Case Study 3.3: Glup SA Glup SA supplies a range of household soaps to supermarkets in northern Europe. There are 12 stock-keeping units (SKUS) in the range. The logistics manager has determined that an investment of 0.5 million on improved material-handling equipment would convert the main distribution center into a more flexible facility. A number of benefits in improved product availability have been identified - but current information is largely in the form of discretionary costs. Glup's assessment of the benefits and its plans to convert the justification into engineered costs are outlined below. Improved in-store availability This is the percentage of time for which a product is available on the shelf. If the product is not available on the shelf, then it will lose sales to competitive products that are available, such as supermarket brands. (Availability is a classic 'order losing sensitive' qualifying criterion) Currently available data at Glup are scant but suggest that average in-store availability is as low as 85 percent for a given stock-keeping unit (SKU). In order to convert this discretionary benefit into an engineered cost, Glup intends to measure the time for which each of the 12 product lines is unavailable each week. One way to do this is to use a market research agency to conduct sample studies of product availability in selected stores at random times across the working week. This will yield an availability guide, such as the 85 percent figure referred to. The new system will, it is believed, reduce this unavailable time. Glup then plans to model the new material-handling equipment methods using simulation and to calculate the new in-store availability. The reduced non-availability time could then be converted into additional contributions for each SKU to give an engineered cost saving. Reduced transportation costs The new equipment would also allow lower transportation costs because trays of different SKUS could be mixed on the same pallet. Glup again intends to use simulation modeling to identify the opportunities for savings using this method. It is considered that this will offer the opportunity to reduce overall transport costs by more flexible loading of the trailers used to distribute the products to Glup's customers. Promotions and new product launches It is considered that the new equipment will enable promotions and new product launches to be delivered to selected stores more accurately and more quickly. Demand uncertainty in such situations is very high: for example, a recent 'three for the price of two' promotion created a fivefold increase in sales. In order to launch a new product, it is first necessary to drain the pipeline of the old product or to 'write it off' as obsolete stock. If the more flexible warehouse system can reduce the length of the pipeline from the factory to a supermarket, it is argued, then a real saving in time or obsolete stock is possible. Glup again intends to measure this by simulation. It will then be necessary to determine by how much sales will increase as a result of the new product advantages. This will be estimated by Glup marketing people, who will use the experience of previous promotions and new product launches. The engineered cost will be the additional time for which the new product is available multiplied by the additional estimated sales volume multiplied by the contribution per unit. Alternatively, it will be the reduction in obsolete stocks multiplied by the total cost per product plus any costs of double handling and scrapping. On a group basis, please research and analyze the following: 1 Comment on Glup's plans to create engineered costs from the perceived benefits of the new material-handling equipment