Executive Summary

This report focuses on the logistics and supply chain of a prime US pharmaceutical group,
Westminster, which owns three companies, manufacturing and distributing differentiated products
autonomously. It talks about the proposed changes in their supply chain systems, which are,
creation of a consolidated warehousing system, having mixed shipments to save on costs,
incorporate IT to maintain its inventory using ERP software, and have an integrated supply chain
management system.

It talks about which processes within the supply chain should be centralized, and which should be
de-centralized so that an efficient system is maintained.

The report concludes that the strategy of having a consolidated warehouse would work best for the
company, and they should follow it, keeping the warehouse in a location which is accessible by all its
manufacturing plants easily.
Table of Contents

Introduction...........................................................................................................................................2

Impact of the three new alternatives on transfer and customer freight costs......................................3

Impact of warehouse consolidation on inventory carrying costs, customer service levels, and order
fill rate...................................................................................................................................................4

Effect of Third Party or private warehousing facilities on warehousing costs. Its effect on handling,
storage, and fixed facility costs..............................................................................................................5

Effect of shipping mixed shipments from consolidated distribution centres on individual company
cost and performance...........................................................................................................................6

Eight supply chain processes in terms of customer classification and degree of

centralization/decentralization.............................................................................................................7

Brief description of the logistical system design recommended for Westminster’s integrated
consumer products................................................................................................................................8

Conclusion.............................................................................................................................................9

References...........................................................................................................................................10

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Introduction

“Supply chain is defined as a set of three or more companies directly linked by one or more of the
upstream and downstream flows of products, services, finances, and information from a source to a
customer.” (Mentzer, 2001)

Westminster Company is one of the largest manufacturers of consumer health products, based in
US. It has three wholly-owned subsidiaries, manufacturing grocery products, Drugs, and Mass
merchandise. Intense competition in the market, and concerns of having an effective supply chain,
compelled it to evaluate its supply chain and logistics. The main focus of its research was the key
clients of the three companies, who contributed majorly to the annual turnovers. The research gave
them a good overview of their customers’ requirements, and their own company’s operations.

Due to the geographical varsity of its manufacturing plants and warehouses, it posed a critical
question, how to implement a good strategy enabling them to reduce costs - transportation, storage
and handling, and fixed costs. The report highlights some of these issues, like having a consolidated
warehouse, and shipping mixed consignments from a consolidated distribution centre, and provides
a recommended action plan.

Logistics is an important function of the business. Without a proper logistics system, all the
manufacturing, marketing and other activities would fail. If the products are not in the shelves of the
stores, they are as good as non-existent. Goods need to be transferred from the manufacturing plant
to the storage centres, and from these to the retailers, and finally, to the customer. In this report we
will see the effects of implementation of third-party logistics by Westminster and why this is a useful
strategy.

Transportation, warehousing, and information systems play very significant roles in the logistics
function. For supply chain in particular, logistics creates the efficient flow of goods between supply
chain partners, and is responsible for the maximization of profits and competitive advantages.

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What impact would the three new alternatives have on transfer and
customer freight costs? Why?

(i)

Traditional inventory replenishment procedures are replaced by POS driven information systems.
This will assist Westminster Company in the production of goods according to the customer’s
requirement. Demand forecasting can be erroneous, and this system will reduce the need to
forecast demand. This helps prevent wastage of excess, redundant inventory, and reduces the cost
of storage. Westminster should ideally implement ERP software, which will enable its customers to
give the position of their inventory, accurately and timely. The software will allow real-time
inventory management of all its points of sales and its various plants and warehouses. The daily sales
and inventory requirements of the customers can be assessed, and accordingly, shipments can be
readied. The trucks can be loaded in a manner, that they are able to cover the maximum number of
customers in a single trip, distributing a considerable amount of products. Since the products are
delivered according to the customer’s order, returns and rejections would be potentially eradicated.
This helps prevent wastage, which can become a major cost in the long run.

The software will enable efficient information dissemination, and relevant information can reach the
concerned persons immediately.

(ii)

Three deliveries per week as opposed to the earlier one delivery will increase the transportation
costs, but if these deliveries can be consolidated such that one trailer can provide deliveries for all
the three companies at the same time, instead of all three companies sending their own trailers
individually, this will balance the increase in cost caused by three deliveries per week. Due to only
one trailer moving in a day, this will further decrease the cost as economies of scale are reached.

Direct store deliveries (DSD) will give a competitive edge to the company and most of the key
retailers would prefer to have that service. This would effectively reduce the customer’s freight
costs, without affecting the cost of transportation for Westminster much. The customers would not
need to transfer the goods from their warehouses to the various stores. Westminster’s trailer would
normally need to travel a large distance to deliver the products to all its customers, so it wouldn’t
really be a costly matter if they are able to deliver directly to the stores for some of its key clients.

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(iii)

Large clients often need specific requirements in their product shipments. They generally have a
large shipment, and to maintain that, they need certain implementations. Bar-coding the entire stick
in accordance with the international standards is a must in today’s world. With the company looking
at warehouse consolidation, proper inventory management is a necessity to ensure efficient
operations. Bar-coding allows easy stock-taking and SKU monitoring. RFID labels can be attached to
big pallets for large clients. This allows for instant stock-taking, just by scanning the RFID label. The
label has all the details about the stock within the pallet. Details include number of SKUs, number of
total units, and details about the SKUs.

They should implement RFID for their own stock in their warehouse for good inventory
management.

They can charge the customers for whatever value added services they provide to cover the costs.
Companies are happy to pay for value added services, because they know they are only being
charged for what they are getting. In the traditional pricing, there is a single, flat rate. Someone who
does not avail of certain services still pays for it.

What impact would warehouse consolidation have on inventory

carrying costs, customer service levels, and order fill rate?

Warehouse consolidation allows the company to have a single warehouse for all its plants, wherein
the products will be categorically placed and maintained. Having a single warehouse storing the
products, coupled with the strategy of inventory replenishment based on demand, leads to a
significant reduction in the inventory costs of storage and handling. It reduces wastage due to
expiring products, because there is never a highly excess level of inventory for a particular product.

Inventory carrying costs consist of Capital Cost, Storage cost, Inventory service cost, and Inventory
risk cost. The Capital cost component is the largest.

Consolidation results in economies of scales, by reducing the overall inventory cost. It also helps
reduce the transportation, handling and operations costs. Another important cost that can be

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controlled with the help of consolidation is the cost of labour. Labour being a major cost, if
controlled, can result in greater profits for the company. (Babel, 2005).

The products are placed in a central location, this, and the fact that there would now be three
deliveries per week will definitely improve the customer service levels and order fulfilment rates.
Shipments can be prepared faster, and will leave the warehouse faster. Thus, customers will be able
to receive the inventory timely, leading to satisfaction.

Goods will be delivered in mixed shipments, and the trailer would be loaded fully, leading to
economies of scale and scope, hence reducing the transportation costs. Customers can order goods
from the different companies without affecting the freight costs. This is beneficial for both the
customer, and Westminster.

How are warehousing costs affected by the decision to use third party
or private warehouse facilities? What effect would this have on
handling, storage, and fixed facility costs?

Warehousing costs represent a major factor of cost for Westminster Company. According to the
case, the total warehousing costs for Westminster during the year were $8.5 billion for Company A,
$6 billion for Company B, $ 7.4 billion for Company C, amounting to a total warehousing cost of
$21.9 billion, which was roughly 38% of the total logistics costs of the company. If the company can
save on these costs, and instead contract a Third Party logistics service provider, it can divert these
funds to other areas of the business, like developing a strong IT infrastructure, which will help them
run the ERP solution and integrate the inventories of all the members on its supply chain.

Apart from the financial gains, by using a third party logistics service provider, it can utilize its
expertise. A third party service provider, whose core-competency is providing the warehousing and
logistical services will be much more efficient than owning our own warehouse, but not being able to
maintain it properly. Another point of contention is the labour. If outsourced, Westminster will not
be responsible for the labour cost, or the availability of skilled workers. The third party will have a
dedicated team of workers skilled in logistics.

By outsourcing logistics activities Westminster can save on capital investments, thus reduce financial
risks. It can also expect an excellent level of service, because of the highly competitive market, and

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the advent of numerous service providers. A contract will be signed before commencement,
detailing all the requirements from the third party logistics service provider. This will reduce the risk
of non-performance.

What effect would shipping mixed shipments from consolidated

distribution centres have on individual company cost and
performance?

Shipping mixed shipments from consolidated distribution centres is advantageous for the company.
Its logistics cost is reduced by delivering various products on the same trailer. Instead of having three
different trailers moving around the country, it can have just one trailer doing that work, thus
reducing the transportation cost, and achieving economies of scale and scope.

Each company’s transportation costs will reduce considerably. At present, the transportation costs
for the company are $4.2 billion for Company A, $3.2 billion for Company B, $ 2.8 billion for
Company C. These can reduce by almost one-third, with the implementation of consolidated
distribution centres. The various related costs will be shared within the three companies.

The companies will be able to ship more goods in lesser time than before. This will improve its
financials, and the overall performance. The complete information technology infrastructure will
further enhance performance by providing instant data, hence improving efficiency.

Instant demand information will allow the plants to manufacture accordingly, and prevent delayed
shipments because of the manufacturing process.

The concept of cross-docking can be followed, wherein the respective plants will send the products
to a consolidated warehouse, which acts as the distribution centre. The warehouse, then delivers a
mixed shipment of products to a multitude of customers.

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Cross-Docking

Evaluate the eight supply chain processes in terms of customer

classification and degree of centralization/decentralization of
required functionality.

Eight Supply Chain Processes

Retail
DPR CRC OF/SD P/SDL MC SRC LCS RL
Segment
Grocery C C C C DC C DC DC
Drug C C C C DC C DC DC
Mass
Merchan C C C C DC C DC DC
t
C = Centralised, DC = De-Centralised.

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Given all available information briefly describe the logistical system
design you would recommend for Westminster’s integrated consumer
products.

Westminster Company should adopt a strategy of consolidating its warehouse. It helps reduce the
transportation costs.

The location of the consolidated warehouse should be in a central location, accessible by all the
plants feasibly. The location I have chosen is close to most of the warehouses on the east coast, and
at an almost equal distance. The plants in LA will have the largest distance to travel, and the ones in
Texas will be far, but not too far to make it inefficient. With the maximum products coming from the
plants on the eastern area of US, the location is strategic, because it can deliver to its customers in
every part easily.

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The inventory must be managed properly, and a good inventory management module must be
incorporated within the ERP system. An integrated system will allow it to control inventory
effectively, and reduce losses and minimize wastage, and cost. The software will link all the members
in the supply chain and provide real-time data of sales, inventory, and other useful information.

Having a third party logistics provider to maintain its consolidated warehouse will utilize the
expertise of the third party, hence they will have a robust and efficient warehouse. Outsourcing will
enhance its performance and help to achieve good results.

Conclusion

The demand planning responsiveness, customer relationship collaboration and supplier relationship
collaboration needs to be centralized functions to maintain proper flow of information. Members
need to have information sharing within the supply chain to make sure there is no communication
gap, and every member has the relevant information. This leads to Westminster’s goal of greater
profitability, and customer satisfaction.

Manufacturing customization should be decentralized to further satisfy customers in a better way.

Decentralizing Life cycle support and reverse logistics will also help to achieve optimum results.

Integrating Company A, Company B, and Company C and consolidating the warehouses will be
profitable for Westminster Company because it reduces the transportation and operations cost
considerably. It should outsource logistics solution to a third party provider, thus allowing
Westminster to focus on other critical areas of the business apart from logistics, like implementing
the ERP system, developing an IT infrastructure, etc. for better management of inventory and
providing value added services and customization to key customers. It will also enable them to get
good skills in the field of warehouse and logistics management.

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References

Babel, R. 2005, ‘Supply Chain Management’

Bowersox, D.J., Closs, D.J., & Copper, M.B., 2010, Supply Chain Logistics Management, 3rd Edition.
McGraw Hill, Sydney

Mentzer, J.T., 2001, Supply Chain Management, Sage Publications, California

Vasiliauskas, A.V, & Jakubauskas, G., 2007, Principle and benefits of third party logistics approach
when managing logistics supply chain, Transport Research Institute, vol XXII.

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