9/30/04

Reprinted with permission:

Bowersox, Closs & Cooper

Supply Chain Management Logistics,

2nd Edition forthcoming; McGraw-Hill.

SCM 5500 ASSIGNMENT 2

CASE: Westminster Company: A System Design Assessment

Company Profile

Westminster Company is one of the world's largest manufacturers of consumer health products. Their distinctive name and

company logo are recognized throughout the world. Originally founded as a family-owned pharmaceutical supply business

in 1923, the company has expanded, by virtue of aggressive new product development, into a global provider of health care

consumer products. Westminster 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 but wholly owned companies that each manufacture and

distribute unique product lines. Decentralized management has been a proud historical tradition at Westminster. According

to President Jonathan Beamer, the policy of maintaining unique and independent companies encourages responsibility, selfownership

of the product development and marketing process and provides the incentive for entrepreneurial management.

Westminster's products are marketed through a network of diverse retailers and wholesalers. Trade class as a percent of

sales is 37% grocery, 20% drug, 35% mass merchandise and 8% miscellaneous. All three companies sell and distribute

products to several of the same customers.

Westminster Today

Pressure from domestic and global competitors, as well as large domestic Westminster customers have recently forced the

company to reevaluate their traditional supply chain practices. In particular, attention has focused on the changes that

customers are demanding as well as other operational modifications in current practice that management feels are required to

effectively compete in the 21st Century marketplace.

Westminster just completed several months of extensive study focusing on their customers' current and future supply chain

requirements. The findings addressed a variety of issues, but two key topics were identified: 1) customer composition; and

2) customer service requirements.

The most significant trend with regard to customer composition over the past decade has been the growth of key customers

into very large accounts. Mass merchants now account for 35% of total corporate sales volume and have become the fastest

growing category of trade. All three companies sell to this category of trade. This trend is expected to continue into the

foreseeable future. The major shift in the mix of accounts is not expected, however, to dramatically alter the historical

composition of product sales. Approximately 70% of domestic consumer sales volume is concentrated with 10% of

Westminster's customers. What may affect the composition of product sales to large retail accounts, however, is the rapid

growth of private-label non-prescription drugs and consumer health competitors. Cost-efficient private-label manufacturers

offer large retail accounts higher profit margins, and willingness to provide private labeled products. The private-label health

and beauty aids business sales exceeded $3 billion in 2003.

The second research conclusion confirmed senior management's belief that these large accounts have an increasing

commitment to improved supply chain efficiency. To maintain and increase the percentage of sales volume Westminster

generates from these important customer accounts, management has identified several key customer service improvements.

These improvements specifically address the second issue of customer service requirements. Company research has also

concluded that the formulation of supply chain collaborations between Westminster and its large customers has now become

a competitive necessity. In many instances, powerful retailers demand such collaboration and oftentimes have the leverage

to dictate relational arrangement. Westminster will have to maintain considerable flexibility in order to develop unique

supply chain solutions for a variety of large, powerful customers. Ideally, Westminster would like to establish a position of

leadership within these collaborations arrangements.

Westminster's management is well aware that successful retailers and wholesalers are focusing strategic effort on more

timely, efficient and accurate inventory delivery. Many large firms have identified their supply chain management

capabilities as a primary strategy to achieve successful inventory management and improving overall financial performance.

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"I visualize three important changes for our operations with regard to large accounts," says Alex Coldfield, Westminster

Vice-President of SCM:

1. First, traditional inventory replenishment procedures must be replaced by POS driven information systems.

Customers have the ability to transmit daily or biweekly actual product sales at the SKU level in order to ensure

timely inventory replenishment and allow production to be scheduled according to response based sales

information rather than 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.

2. Second, order cycle times can be reduced from current levels. Large accounts will increasingly demand three

rather than one delivery per week. In addition, many large accounts want to simplify their procurement practices

and are questioning why we cannot provide integrated deliveries of merchandise from our three consumer

product companies when cost reductions are achievable. The demand for direct store delivery (DSD) may also

significantly increase. A long term goal is to arrange a mix of products from all Westminster companies delivered

on a single trailer to key customers, perhaps direct to retail. The long term has become now.

3. Third, products will increasingly have to meet specific customer requirements, such as assembly of individual

store customized pallets, and customer specific inner packs and display units. Bar codes will have to utilize

industry standards such as UCC 128 and there will be increased demand for RFID capability on unit loads and

master cartons. Invoicing and payment, particularly with regard to promotional allowances and discounts, must

increasingly move toward paperless transactions. Our pricing will evolve to reflect value added services as

provided, rather than purely traditional logistical order fulfillment, transportation and handling.

For the balance of Westminster's customers, the smaller retailers, service will be provided much as it is today. Although

other customers may not be willing or able to initiate close working relationships, they are 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 supply chain taskforce. The taskforce, to include top-level managers from each company, has been

directed to identify changes necessary within the three domestic sales' supply chain practices and operational network that

will achieve improved distribution performance and responsiveness.

As a framework to guide the integrative redesign McKee decided to seek recommendations around the eight key processes

that link a firm into a supply chain structure with customers and suppliers. McKee remembered a framework he was

introduced to at a leadership seminar he attended the previous year. A speaker on supply chain strategy highlighted a

set of "Eight Supply Chain Processes" (see Table 1) as a requisite for supply chain excellence. McKee then thought

about the performance gaps that existed between present-day and the idealized processes, as well as the measures he

proposed to achieve operational integration.

Clearly McKee's initiatives, if implemented correctly, would enhance demand planning and strengthen relationships

with customers and channel partners. Moreover, the initiatives also would improve the timeliness and attentiveness of

how Westminster fills and delivers its orders. However, implementing the new processes would be no mean feat, and

would represent a paradigm shift from an anticipatory mode, based on forecasts to a more customer-responsive based

operation.

The program would require buy-in from the top down to the delivery truck drivers. Furthermore, thinking in terms of

key organizational processes, spanning across all divisions and departments, was a significant departure from the

autonomous way Westminster companies had operated in the past. Nevertheless, McKee was steadfast in his belief in

the new processes, and was eager to deal with the challenges associated with implementing his new program.

Westminster's Distribution Network

Table 2 outlines Westminster's existing distribution network for the three domestic consumer sales companies. Each

company consists of a number of company-owned and operated manufacturing plants and distribution facilities. Table 3

presents a number of key demand and inventory statistics for the facilities.

Each manufacturing plant produces stock-keeping units (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 supply

chain taskforce has already eliminated the possibility of relocating any manufacturing facilities from their present locations.

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Manufacturing plants route products through a distribution center before final delivery to a retail or wholesale customer.

Any distribution center may be utilized within its own company. 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 [within a company] are frequently made to achieve an

assortment of products for customer shipment.

Most shipments from manufacturing plants to distribution centers are delivered via motor carrier on a truckload basis. Air

freight is sometimes utilized for emergency shipments from plants and between distribution centers before delivery to

customers. Most shipments between distribution centers and customers are delivered by motor carrier on a less-thantruckload

basis and vary in size from a few pounds to nearly truckload quantities. Table 4 shows the three domestic sales

companies' shipments by typical weight brackets and the number of bills of lading issued within each bracket. The first

weight bracket (0-70 pounds) represents shipments typically delivered by small parcel carriers; the majority of these

shipments represent order fulfillment of back ordered SKUs. Approximately 47 to 50% of all shipments are 500 pounds or

less.

Distribution center locations are based both on 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 companies. Most distribution centers were originally located near manufacturing plants to

reduce transfer transportation costs.

Table 5 lists the current system's transportation and warehousing costs for each of the three companies. Freight rate

classification for product shipments is different for each of the three companies. Company "A" freight has a rating of class

60; Company "B" freight has a rating of class 70; and Company "C" freight has a rating of 150. In general, these ratings

reflect the relative expense of moving products based on density and value. Transfer freight costs are based on truckload

rates from the manufacturing plants to the distribution centers. Customer freight costs are based on less-than-truckload

shipments from distribution centers to retail and wholesale customers. Average number of days transit time from the

distribution centers to the customer is the shipment time from the point an order leaves the distribution center's loading dock

until reaches a customer. Any potential systems redesign must consider the effect of labor costs.

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 to answer in your Case Teams:

Submission of a mathematical model is not a requirement of this assignment. However, some teams may find it helpful to analyze

aspects of the data provided in order to gain further insight into Westminster's business operations. A mathematical answer to the

question below is not required; however, a thoughtful, well supported answer is essential for full marks.

Consider the two new options under review by the logistics taskforce, how might these options impact transfer and

customer freight costs? Why?