sweet Deals Distribution Inc. Presented from the perspective of George Hatcher,
ID: 353277 • Letter: S
Question
sweet Deals Distribution Inc.
Presented from the perspective of George Hatcher, Vice-President of Distribution, Sugar Creek Candy Company
The Immediate Challenge
George Hatcher, the Vice-President of Distribution for Sugar Creek Candy Company wanted to be well informed prior to meeting with Sweet Deals Distribution Inc. to discuss the candy company’s recovery alternatives. He set forth to complete a thorough case analysis of the issues.
Introduction/Background
George Hatcher, Vice President of Distribution for Sugar Creek Candy Company, just down the phone and pondered the latest in a long list of growth and quality problems he has uncovered at Sugar Creek’s newly hired public warehouse, Sweet Deal Distribution Inc. (SDD). The call had been to schedule a meeting with the executives of SSD to discuss options available to fix the problems. If the problems continue, Sugar Creek may be forced to give SSD a 30-day-move-out notice.
Hatcher knew now that he had to dig deeper for solutions to SDD’s quality problems. He wanted to have his facts together before blaming SDD for all the service problems, so, he set out to analyze the situation from several aspects.
Sweet Deals Distribution Inc. is a 1.5 million square foot public warehousing company, has been located in Atlanta, Georgia, the USA for twenty years. SDD’s first customer was a large consumer packaged goods manufacturer for whom SDD performed as Receiving, Inventory Storage, Shipping,
Throughout the 1990’s, SDD’s client base expanded to more than 120 clients and the firm catered mostly to manufacturers of consumable packaged goods. Along with the product storage, SDD also had an extensive freight consolidation program. This was especially attractive to clients because, on their own, no single client had enough volume shipping to a single consignee to warrant truckload service. SDD’s capability to combine multiple small orders from multiple manufacturer clients and ship the orders together to common consignees allowed SDD to offer individual clients lower rates for each order. The consolidated rates were lower than what a single manufacturer could have negotiated with a less-than-truckload (LTL) carrier. Throughout the years, SDD had gained a reputation in the Southeast United States as providing personable and high-quality service at the lowest competitive prices. SDD receives shipments in the afternoons, picks orders at night and ships orders in the mornings and some throughout the day. A product is received, checked and put away in dedicated product zone locations. Orders are picked throughout the night one order at a time utilizing a manual paper system. Pick sheets and stock movement forms are entered into the system the following morning. Annual inventories cause a three-day shutdown of the facility to count stock and reconcile inventory reports to the physical product count.Traditionally, SDD’s focus has been to provide low-cost warehousing and distribution services.Order receipt and customer service primarily consists of receiving orders via Client information system Facsimile (fax), Telephone (phone), Courier, Sometimes drivers, SDD and several clients have established EDI capabilities for order transmittal and shipping verification. The traffic department handles Order Consolidation, Routing , Carrier Negotiation, Claims Processing,
Warehouse operations are labor intensive and consist of Lift operators (forklift operators), Checkers (order checkers), Stock Locators (pickers), Clerks, Supervisors
Radio Frequency (RF) barcode technology was recently adopted for product receipt and storage. A product is shipped the day after receiving the customer’s order.
SDD’s reputation, years in business, low-cost strategy and polished marketing pitch recently led to three long-term contracts with other large candy and consumer goods manufacturers. The firm has grown quickly to approximately 1.5 million square feet located in four buildings. RF capabilities are available in two of the buildings.
The Situation
Problems began for SDD the day of contract agreements with the new customers. All three clients wanted to begin operations with SDD during the same month. SDD’s owners were convinced, and convinced the clients, that this would be no problem. SDD created implementation teams to assist each new client.The three clients operated under different strategic philosophies had major customized product handling needs, and radically diverse communication and system requirements. Each required that SDD have the capability to totally integrate with the client’s processes, technologies, and people. SDD ensured that this was possible and gave the commitment to long-term partnerships with each of the consumer packaged goods product manufacturers.
Exhibit A contains the information utilized by one of the new clients – Sugar Creek Candy Company, to make its decision to hire a public warehouse such as SDD for its distribution needs, the following are the services that all three new clients require:
Same day order receipt and shipping, Same day delivery verification, Computer-to-computer communication, Intensive Cross-docking capabilities, RF and barcode capabilities to track product throughout the warehouse, Real-time inventory update, tracking and reporting capabilities, Daily cycle counts to replace annual inventories. Quality program by which the Distribution Centre (DC) measures all aspects of productivity and daily reports performance in each area.
SDD began customizing to the customer’s systems requirements and began hiring and training labor for handling the new business. The new clients began closing down multiple distributions and warehousing facilities and began operating through the Southeast with SDD as its single centralized distribution center. SDD’s management ensured its current customers that the personable service, of which they were accustomed, would not be disrupted and that they are treated equally as important as the new larger clients.SDD’s Customer Service Manager (CSM) Rich Lander, became aware of possible major problems with handling the new business during yesterday’s follow-up meeting with one of the new client’s headquarters. The client was under the impression that all information systems were up and running, the tailored process was in place, and the workers were trained in the special handling need. Moreover, someone in SDD’s management informed the client that specialized storage bins and customized tracking systems were installed in the warehouse. Rich Linder knew better and informed the customer that the items were being worked on but were not yet in place. The client became alarmed that the systems were not in place and operational after four months of business. In less than a year, SDD’s plans began to fail. A product from the three new clients began filling the additional 300,000 square feet of space. SDD’s operations had virtually doubled overnight ad orders began flowing to the distribution center for shipment. SDD”s internal product tracking proved inadequate as orders were lost in-house, shipment delays piled-up, and inventory accuracy was approximately 82 percent. To make things worse, it seems that the estimated space requirements for the new business were inaccurately low and caused several delays in putting away inbound product. Sugar Creek Candy Company (a new client manufacturing and marketing chocolate candy to wholesalers and retailer) estimated a total annual volume of 5.5 million cases per year (expected to increase within the year to 9 million cases) at 12 inventory turns per year. The current maximum storage requirement at a given time period is equal to one month of cases. It was estimated by SDD that Sugar Creek would require 130,000 square feet of temperature-controlled space to maintain the freshness of its product. (Exhibit A contains a description of Sugar Creek’s product to be stored)
Monster Merchandising Inc. (a new client of dry goods) estimated the total annual volume of 2 million cases at 8 inventory turns per year. Happy Homes Products, Corporation (a new client of small appliances) estimated a total annual volume of 40, 000 pallets (containing four high cube cases each) at 4 inventory turns per year. SDD began hiring additional laborers from a temporary service to keep costs low and manage their operation. This worked in the past when additional temporary labor capacity was required to meet the seasonal demand increase for a few clients. Only minimal additional management and supervisory staff were hired. Clients began requesting additional value-added service not specified in the contract. SDD made the decision to reduce the carrier base from 30 to 3 core carriers, and the primary core carrier was new to SDD’s operation. The core carriers were not prepared to handle the special handling and checking requests of the new freight. Service levels began to diminish, and the core carriers began to ask for adjustments to the contract rates.
Voice-mail and e-mail were added to SDD’s communication network; however, customer service representatives began to use the system to avoid customers, and therefore, the problems exponentially multiplied. Previous consignee field visits to retailers, designed to keep a “finger on the pulse” of concerns of the ultimate customer, were abandoned. Prior to the new business, the previous Customer Service Manager maintained bi-monthly contacts with retailers to correct any distribution problems and maintain positive customer perception.
After four months of operations, things began to settle for SDD and the three new clients. Still, the warehouse space and systems were not meeting all of the needs of the new customers; cost-savings anticipated were not realized, and the primary core carrier had discontinued its contract obligations. To add to the stress, SDD was losing money on all the new business. The three clients claimed that their warehousing costs were above the estimated cost of $5.83 cents per case received $8.07 cents per case handling, and 5.10 cents recurring storage charge per case (based on an average monthly inventory) because of SDD’s poor quality service.
For example, Sugar Creek Candy Company tracked customer returns, damaged and destroyed cases received at retailers, back ordering cost due to stock-outs and late deliveries from SDD’s facility. Exhibit B contains the “non-performance” costs estimated by Sugar Creek. SDD’s owners were still convinced that the firm could handle the business and believed overall their customers were happy with the service provided. George Hatcher knew better. Hatcher felt that a completely new analysis was needed pertaining to the warehouse space needs
product layout, non-performance costs, breakeven analysis
Hatcher expects Rich Lander of SDD to perform similar analyses to convince Sugar Creek to remain with SDD instead of switching to a contract warehouse or operating their own private warehouse. Exhibit C has alternative warehouse cost data. George Hatcher hopes that the results of the analyses can help Sugar Creek and SDD in developing a service recovery plan, but it may result in Sugar Creek taking the business to Competition Contracting Corporation, a competing contract warehouse.
Exhibit A:
Sugar Creek Candy Company’s Product Information
There are 100 different product codes pertaining to Sugar Creek’s business with SDD. The most popular items makeup approximately 20 percent of the product codes and comprise approximately 80 percent of the daily orders. Approximately 500 orders are shipped daily. The only product descriptions available, however, is provided here Items are stored on pallets, in racks, five positions high in each bay location.
Case size is measured in Width x Length x Height
Each case is 2 x 1.5 x 1.5
Pallets are 48 inches x 40 inches
Pallets are stacked three tiers (rows) high
The aisle allowance is estimated from past experience to be 20 percent
The honeycombing allowance is estimated from past experience to be 12 percent
The pallet height is 6 inches
The clearance between pallets (side-by-side) is 4 inches
Due to the racking system, the space between the pallets (above each pallet) is 12 inches
SDD estimated the need for 130,000 square feet of temperature controlled space for Sugar Creek’s products
Exhibit B:
Sugar Creek Candy Company’s Estimated Cost of SDD Poor Service Quality
Event
Cost per Event
Number of Occurrences
Returns
$100
200
Destroyed Case of Product
150
298
Damaged Case Salvaged at Retailer
95
175
Back-Order
65
220
Late Delivery
100
190
Exhibit C:
Sugar Creek Candy Company Information: Warehouse Alternative Costs
Private Warehouse:
Estimated Annual Cost of operating (following)
Total Annual Warehouse Cost: $1,885,800.00
Total Variable Cost 385,000.00
35% cost of labor/supplies
32% cost for manager/section supervisors/office administrator/clerks
16% cost of storage maintenance
17% cost of machinery
Total Fixed Cost $1,500,800.00
69% construction/lease facility cost
16% overhead
15% information management systems – Warehouse Management System
Contract Warehouse:
Estimated Annual Cost of hiring Competition Contracting Corporation
Total Annual Warehouse Cost $1,244,900.00
Total Variable Cost 814,900.00
39% cost for labour/supplies
31% cost for manager/section supervisors/office administrator/clerks
10% cost for storage maintenance
20% cost for equipment
Total Fixed Cost $ 430,000.00
60% for construction/lease facility cost
10% for overhead
10% for information management systems – Warehouse Management System
20% of profit contribution
After your review of the case and the solution, do you think these considerations and options are applicable to your organization (or one you are familiar with?). Explain why you think this is about 100-200 words.
Event
Cost per Event
Number of Occurrences
Returns
$100
200
Destroyed Case of Product
150
298
Damaged Case Salvaged at Retailer
95
175
Back-Order
65
220
Late Delivery
100
190
Explanation / Answer
Sugar Creek company was right in choosing SSD as their warehouse partner, but did not consider service failure costs. Also, since their products were quite customized from the industries’ standards, they should have asked for a dedicated and not shared warehouse. One more reason was the underestimation of warehouse capacity, not considering honeycombing, which led to low inventory accuracy and productivity too.
In today’s world, technology is very important. For example, Amazon’s warehouses are able to run efficiently using state-of-the-art technology, avoiding human issues. Technological capability of SSD was overlooked in this case where they had only 2 RF-enabled warehouses out of 4.
Yes, such considerations are always required before choosing the warehousing partner in today’s world. Infact, it is true for many Made-to-Stock type of companies like P&G, Unilever, Kraft Heinz, etc. Today’s businesses models are moving towards being asset-light where they outsource their manufacturing, storage, distribution, etc. to specialized firms and focus only on 1-2 activities within the value-chain. So, it is imperative that companies come across such decisions that they need to make. Also, with the rise of 3PLs, 4PLs & 5PLs, choosing the right storage & distribution partner is very important.
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