Answer the following question based on the following information:

Question $1$: Evaluate the costs of the current distribution systems and a direct$-$to$-$hospital supply chain in the following areas: storage, fulfillment, customer service, transportation, and warehouse handling.

Question $2$: Besides costs, what other factors should be taken into consideration as part of the analysis?

$3$M CANADA COMPANY LOGISTICS NETWORK

Like all $3$M Canada businesses, the Health Care Group drew its logistical support from the company's

shared services organization. Products were manufactured globally, and Canadian materials management

staff ordered products that were shipped to $3$M$\text{'}$s distribution centre $($DC$)$ in Milton, Ontario

$($approximately $50$ kilometers west of Toronto$)$ from $3$M$\text{'}$s Forest City, Iowa DC$.$ Approximately $7\mathrm{.}5$ per

cent of the Milton DC capacity was dedicated to Medical Division products.

A third party logistics company operated the Milton DC$,$ which had monthly facility costs of

approximately $$250,000.$ The DC handled only full case shipments and current volumes for the Medical

Division were approximately $76,000$ cases per month. The associated monthly picking costs were

approximately $$12,000,$ of which the hospital portion was approximately $65$ per cent.

The company targeted inventory turns of $12$ times in all of its distribution centres, and the Milton DC

maintained an average inventory level of approximately $$5\mathrm{.}5$ million in Medical Division products,

including $$3\mathrm{.}575$ million for the hospital market. The distribution centre manager indicated to Scott that

moving to subcarton picking to support direct distribution would require significant changes to the

warehouse configuration and picking processes, which would be much more labour$-$intensive. He indicated

that picking costs for hospital products would increase by approximately tenfold under direct distribution.

$3$M Canada had a centralized materials management and customer service team based in London, Ontario.

A team of customer service staff managed all orders that were received from $3$M customers, including the

Medical Division. The orders placed for the hospital market differed from much of the other health care

group orders in that orders were primarily received from the five VARs, who ordered in large volumes.

Scott estimated that, of the approximately $500$ orders $3$M currently received each month, more than $80$ per

cent were electronic orders and the balance were manual orders. Moving to a direct$-$distribution model

would result in a significant increase in the number of Medical Division orders processed each month and

the percentage of manual orders was expected to increase dramatically because many hospitals did not

have systems to support electronic orders. Scott estimated that the customer service team would need to

add additional staff and resources to handle the increased workload at a total cost of approximately

$$550,000$ per year.

THE DIRECT$-$DISTRIBUTION ALTERNATIVE

Matt Pepe expected Scott to evaluate the existing method of distribution for the Medical Division and to

make appropriate recommendations. As part of this assignment, Scott decided to interview several

directors of strategic sourcing at $3$M$\text{'}$s largest hospital customers. These interviews indicated a strong

perception that major cost savings could be achieved in the supply chain if hospitals bought product

directly from $3$M as opposed to using VARs. As part of initiatives to restructure provincial health care

supply chain organizations, most hospitals were members of regional supply chain service organizations,

such as HSSBC and Health Care Materials Management, located in London, Ontario. These organizations,

although not a substitute for the VARs, provided some of the logistical services offered by the VARs, such

as consolidation, inventory management, replenishment and small lot shipments. Contracts with VARs

compensated hospitals for services by regional supply chain service organizations through reductions in the

agency fee.

Scott also investigated how direct distribution would affect supply chain costs in the areas of warehouse

handling and transportation. Exhibit $4$ summarizes the warehouse handling costs incurred by $3$M Canada

under the existing distribution model for both the hospital and out$-$of$-$hospital markets. Based on

conversations with the manager of the Milton DC$,$ Scott expected that these costs for the hospital portion

would triple under direct distribution. He also estimated that hospital inventories at the Milton DC would

need to be increased by approximately $25$ per cent to support a direct$-$distribution model.

Working with the transportation manager, Scott had also been able to collect information from the VARs

concerning their transportation costs. Exhibit $5$ provides estimates of the additional transportation volumes

and costs from the $3$M Milton DC to hospital customers under direct distribution.

PREPARING FOR THE MEETING WITH MA