehousing rate in NewColumbus vs. the total cost

warehousing-rate-variation

Figure 6: Financial impacts of warehousing rate variations

of the actual phase-out plan. If throughput-rates sank down more than 3.5% of the actual rate of $0,25 in New- Columbus warehouse would be more rentable than its phase-out. Because of the low needed-reduction of about 3.5% of the throughput-rate maintaining the Columbus warehouse could be a very profitable option to the phase-out-plan.

3.3. Additional personnel A comparison of the two

Personnel-costs-Variation (Variation of Phase-Out-Plan) Phase Out-Plan $640.000 total costs
BEP at 110%

possible decisions has to be done according to the change of personnel-costs.

New Columbus (const.)

Personnel-costs are included

$620.000
actual handling-rate

in the handling-costs as a percentage of manufacturing

$600.000
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

costs. The initial situation for this percentage is 1.5%. Fig 7 shows the course of the total

handling-rate-variation

Figure 7: Financial impacts of personnel-variation concerning phase-out-plan

cost

depending

to

the

personnel cost when phasingout Columbus. The phase-out-plan is rentable until the handling-rates increase to 110% of the present warehousing-rate. From that point on the New Columbus contract would be more profitable. At a changed point of view, that means a flexible to
$640.000 total costs
BEP at 90%

Personnel-cost-Variation (Variation of New Colum bus) Phase Out-Plan (const.) New Columbus

handling-rate maintaining warehouse,

according the

Columbus

handling-rates

have to decrease by 10% that a renegotiation would be

$620.000
actual handling-rate
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

rentable (cp. Fig. 8). Referring to this analysis the phase-out plan can be realized.

$600.000

handling-rate-variation

Figure 8: Financial impacts of personnel-variation concerning New Columbus

4. Favorite scenarios referring to transportation and warehousing management

4.1. Transportation Management The first plan phasing-out Columbus - includes higher transportation costs but fewer inventory costs. The second plan renegotiating the contract with Columbus - means more inventory costs but lower costs for transportation. On the one hand there are lower transportation costs of $ 50.925 for New Columbus, due to the shorter distance between the Giles-warehouses and its customers. Maintaining Columbus contract means better access of Giles to their customers. On the other hand the phase-out plan implies more full shipments for the whole distribution-chain. There will be more direct transportation relations between the plant, warehouses and customers. The transportation management gets a better overview about the whole logistic-chain and the warehouse stock. Besides that a reduction of the complexity in tour planning for the Giles HQ, due to direct relations and fewer inventory turn over in different warehouses is also possible. 4.2. Warehouse Management On the hand inventory management has to maintain a certain service level to ensure a fast reaction to the customers demands. On the other hand inventory management has to offer its services at the lowest possible costs. In consequence inventory management has to find a balance service level and inventory costs. Keeping Columbus warehouse would enable inventory management to act more flexible to the current demand situation. Furthermore the warehouse offers a safety function to guarantee the supply of Giles customers. The phase-out plan would result in a lower stock of about $ 135.000 and a one time saving of $ 108.000. Moreover the reduction of stock in public warehouses would result in a better overview for the inventory management about the current stock level. 4.3. Conclusion according to the different objectives Due to the full shipments and multitude of direct relations between Indianapolis and Columbus customers the phase-out plan seems to be the better way to handle the costs and customer-service level for the transportation management. Warehouse management however would renew the Columbus-contract. The most important factor for the

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management are that the warehouse is close to the customers and that this decision can help to maintain and to extend the service-level for the Columbus customers.

5. Customer service considerations

5.1. Customer service level - objective of an integrated logistics system In Fig. a the logistics and the marketing divisions are shown and in what way they are interlinked. While marketing consists of the four Ps Product, Price, Place and Promotion - logistics causes costs to fulfill the place-requirements for the marketinglogistics intersection. This system of functions must be seen as an integrated system, which single objective is to achieve a targeted service level. Each function is interlinked among each other. Thus it must be the objective to align this integrated logistics-system towards the targeted customer service level.
Fig. a
Product Price Promotion Marketing

Fig. b

Revenue

Place (Customer Service Level)

Incremental costs or incremental revenue

Maximum incremental profit

Inventory CC Logistics

Transp. costs

Lot quantity costs

Integrated System

Order Processing and information costs i. A. Stock / Lambert: 2003: 97

Figure 9: Customer Service Level as the objective function of a logistics system Fig. b shows an approach to define the customer service level. The x-axis shows an increasing customer service, while on the y-axis increasing logistics cost and revenues can be seen. The function that represents the revenues runs concave. A high customer service level leads to a situation of market saturation. Whereas the logistics-costs function runs convex. At a certain point before the maximum service level the logistics costs exceed the revenues. Due to that effect a service level has to be found, where the

Objective Objective Objective Function

Warehousing costs

Optimum Service Level

Logistics Costs

Incremental customer service

i. A. Stock / Lambert: 2003: 105

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difference between logistics costs and revenues in relation to the service level reaches its maximum. That level has to be the objective function of the logistics system. 5.2. Influence of customer service level to the future plan
New Columbus
- Total variable costs with ICC-Reduction - ICC-Reduction Total variable costs p. a. Variable costs per case

Phase-out Plan
$604.588,20 $18.370,80

$624.534,00 $3,47

$622.959,00 $3,46

- Variable costs - Variable costs of manufacturing Variable costs per case Revenue per case Marginal contribution per case 20 % fixedcharges Marginal contribution per case BEP

$3,47 $14,40 ./. $17,87 $24,90 $7,03 $648.000,00 $7,03 92172 92057 ./. $17,86 $24,90 $7,04

$3,46 $14,40

$648.000,00 $7,04

Table 3: Marginal contribution and BEP of New Columbus and Phase-out Plan A change in customer service level can influence the sales volume. Consequently this can influence the future plans. Tab. 3 shows the comparison of the marginal contributions per case and the break even point of both solutions. If Giles keeps Columbus warehouse, it has to produce 92.172 cases. When closing Columbus Giles can reach the BEP at 92.057. That means even without taking the one-time reduction of inventory of $ 108.000 into account the phase-out plan contributes positive to the result of Giles. 5.3. Development of an alternative distribution plan The main objective of the logistics system within Giles is to achieve the requested service level (cq. Chapter 5.1). Thus the alternative distribution plan concentrated on achieving
Complete Indianapolis Area

Commercial traveler
CT

CT

Customers

Michigan plant warehouse

Plant Warehouses 1 - 4

Giles

Indianapolis plant warehouse

Giles Central warehouses

of customers

Figure 10: Alternative distribution plan 12

this aim at the lowest possible costs for the whole logistics system. The existing structure (cp. fig. 2) is not optimized for Giles most important clients. Usually these clients are supplied by their own distribution centers. Consequently Giles has to withdraw from supplying all their customers directly (cp. Fig. 10). The new concept is to provide the central warehouses of the main customers directly. Smaller customers within the Indianapolis area can be supplied by a commercial traveler who is contracted by Giles. Thereby the Giles sales representatives can concentrate on purchasing departments of the important customers.

6. Carrier plan analysis - Information processing

6.1. Current carrier plan - Information processing This chapter deals with the aspects of the information controlling the physical distribution system. In Fig. 11 shows the current situation of information processing and planning of the carrier plan.
O rd e rs

F ie ld W a r e h o u s e 15 C ase - TL
T L -O rd e rs I n itia t io n o f c o r r e c tiv e a c t io n s

C u s to m e r

S to c k in g R e q u ire m e n ts F W u s a g e le v e l

TL

H e a d q u a r te r
T L -O rd e rs S h ip p in g s c h e d u le s

TL

P la n t W a r e h o u s e

Figure 11: Current carrier plan At the moment field warehouses deal with customer orders and organize LTL shipments. TL-orders are given to the headquarters (HQ). When anything extraordinary happens supervisors initiate corrective actions by informing the HQ. The HQ in turn distributes TLorders to the plant warehouses and makes the shipping schedules. Stocking requirements for field warehouses thereby also the shipping schedules are based on the average usage level. This implies that all plans are made regarding the past. The current arrangement is not the optimal solution due to the decentralized order 13

management and the planning of stocking requirements. Optimizations can lead to decreased stock levels and a quicker order to delivery time. 6.2. Future carrier plan Information processing An organization has to assure that orders one of the most important information for a company is dealt with according to its importance, by implementing business processes. Figure X shows the future plan of information flows concerning orders and the planning of stocking requirements.
Field Warehouse
Deliveries (Data transm.) Orders

LTL

Customer

Orders < TL

Headquarters
Stocking Requirements by orders Shipping schedules

TL

TL

Plant Warehouse

Figure 12: Future plan The future plan suggests that orders should be placed at the HQ. These orders in turn are the basis of stocking requirements calculations and shipping schedules and initiate LTL shipments from the filed warehouses. Then concluded deliveries are send from the field warehouses to the HQ, to initiate corrective actions. In so doing the planning of the carrier plan is forward-oriented, processes can be harmonized and the order to delivery time can be reduced.

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7. Further room for improvement

There are some different points, which should be changed at Giles. The first is, to establish a new purchasing department. Right now the purchasing department belongs to the office of distribution, although there does not exist an interlink between these functions regarding the work-content. Purchasing has to be more strategic oriented and should work closer with its most important intern customers, especially the manufacturing department. Production planning should know the conditions of production, especially trough run times, machine informations and worker qualifications, the output quantity and quality and the requirements of the plants. Therefore production planning should be done at the department of manufacturing. Another point to mention is the missing close relationship of Giles with its customers. This relationship can be realized by an installation of EDI-Technology and automated reports of stock level (cp. Chapter 6). The implementation of these proposals can lead to more inventory-deposit and in-time data transfer between transportation units, field and plant warehouses and HQ. The last point to mention is the necessity to increase the integration of sister companies concerning shared warehouses.

8. Conclusions
Overall the phase-out plan is recommendable due to its cost advantages and the general strategical proceeding of Thurber regarding the numbers of warehouses. The analysis of parametrical variations concerning freight rates and personnel figured out that even drastic changes would not excuse an alteration of closing down Columbus warehouse. A slight reduction of the throughput rate would make maintaining Columbus more attractive, without taking the one time reduction into account. Further room for improvement is given through the possibility of integrating customers via EDI and better information processing. Regarding the mother companies strategy to reduce warehouses, the new distribution plan and the cost-analysis it is highly recommendable to phase-out Columbus warehouse.

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9. List of figures
Figure 1: Giles organization structure.3 Figure 2: Current distribution plan...4 Figure 3: Phase-out-plan..4 Figure 4: Financial impact of freight-rate-variation concerning the Phase-out-plan7 Figure 5: Financial impacts of freight rate variation concerning New Columbus....8 Figure 6: Financial impacts of warehousing rate variations8 Figure 7: Financial impacts of personnel-variation concerning phase-out-plan..9 Figure 8: Financial impacts of personnel-variation concerning New Columbus..9 Figure 9: Customer Service Level as the objective function of a logistics system11 Figure 10: Alternative distribution plan.12 Figure 11: Current carrier plan...13 Figure 12: Future plan.14

10.

List of tables

Table 1: Total costs overview New Columbus...5 Table 2: Total costs overview Phase-out plan...6 Table 3: Marginal contribution and BEP of New Columbus and Phase-out Plan..12

11.

Attachment

A: Excel calculating-sheet (digital) B: Word Document Giles Laboratories C: Pdf-File Giles Laboratories D: Powerpoint presentation Giles Laboratorie

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