Magna Logistics operates a public, 3PL cold storage facility in Indianapolis, Indiana. 1 Five years ago the company moved into of a state-of-the-art, 120,000 square feet, refrigerated warehouse. At a cost of USD 150 per square foot, this 20-foot-high storage space offers the latest in picking and packaging automation as well as temperature control and tracking.

Magna Logistics differentiates itself by offering unique services. These include blast freezing, internet inventory control, pallet exchange, customs bonding, and load consolidation. Magna customers are willing to pay a premium for these services because their products demand it. On one hand, their high-end ingredients have short shelf lives. On the other hand, both the taste and texture of their specialty foods are highly affected by small variations in temp.

Magna has five customers: Leonards Fresh Catch, Organic Produce of Westfield, White River Cheeses, Martinsville Prime Meats, and Farm Fresh. While the USD 14 million in sales last year were impressive, the same cant be said for on time delivery and profits. Last year, deliveries to promise date were down by 4%. A key reason for delays was order picking. The company has seen a steady increase in the number of items and stock-keeping units (SKUs) per pallet shipped. Last year, warehouse operators picked on average 72.2 items and 44.2 SKUs per pallet. This represented a 25% increase in items picked, and a 35% increase in SKUs packed compared to three years ago. Company President Ann Davis knows pricing is no longer adequately capturing the rising cost of serving customers. She has asked her management team to develop new staffing and pricing models.

Cold Storage at Magna Logistics

In the United States, commercial developers typically build then lease out cold storage facilities. Leases usually run 20 to 25 years. Senior management at Magna decided to take a different approach. They built their own warehouse. With a 10% down payment, management was able to secure a construction loan at 3% inter- est. Business property tax is 1.05% of depreciable building value. Commercial property insurance costs the company USD 200 per month per million dollars of depreciable building value. The building is being straight line depreciated over 39 years.

Under the Uniform Commercial Code (UCC) that covers all commercial transactions in the United States,

Magna Logistics is legally responsible for the materials stored by their clients. To mitigate this risk the company purchased a Warehouse Legal Liability policy. Coverage costs USD 150 per month per million dollars in sales revenue.

Not all of the warehouse space is generating sales revenue. Office space, aisles, breakrooms, and restrooms account for 30% of the warehouse. Aisleways between the 4-high, 4048-inch pallet racks take up 10% of available storage space.

Magnas building expenses pale in comparison to what the company pays for electricity. Refrigeration requires 1.5 watts per hour per cubic foot. Condensers run all day every day. The local power company charges 12 cents per kwh.

Considering high building and utility costs, management decided to lease warehouse equipment. Assets include three fork trucks and four walkie stackers.

Equipment Lease

Item

USD/month/Asset

Term

Down payment

Fork truck

1000

6 years

0

Walkie Stacker

500

6 years

0

Due to frequent upgrades in Warehouse Management Systems (WMS), management decided to lease WMS software and hardware. The perpetual license fee is USD 3,000 per month. On top of the license fee the vendor also charges a 10% maintenance fee.

Cold storage is clearly asset intensive. Its also labor intensive. Hourly warehouse personnel work three 8-hour shifts per day, 21 days per month. There is a 30-minute unpaid lunch break. Due to the cold warehouse conditions, workers are also entitled to one, unpaid 15-minute break every 2 hours. Even though Indiana is an employment-at-will state which gives employers the freedom to terminate labor at any time, management at Magna does not believe in laying people off during slow periods. They have seen the negative impact that layoffs have on morale. They pay their hourly staff USD 15 per hour. After factoring in insurance, paid time off and retirement, as well as legally required benefits such as social security, unemployment insurance, and workers compensation, the hourly worker cost to the company is USD 36 per hour.

The management team consists of an operations manager, a financial manager, and an HR manager. On each shift, there is a warehouse supervisor. On day shift the warehouse employs one mechanic and a custodian. There is also an IT specialist, one quality analyst, and one accountant. A second mechanic works on the afternoon shift. Annual salaries for these occupations are summarized in Table 2. After taking benefits into account, salary costs to the company increases by 30%.

Overhead cost

Position

Annual Salary (USD)

Operation Manager

82000

Finance Manager

82000

HR manager

82000

IT analyst

45000

Quality analyst

40000

Accountant

55000

Maintenance

40000

Custodian

30000

Even with its well-trained staff, on-time delivery was a problem last year. According to the operations manager, the primary reasons for the shortfall were lower than expected picking accuracy and longer than expected pick times. The quality analyst summarized last years picking accuracy by month.

Final answer

Part 2

Table 3: Picking Accuracy

Month

Picking Accuracy (%)

January

91.2

February

89.3

March

92.5

April

90.8

May

91.0

June

89.1

July

87.2

August

90.0

September

88.8

October

90.5

November

92.1

December

89.9

The operations manager believes that the increase in the number of items and SKUs per pallet has made the picking process more complex. Additionally, the warehouse layout is not optimized for efficient picking. Pallets with items that need to be picked are sometimes located on high racks, which increases pick times.

Magna Logistics has been using a basic cost-plus pricing model. The company adds a markup of 35% to the sum of direct costs and overhead to determine selling price. Management believes that this model is no longer adequate given rising costs and increasingly complex customer requirements.

Ann Davis has asked her management team to develop a new staffing and pricing model that will enable the company to increase profitability and improve on-time delivery. She has set a target of reducing order-to-delivery time by 15% and increasing profits by 20% over the next year.

Questions:

What are the unique services offered by Magna Logistics? Why are customers willing to pay a premium for these services?

What were the reasons for the delays in on-time delivery last year?

How does Magna Logistics mitigate the legal risk associated with storing customers materials?

What are the building and utility costs associated with Magnas warehouse?

How does Magna Logistics staff its operations? What are the annual salary costs of different positions at Magna Logistics?

Why has Magna Logistics been experiencing on-time delivery problems? How has the increase in the number of items and SKUs per pallet affected the picking process?

What pricing model does Magna Logistics currently use? Why is this model no longer adequate?

What are Ann Daviss targets for the company in the coming year?