Subject: Inventory & distribution management PRISM SUPPLY & DISTRIBUTION (PSD) I
ID: 347029 • Letter: S
Question
Subject: Inventory & distribution management
PRISM SUPPLY & DISTRIBUTION (PSD)
Introduction:
Jim West, a recent graduate of a Logistics and Supply Chain program was hired as an Inventory Analyst for a distributor of medical and home health care products. Jim is working directly for the President of the company and is the only person in Prism Supply & Distribution with formal education in Supply Chain Management. Having been with the company for about six months, Jim has been observing the inventory activity at the company and feels they need to improve the inventory management to improve the overall results. In Jim’s opinion, PSD is working towards disaster if they do not get a handle on the situation.
Jim has briefly discussed this with his superior and was given the green light to prepare a report with his thoughts. Jim is excited and apprehensive that he has been given the opportunity to work on this plan, but is concerned that the report may not be understood. As he was working on his report, the president came to his desk and told him that he felt this would be a good opportunity for Jim to present the analysis and plan to the management team at their meeting next week. This has Jim worried that he may not be able to complete the project satisfactorily. This in your mind as you consider how to put together a report to a group of PSD managers who are is more marketing oriented.
Background:
Prism Supply & Distribution was a family owned business started over 90 years ago by the current president’s grandfather. There are several family members working for the company which has over the years been the source of friction amongst the employees. It is located in Essex County which provides easy access to major distribution routes. The company has two warehouses in the county within a block of each other. They also utilize the services of a third party receiving organization in Michigan State.
Prism Supply & Distribution is considered to be a medium sized player in the independent medical/home health distributors industry in Canada. They ship product from coast to coast in Canada with the majority of their customers being with 200 miles of their location. Prism sells products manufactured in Canada, the United States, Europe and the Far East.
There are approximately 4,000 items maintained in stock, but the Purchasing person also has availability as special order another 15,000 items. The purchasing person has had no formal training in procurement. She relies on the habits that have been in place for several years. In fact previous presidents used to do all the purchasing and the current president is still heavily involved in the negotiations with the manufacturers.
The company has 10 sales representatives on the road covering all of Canada, five of which are in Ontario. It also has 4 employees in one warehouse, one of which also is a driver for local deliveries and pick-ups from the 3rd party receiving company in Michigan. Other employees are three in the other warehouse, 4 on the order entry desk. The order entry desk is located in in the first warehouse, which is a block away from the head office. A purchasing person, a controller, an IT person the president and 20 other employees, most of whom who are retail employees. It also has a special person, who should have retired, but is a valuable knowledgeable asset to the company as a wholesale/export manager. The wholesale manager is responsible for the development of wholesale customers, most of which are in the United States and the preparation of shipments for export.
Prism Supply & Distribution is organized as follows:
The company has four divisions, Retail, Medical Supply, Homecare and wholesale. Retail has 4 locations in the Essex county area, and a fifth location in the Niagara Peninsula. Medical Supply has the 10 sales representatives on the road covering specific territories and calling on medical professionals, hospitals and clinics. The Medical Supply division also oversees the large contract for the local Community Care provider. Home healthcare sells primarily in the Essex County area, but also sells products through the retail location in Niagara. Area representatives from the Medical Supply division can also sell Homecare products to Nursing Homes and providers.
All goods ordered are shipped to the main warehouse location where they are inventoried and re-distributed when ordered by any of the three areas. The secondary warehouse is primarily used to supply a major customer contract with the Essex County Community Care organization. Inventory in this location is identified as specific to the customer even though the majority of the products are the same as is maintained in the other warehouse. Specific products for this customer are also ordered and maintained in stock.
The largest retail location is located in the head office of the organization, and is one block from the new leased warehouse. The retail/head office location was until recently also the warehouse operation for the organization in Ontario and Canada, but the space became too limiting with all the other operations under the one roof, so it was decided to move it to a new leased location. The leased location is where the President has stated would be where the head office would move to, consolidating the operations into a newer and larger facility. The President also envisioned that the Retail Operation could operate out the front part of the leased warehouse.
The Retail operation/Head Office location, also held stock for a special large contract Prism had. The products stored here were the same as the main warehouse, using the same part numbers. Special items for this contract were shipped direct to the “old warehouse” within the Head Office. This facility also housed the repair operations and the stock for the Retail and Rental operations.
There is also another warehouse/receiving point in Michigan which acted as a receiving/distribution point for American and some overseas orders, but also as a receiving point for American suppliers who did not know how to, or have the desire to ship to Canada.
The manager of the Purchasing Department was to be hired by the President of PSD to take over the buying and management responsibilities that the president had been doing directly. The mandate of the new manager was to improve and control expenses related to Purchasing and Inventory Management. Until the new manager arrives, Jim West reports directly to the president, as does the purchasing and warehouse operations.
The organization had been using a computer based purchasing system that they installed fifteen years ago. They have done minor adjustments and program additions to as required, based on the current trends and readings of the president. The system was an outdated system, but functional, and the number of modifications over the life of the software had made it difficult to work with. The Financial Management of the organization was shifted from the computer system to the PC based - Simply Accounting®. This meant all financial transactions related to the Purchasing function required duplication of information to ensure all information are considered.
Realizing the duplication of effort, and the need for a computer system that would take the firm into the future, a decision was made to hire a consultant to develop a Request for Proposal and source out a new system that would meet the needs of the organization for several years to come. It was agreed early in the review of needs analysis that the best opportunity was to purchase a readily available and supported system from a reliable vendor. This process has been completed and the new system is to be installed and operational for the upcoming new fiscal year (2015).
Purchasing Activity:
The products purchased by the company are sold, as is, to four levels of customers,
Retail
Specialty End Users ( those that use the product to create another product for sale)
Distributors
Contract End-Users (those that actually use the product in providing service)
Although the company’s customers can purchase many of the products elsewhere, they remain loyal because of pricing and service.
Recent supply and availability problems from a number of suppliers was creating additional workload for several departments, including sales and receiving which has created tension amongst all departments. There are many reason for the availability problems, including poor ordering, terrorist activity in the world, severe weather, poor inventory management, and poor forecasting to name but a few.
The Retail Manager, who oversees the five retail outlets, also has the authority to purchase products that he feels would be best suited for the retail sales he is trying to obtain. This ordering is normally done without involvement of Purchasing and even though he has been reprimanded by the President of Prism Supply & Distribution, his division is doing well. The reprimands he has received have been ignored. The Retail Manager also expects the Warehouses to keep inventory for him, and if the products selected by the retail division to sell, that is wonderful, but if they do not he puts the responsibility on purchasing to either return or keep the product in inventory.
In the year 2015 the total purchase activity of the organization was as follows:
Total Dollars Purchased
11,000,000.00 (CDN)
Purchases for Retail Operations
4,500,000.00 (CDN)
Total Number of Orders Issued
5,000
Total Number of Orders for Retail Operations
1,000
Total Number of Vendors
500
Total Number of Receipts
7,000
The 2015 information is very similar to the 2014 information and looks like 2016 will be the same. The president, who reads business books and articles incessantly and as he heard, read, or saw an idea, thought that he should introduce these thoughts and concepts he read about to the organization. Several of these concepts introduced over the years were:
Monthly Orders
Smaller volume orders to maintain above order minimum
Weekly Orders
Larger volume than monthly, which allow for smaller inventories on site
Freight Consolidation – Incoming
Bulk Buying of Fast Moving Quantities
Buying through a buying group
Just In Time
Forecasting
Supplier Switching
The implementation of these concepts was not always as successful as they could or should have been. As long as the costs were not increasing dramatically and the organization was making money they did not seem concerned. The President, however, did realize that he did have the expertise to take the Purchasing/Supply Management function into the 21st century, so he hired Jim and has initiated the process to hire the Purchasing Manager to accomplish the transition.
The value of the inventory maintained in the two warehouses is valued at 2,000,000.00. The value of the inventory at the five retail locations is valued at approximately 100,000.00 per location. The warehouse inventory has a carrying cost estimated to be 15% of the value. This carry cost value has been in use for several years and may, or may not, be correct.
The Warehousing Operation:
Another ongoing issue is the inventory accuracy in each warehouse facility and throughout the entire company. As the computer system used by the retail locations is again separate from the main computer, the retail sales activity is not always accurate. In many instances, the product numbers used by all divisions (retail/end-user/wholesale) are identical and when supplied from the warehousing/inventory locations, get confused as to the type of release/sale.
Pricing of product is also confused because of the conflicting/competing computer systems, the customer type and the internal handling of the activity. “Sales” to the corporate retail locations are done as Stock Transfers. End users are regular customers and wholesalers are special customers.
Delivery of product to the inventory locations, the customers and retail locations is done with a company-owned vehicle, multiple small parcel services, or common carrier. Several of the shipments received at the inventory area are delivered by common carrier contracted/contacted by the company at special rates.
Materials from the United States receiving service are picked-up twice per week by the company owned vehicle, some weeks there are additional trips to the US receiving service due to the need to fulfill customer orders.
Some other information relating to the inventory and warehousing that Jim needs to be aware of are:
Number of Sales Orders per year
37,500
Number of line items picked per year
105,000
Number of Outgoing Shipments per year
45,000
Number of pieces shipped annually (boxes)
85,000
Inventory Turnover Rate
Unknown
Number of Backorders per year
1,800
Value Range of Products in Inventory
0.10 to 6,000.00 (CDN)
Product Life
Weeks to Years
Product Types
Non Food – although some are expiry dated
The prime PSD warehouse is 22,000 square feet and utilizes racking and floor storage to hold the products. Shelf locations are not identified. Product numbers are also not identified on the racking/shelving system.
Transportation Operations:
Incoming/Receipt of Materials
As mentioned earlier, Prism has two warehouses and 5 retail locations. Incoming shipments are all sent to the main warehouse facility, which has two large truck bays (can take large highway trailers) and three ground level doors (can accommodate courier and small parcel vehicles). There is not a full time receiver. The warehouse lead hand is responsible for receiving all shipments.
Some of the shipments are delivered using contract carriers, contracted by Prism, to bring materials from manufacturers in the United States. This is not a scheduled service, however the contracted carrier is contacted when a shipment is needed to be picked-up. They let Prism know when they will have a truck in the area of the manufacturer.
Shipments, not arranged for by Prism, come from a wide variety of manufacturers/distributors, who ship using common carrier and small parcel delivery services.
Shipments from the 3rd party receiving organization in Michigan are picked-up twice weekly by the Prism vehicle and delivered to the main warehouse for further distribution. This system put in place several years ago also utilizes a Customs Brokerage firm to clear the shipments. This reduces the time required to cross the border with the goods, as all the goods have been pre-cleared.
Outgoing Activity:
Outgoing activity can be classified in three ways, Small Parcel delivery, Own Vehicle and Walk-in. The majority of the outgoing shipments are delivered using the small parcel delivery systems (couriers) based on who is providing the best rate. There are no long term contracts and at best the length of a contract is one year. Small parcel delivery currently is split between UPS, Purolator and Can-Par, depending on who provides the best service to a particular region of the country.
Deliveries within the Essex County region are made by the PSD delivery vehicle. These deliveries include orders to customers as well as deliveries to the retail locations within the region. On occasion the vehicle is also used to deliver product to the Niagara Region retail location and some Niagara Region customers. When the Prism vehicle is used to pick-up in Michigan, or delivery to the Niagara Region retail location it is not available.
With the head office retail location and the secondary warehouse only a block away there is also “walk-in” activity and “rush” requirements where a staff member from either side is sent to the other side to collect small quantities of the product for a specific order that perhaps a customer is waiting for. Sales representatives also have access to the main warehouse facility and have been known to come and take materials to deliver to customers. Several of the representatives have small quantities of common products in their company vans or home-offices for “rush deliveries” to customers. This is more common among the representatives in the local area. This practice of coming into the warehouse is more common among the local representatives, however all 10 representatives have inventories in their respective home offices.
On occasion, a customer is sent from the head office retail directly to the main warehouse to pick up their order. Local area customers also have the option of picking up orders directly from the warehouse.
Assignment:
As James West, what actions would you recommend Prism Supply & Distribution take to improve their operations going forward. As James West you are to
Develop a plan to reduce the costs for your manager, focusing on inventory in the two PSD warehouse locations. This should focus of methods of improving the organizations inventory and distribution processes.
Focus on how you would proceed with the project – remember you only have a limited time to have the project ready for your presentation
What tools would you use to obtain information?
What tools and programs would you suggest be implemented, and why would you select themInclude Financial Estimates – base them on information provided
If assumptions are made these must be identified and included in the analysis
Show how you would achieve the results you have detailed – a timeline
Prepare Summary Slide(s) of the reductions/savings that can be presented to the Management Team meeting.
Questions to Consider:
What do you think the problem are?
Please help me with this case study
Total Dollars Purchased
11,000,000.00 (CDN)
Purchases for Retail Operations
4,500,000.00 (CDN)
Total Number of Orders Issued
5,000
Total Number of Orders for Retail Operations
1,000
Total Number of Vendors
500
Total Number of Receipts
7,000
Explanation / Answer
Some of the main problems in this case are:
1. Inventory management process is not standardised. Order quantities are not optimised to meet periodic demand. This results in high carrying costs.
2. Warehouse operations are not synchronised. Secondary warehouse is used to stock only for special customer orders even though the items are same as that stores in the primary warehouse. This leads to over/under utilisation of warehouse capacity.
3. Inventory is inaccurate due to ad hoc process of pick up by sales reps and walk in customers.
4. Management does not get timely reports due to the outdated and duplicate computer systems.
5. The company is unable to get the best bargain on transaport service providers since it does not have any long term contract with any of the vendors.
6. Retail orders are not synchronised with purchasing, which is leading to over/under stocking.
7. Inter-departmental coordination is lacking due to decentralised and ad hoc planning.
Approach to solving the case: