Westminster Company Case Study Help Analysis With Solution

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A System Design Assessment at Westminster Company

David J. Closs and Christopher Kitchen
 
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 important 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 as 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.
 
Westminster's Distribution Network. Table I outlines Westminster's existing distribution network for the three domestic consumer sales divisions. Each division consists of a number of company-owned-and-operated manufacturing plants and distribution facilities. Table 2 presents a number of key demand and inventory statistics for the facilities. Each manufacturing plant produces SKUs unique to that particular facility. All SKUs are distributed on a national basis. Due to significant capital outlays and fixed costs associated with each manufacturing plant, the logistics taskforce has already eliminated the possibility of relocating any manufacturing facilities from their present locations. Manufacturing plants must route products through a distribution center before final delivery to a retail or wholesale customer. Any distribution center may be utilized within its own division. Distribution centers may ship product to any region of the country; however, customers are typically serviced by the closest distribution center based on Westminster's regional boundaries. Transfer shipments between distribution centers are also permissible. Most shipments from manufacturing plants to distribution centers are delivered via motor carrier on a TL basis. Air freight may be utilized for emergency shipments, but also must pass through a distribution center before delivery to a final destination. Most shipments between distribution centers and retail or whoIesale customers are delivered by motor carrier on an LTL basis and vary in size from a few pounds to nearly truckload quantities. Table 3 illustrates the three domestic sales divisions' shipments by typical weight brackets and the number of bills of lading issued within each bracket. The first weight bracket (&70 pounds) represents shipments typically delivered by small parcel carriers; the majority of these shipments represent order fulfillment of back-ordered SKUs. Approximately 67 percent of all shipments are 500 pounds or less. Distribution center locations are based upon both market and production factors. The majority of distribution centers are strategically located throughout the country to service geographic 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.
 
The logistics taskforce is presently considering these three options or alternatives:
 
1. Consolidating the current three distribution systems to a single distribution system serving all three companies, using fewer warehouses than are currently being used.

2. Using public or third-party warehousing and third-party transportation rather than the current system network.

3. Continuing with the current arrangement as is.
 
Questions
1. What effects would the two new alternatives have on transfer and customer freight costs? Why'?
 
2. What effects would warehouse consolidation have on inventory carrying costs, customer service levels, and order fill rate?
 

 
3. How are warehousing costs affected by the decision to use public or private warehouse facilities? What effect would this have on handling, storage, and fixed facility costs?
 
4. What effect would shipping mixed shipments from consolidated distribution centers have on shipment profiles?
 
5. What factors should be taken into consideration when determining the appropriate number of warehouses?
 
6. 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?
 

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