Supply Chain Agriculture Nutrient Supplies
Question :
Is there a value in specifying the routes for the drivers? What level of cost savings are possible from this approach?
Do you think that Steve should expand the two warehouses? Why or why not?
If Steve has to propose increasing the turnover ratio of his two warehouses, what turnover ratio should he propose for either of the two warehouses?
Should Steve consolidate the two warehouses into one? Why or why not?
If the vice president eventually decides to consolidate into a single warehouse for British Columbia, what location should Steve propose? What would be the impact on both primary as well as secondary transportation costs? Using centre-of-gravity as an approximate guideline, apply qualitative location criteria to propose a good location closer to the centre-of-gravity.
Answer :
1.Is there a value in specifying the routes for the drivers? What level of cost savings is possible from this approach?
Ans. Yes. There is a value in specifying the routes for drivers. Transportation costs are heavy.
1-The secondary transportation costs- are $ 31,13,250.00 and they are set to rise in the future due to unprecedented business growth experienced by the company. Annual throughput is also likely to register steep growth of 28% from recent annual throughput of 2,54,50,000.00 kg to Projected annual throughput of 3,32,50,000.00 kg.
2-Drivers should be specified shortest routes from 8 retail locations to the two warehouses at Kamloops and Abbotsford. Goods will be listed early and more space in warehouses, already facing space constraints, shall be free. Company’s inventory holding costs will reduce resulting in higher turnover and more profitability.. When they reach early, they can load goods at a faster rate because space will be released as the company is already short of space in existing warehouses. Kelowna and Williams Lake are 170 km and 290 km, respectively from their allotted warehouse of Kamloops. On the other hand, Mission and Langley are just 15 and 35 km from Abbotsford. From the map, it is clear that if the driver takes the direct shortest route from Kelowna (which has the highest throughput) to Kamloops, accepted distance can be reduced by 40%. This will result in early delivery, thus freeing space at warehouse, lower fuel costs and lower administrative charges because fuel costs can be significantly by about 40% if direct short routes are undertaken by drivers.
3- Another way to calculate broadly cost-savings through 3PL is
Total distance between Kamloops and its 4 retails stations= 70+110+90+290= 1370 km
Distance between Abbotsford and its 4 serving outlets=320+370+290+205= 1185 km
Total freight charges through 3PL for all routes= 20*(1370+1185)= $ 51100
If these drivers use alternate shortest routes and reduce distance by say 30% then correspondingly 3PL charges will also reduce for above by $51100*30%= $ 15330.
This amount is saved in one single route by all trucks through 3PL and if there are weekly rounds of trucks than in one year (52 weeks) this cost by one segment only will be saved
=$ 15330*52= $ 807160
2. Do you think that Steve should expand the two warehouses? Why or why not?
Ans- Yes. Steve should expand the two warehouses.
1- This will reduce fixed expenses like staff salary, electricity, water, and fixed charges on new warehouses. These charges need not be incurred on existing warehouses in the same ratios and will involve minor changes. Taking a fresh warehouse involves fixed costs, rent agreement stamping, and registration charges, and other administrative expenses even if there are no goods stored.
2- As per the case study, opening two new warehouses will involve $ 50 million, for say five years ( actual duration of facilities is not given as life cycle and annual changes/ lease etc are different thins). Whereas expansion of two existing warehouses at Kamloops and Abbotsford will involve –only $1,300,000 ($ 500000 by Kamloops and $ 8,00,000 by Abbotsford for a 5-year block of 500000 kg of product storage.
Tentative costs establishment costs likely to be incurred on two new warehouses for 5 years block- $ 50,000,000
Total storage expansion cost for existing warehouses = $ 5,00,000 +$8,00,000= $13,00,000 The eight retail stores have their own fairly spacious storage at the back.
Thus, the company can save on storage expansion of existing warehouses instead of going to new ones=$50,000,000-$ 13,00,000=$ 37,00,000. Besides other fixed charges on new facilties will further add up the costs and reduce company savings. Hence, The company should expand the existing warehouses only.
3. If Steve has to propose increasing the turnover ratio of his two warehouses, what turnover ratio should he propose for either of the two warehouses?
Ans- Turnover ratio helps us measure how quickly inventory can be turned into sales. A high turnover ratio is considered positive as inventory holding costs are saved. Cash flows are faster and company’s profitability is increased as it can hold more and sale quickly realising more sales.Turnover ratio of an organization can be calculated using the given formula
Cost of goods sold / Average inventory
Higher TR reduces inventory holding, storage, and increases protability.
Steve Sanders should increase the turnover ratio of each warehouse by about 25% annually. The turnover ratio significantly varies on the basis of industry. High inventory ratio is preferred in most of the companies because it represents that the performance of the organization in turning inventory into sales. However, due to long manufacturing time as well as high cost, sellers of high-end goods may have less turnover.
Existing TR =10
Proposed TR= $100,000(cost I warehouse) + $160,000(cost II warehouse) + 30,00,000* 3 (price per kg of fertiliser)/ 15000 kg+15000 kg (truck load of each truck) *12(months)
= 25.04
So, each warehouse should have a turnover ratio of about 25 to handle unprecedented growth and reduce inventory holding levels. However, specific turnover ratio will depend on many factors in above case study also. He may propose about 30% turnover ratio for each warehouse. This is essential to keep pace with 28% projected rise in throughput as per the tables given in the study for existing and projected figures for all 8 locations that would rise from 2,54,50,000.00 kg to projected annual throughput of 3,32,50,000.00 kg.
References
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Fan, Y. (2018). Position adjusted turnover ratio and mutual fund performance. Studies in Economics and Finance.
St-Vincent, M., Denis, D., Imbeau, D., & Laberge, M. (2005). Work factors affecting manual materials handling in a warehouse superstore. International Journal of Industrial Ergonomics, 35(1), 33-46.
