TABLE 4 Distribution Cost
3. Handling and storage at actual local cost for each existing and potential facility. Appropriate
storage rate applicable at intransit warehouses.
4. Inbound transportation from plants and intransit warehouses to field warehouses based on point
topoint rates.
Table 4 contains the costs for the reference year.
Questions
1. What is the total distribution cost for WGP Chemical Company? What is the cost per pound,
cubic foot, case, line, and order? How can these measures contribute to the distribution review
process?
2. On a map, plot the distribution facilities and network for WGP Chemical Company. What
product and market characteristics can help explain this distribution structure?
3. What alternative methods of distribution should WGP consider for Prevention and Support?
4. Discuss the rationale for:
A. The early order program,
B. Customer pickup policies,
C. Use of public versus private warehouse facilities.
CASE 6
Western Pharmaceuticals (A)
George Castro had a lot to be proud of. His company, Western Pharmaceuticals, had just merged with
the largest producer of overthecounter (OTC) cold remedies on the East Coast. The merger with
Atlantic Medical should guarantee coasttocoast market penetration for both Western's upset stomach
products and Atlantic's cough syrups. George had been selected to serve as CEO of the newly formed
United Pharmaceuticals, and was rapidly becoming recognized as being one of the top Mexican
American business leaders in the country.
History
Western Pharmaceuticals had been founded by George's grandfather in postwar Los Angeles. Tony
Romero's reputation for hard work combined with his strong pharmaceutical background made the
introduction of his first antacid tablet an unqualified success in the booming downtown area. The
company grew quickly, and soon became the largest producer of antacid tablets in Central and Southern
California.
George's father, Rudy, married in to the Romero family in 1961. Although not a pharmacist, Rudy
received a degree in urban planning from Pepperdine University. After many heated discussions with his
new soninlaw, Tony acted on Rudy's advice to expand the company outside of the now congested Los
Angeles city limits. Tablet production would now take place in tiny Ontario, some distance to the east of
L.A. The urban site, conveniently located in proximity to several major freeways and a railhead, would
now serve only as a distribution center.
Rudy's suggestion to separate production and distribution worked. Ontario offered markedly lower
rent and labor costs than Los Angeles, but was close enough to the city to prevent any significant
inconveniences. Additionally, allowing the Los Angeles site to focus only on distribution led to
significant economies. Western Pharmaceutical flourished.
Upon his fatherinlaw's recommendation, Rudy enrolled in business school and received his MBA
from CalState Los Angeles in 1968. Rudy was subsequently appointed executive vicepresident of
Western and quickly focused on expanding and diversifying the company. Aside from seeking new
products, Rudy recognized the importance of a viable distribution system to market penetration. A
second distribution center was constructed in Indianapolis, and Western Pharmaceuticals became the
market leader of Nevada and Arizona by mid1971. By 1972, Western had a dominant position in the
Northwest, Utah, Idaho, and New Mexico, and was making significant inroads in Colorado. Upon
Rudy's recommendation, Tony pursued the acquisition of Central Solutions, a small Midwestern outfit
that manufactured liquid antacids. Although Central was a struggling company, its acquisition allowed
Western Pharmaceutical to diversify into the liquid market. More importantly, Western obtained
distribution centers in Nebraska and Sparks. Midwestern market share and profits followed.
George started working parttime as a warehouseman in the Los Angeles distribution center in 1978.
After graduating from UCLA in 1982, George worked as a production manager at the Ontario site. By
the time George earned his MBA in 1986, Western Pharmaceuticals had conquered the majority of the
West and Midwest and was now eyeing the South. In 1988, Western opened its newest distribution
center near Atlanta's inner beltway. Construction of the Atlanta site made access to the South and
Southeast significantly more efficient, and market share increased accordingly.
By 1996, Western Pharmaceuticals was recognized as a “cashcow” in the stomach upset industry. No
longer an innovator, Western had wellrecognized products that retained their market share through
creative and aggressive advertising campaigns. Rudy, now president of the company, was content to
leave the company in its current state. This led to some amount of disagreement between him and his
son. George, always the “gogetter,” had developed an aggressive reputation within the company and
frequently encouraged his father to tackle the East Coast.
George became the president of Western Pharmaceuticals after his father's retirement in mid1997,
and immediately began his pursuit of the East Coast. Atlantic Medical offered everything that he felt
Western needed in order to guarantee its continued success. First, the company offered cold remedies,
something that Western had considered but never pursued. Second, the company had key East Coast
distribution centers in Mechanicsburg, PA., and Atlanta, GA. George was convinced that the successful
merger of the companies would guarantee nationwide success in the OTC market for antacids and cough
syrups.
Present
The newly formed United Pharmaceuticals was comprised of six factories and seven distribution centers.
The newly formed company produced six products (A–F) with nationwide market penetration. Now that
the company had achieved a coasttocoast presence, George looked internally for further efficiencies.
Namely, based on production and handling costs, inbound, outbound and service costs, were all of the
distribution centers necessary?
TABLE 1 Western Pharmaceuticals Current Plants and Distribution Centers
TABLE 2 Atlantic Medical Plants and Distribution Centers
TABLE 3 Plant Production Profile
Table 1 lists the premerger, Western Pharmaceuticals plants and distribution centers. Table 2 lists the
premerger plants and distribution centers for Atlantic Medical.
Table 3 lists the production capability and percent of volume for each plant.
Even though both firms utilized contract warehouse facilities, there are fixed costs incurred for each
facility due to management and technology. Each Distribution Center operates with fixed costs of
$300,000. The handling cost at each distribution center is estimated at $1.00/cwt. The handling cost
covers the labor and equipment required to receive shipments from plants, putaway, order picking, and
truck loading.
For accounting and inventory carrying cost purposes, each pound of inventory is valued at $5/lbs.
Finished goods inventory turns in the distribution centers have historically been 3.5 turns annually for
Western Pharmaceuticals and 3.0 turns annually for Atlantic Medical. Each product at the distribution
centers is typically replenished on a biweekly basis.
Table 4 lists the current service areas for each division and state. While there are numerous exception
shipments, each state is generally served by its assigned distribution center.
At this time, the production capacity of the combined firm is 100 percent utilized. As a result, it is not
possible to shut down any production capacity. It is possible, however, to shift capacity around to
different plants for a onetime charge of $500,000. This covers the cost to prepare the new site, tear
down the equipment, transfer it, set up, and recalibrate it at the alternative plant location.
Customer satisfaction requires that all products for a single customer must be shipped from a common
distribution center. This implies that shipments cannot be made directly from any plants. The integrated
firm has operationalized this policy by requiring that each state should be assigned to only one
distribution center source. The firm also requires that 95 percent of the volume be within two days transit
of the servicing distribution center. This effectively means that 95 percent of the volume must be within
750 miles of the servicing distribution center.
TABLE 4 Historical Service Areas
The accompanying Excel spreadsheet [spreadsheet can be found at www.mhhe.com/bowersox4e
http://www.mhhe.com/bowersox4e>] contains three worksheets. The first, “Weight by State,” lists the
number and total weight of the current shipments going to each state. The volume is broken down into
LTL (lessthantruckload) and TL (truckload) shipments and includes a standard mixture of all products.
For products that have multiple production sites, each distribution center is sourced from the nearest
plant. The second worksheet,“Customer Rates,” contains the LTL and TL rate (per cwt.) from each
distribution center to the major city representing each state. These rates are based on the discounted ZIP
to ZIP rates provided by Western's major carrier. The third worksheet, “Inbound,” provides the inbound
TL rates from each plant to each distribution center. These rates are also in $/cwt.
CASE 7
Western Pharmaceuticals (B)
Once George initiated the supply chain design project (see Western Pharmaceuticals A), his next task
was to investigate the firm's inventory management capability relative to the refined supply chain. The
integration of the Western and Atlantic Medical distribution systems required a refinement of the firm's
inventory management system. [spreadsheet can be found at www.mhhe.com/bowersox4e
http://www.mhhe.com/bowersox4e>].
Although the firm wanted to have a comprehensive inventory analysis, the information available was
limited due to the merger and a simultaneous move to an Enterprise Resource Planning system. In fact,
in terms of quickly available data, there was only a limited sample from the Atlantic Medical sales and
inventory records. For a sample of 100 stockkeeping units (SKUs), the data base includes the average
and standard deviation of weekly sales, average order cycle time (OCT), replenishment order quantity
(OQ), and the average inventory. Based on history, the current standard deviation in the replenishment
cycle time is 1 week. The sales, order quantities, and inventory are recorded in cases. The historical
information is provided for each of the three existing distribution centers.
Atlantic believes that the historical case fill rate is 95 percent but they are not really sure.
Questions
1. What should the case fill rate be for each product given the current uncertainty levels and order
quantities and how does the calculated aggregate case fill rate differ from the historically observed
level?
2. What are the safety stock and average inventory levels for each product and in aggregate necessary
to achieve 95 percent case fill rate for each product? To what extent do the actual inventory levels
deviate from the theoretical inventory levels? What conclusions can you draw from the
differences?
3. What is the inventory carrying cost impact for increasing the case fill rate from the current level of
95 percent to 99 percent? Assume an annual inventory carrying cost of 20 percent. Assuming that 5
percent is potentially lost due to stockouts (100 − 95 percent) and that there is a 25 percent margin
on the average item (COGS = 75 percent), would you recommend that the service level be
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