Case 5w G P Chemical Company John White Vice President

Case 5w G P Chemical Companyjohn White Vice President Of Distribution

Case 5w G P Chemical Companyjohn White Vice President Of Distribution

CASE 5 W-G-P Chemical Company John White, vice president of distribution for W-G-P Chemical Company, was preparing for the annual strategy review session conducted by the firm's executive committee. He was charged with the task of evaluating his firm's logistics costs and customer service capability for his firm's packaged dry and liquid agricultural chemicals. W-G-P Distribution Systems Figure 1 outlines the existing logistics system for W-G-P Chemical Company. Four types of facilities are used: (1) two continuous, company-owned manufacturing plants; (2) nine seasonal contracted manufacturing plants; (3) three in-transit distribution centers; and (4) 28 full-line distribution centers. Growing environmental activism has influenced management to reject any relocation of the manufacturing plants.

W-G-P distributes 129 different products or SKUs on a national basis. For distribution considerations, the products may be grouped into two different categories. Category A consists of 13 SKUs of a product called Prevention. The sales of Prevention are highly seasonal and account for 85 percent of W-G-P's total revenue. The sales of the 116 Category B products (called Support) sell throughout the year but also have a seasonal pattern similar to that of Prevention's sales.

Although the sales volume of Category B is only 15 percent of W-G-P's total revenue, this group of products contributes approximately 30 percent of total before-tax profits. The typical end user of W-G-P's products purchases a variety of both A and B products. In many cases, the products are used jointly in agricultural applications. W-G-P's total product line is marketed through a network of agricultural dealers. The company sells to the dealers, who then resell the products to farmers.

The typical dealer provides farmers with a broad line of products, including those that are directly competitive with W-G-P products. Historically, farmers tend to purchase both A and B products 1 to 2 weeks before field application. Application occurs at different times in different parts of the country and is directly related to the intensity of rainfall. Thus, W-G-P's products must be available precisely when the farmers need them. Likewise, the quantity needed per acre varies depending on the rainfall received in an area.

Therefore, although W-G-P produces Prevention and Support all year, sales to farmers take place during a very short time period. Farmers' requirements vary in time and duration of use throughout the country. Image FIGURE 1 W-G-P Chemical Channel Flow To even out distribution to dealers across the year, W-G-P offers discount incentives and allowances to dealers who purchase at least 90 days in advance of estimated application dates. This early-order program accounts for 30 to 40 percent of the total annual sales of Prevention and Support. For the dealer, placing an early order means taking an inventory position on Prevention in advance of farmer purchases. However, since both Prevention and Support products are available, in effect, the early-order warehouse allowance means a special discount of the Support products which sell all year.

To avoid abuse of the program, W-G-P requires that a proportional amount of Prevention products accompany each order. W-G-P also agrees to accept returns up to 15 percent of the total quantity of early-ordered Prevention products. The return policy requires a refund of the full purchase price providing dealers repay the return freight to W-G-P's warehouse. The advantages afforded W-G-P through the early-order program are two-fold. W-G-P can schedule shipments at its convenience to achieve the lowest possible transportation cost.

Dealers are given an additional discount if their own transportation equipment is used to pick up early orders, provided the cost is less than transportation paid for by W-G-P. Seasonal sales, those sales which dealers buy within 90 days of estimated application dates, account for 60 to 70 percent of sales. Thus, to a significant degree, seasonal sales volume depends on W-G-P's ability to deliver products rapidly. During the seasonal period, dealers expect Prevention and Support to be available for pickup at distribution centers within a few hours of order placement. During this period, approximately 50 percent of the dealers pick up products.

When transportation is arranged by W-G-P, dealers expect overnight delivery. Although the service level required during the seasonal period is high, these sales are very profitable for dealers because the farmers who purchase the products are willing to pay the full retail price. The capability to provide products during the application period is one of the most important criteria dealers use when selecting a chemical firm. Historically, sales have been concentrated in eight midwestern states which account for 80 percent of annual revenue. Table 1 presents a summary of the most recent data.

The distribution pattern for W-G-P products is relatively simple. Two company-owned manufacturing plants are located in Alabama and Louisiana. The Alabama plant produces Support, while the Louisiana plant produces both Prevention and Support. Both facilities are continuous-process plants, and their location at deepwater ports facilitates economical inbound raw material movement. The nine contracted seasonal manufacturing plants have passed the environmental audits and are strategically located at key transportation gateways.

The three in-transit warehouses are utilized because the manufacturing plants have only enough storage space for 2 or 3 days' production. In terms of total system, the in-transit warehouses have three functions: (1) to provide storage until forward shipments are required; (2) to postpone the risk of advance shipments; and (3) to provide a combination of transportation rates that are lower to field distribution centers than the sum of published rates into and out of the in-transit warehouse. In a sense, the in-transit warehouses are economically supported by special transportation rates. All warehouses and distribution centers in the W-G-P system are public facilities. Therefore, W-G-P's costs are based on volume throughput and duration of storage.

The 28 full-line distribution centers are primary facilities from which dealers are served. Although some early orders are shipped directly from plants and in-transit warehouses to dealers, they represent less than 10 percent of the annual tonnage shipped to dealers. Ninety percent of all tonnage is either shipped from or picked up by dealers at the full-line distribution centers. Table 3 provides a list of distribution center locations. Replenishment of distribution center inventories is primarily on an allocation basis controlled by central inventory planning.

All orders are processed in an online basis at the central office after they are received over a telecommunications network. The elapsed time from order entry to shipment release from the distribution center is less than 24 hours. The primary method of shipment from plants to in-transit warehouses and distribution centers is motor carrier. The System Review A primary objective of the physical distribution system review is to evaluate the cost and service levels of the existing program in comparison with alternative methods of operation. Despite relatively smooth operations, the fact remains that at the end of each application season, many dealers' requirements have not been satisfied, while other dealers have returned inventory.

Thus, sales are lost that could have been enjoyed if products had been available to the dealers in need. A critical element of customer service is forward inventory availability to accommodate customer pickup. In preparing the study, John White asked the Accounting Department to provide standard costs. The following standards were developed: Order processing at a standard fixed cost per month with a variable cost per order. Inventory at before-tax cost of 18 percent per annum of average inventory per field warehouse location. Image TABLE 4 Distribution Cost Handling and storage at actual local cost for each existing and potential facility. Appropriate storage rate applicable at in-transit warehouses. Inbound transportation from plants and in-transit warehouses to field warehouses based on point-to-point rates. Table 4 contains the costs for the reference year. Questions 1. What is the total distribution cost for W-G-P 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 W-G-P Chemical Company. What product and market characteristics can help explain this distribution structure? 3. What alternative methods of distribution should W-G-P consider for Prevention and Support? 4. Discuss the rationale for: The early order program, Customer pickup policies, Use of public versus private warehouse facilities.

Paper For Above instruction

The comprehensive evaluation of W-G-P Chemical Company's distribution system necessitates a meticulous analysis of costs, service levels, and operational strategies. The following examination synthesizes these aspects through detailed calculations and strategic considerations.

Total Distribution Cost and Metrics

To estimate the total distribution cost, one must aggregate costs associated with production, transportation, warehousing, and order processing. Based on the provided data, the reference year's costs outlined in Table 4—including handling, storage, transportation, and processing—serve as foundational inputs. For an accurate calculation, the costs are multiplied by respective activity levels and volume throughput. For instance, transportation costs are derived from point-to-point rates between plants, in-transit warehouses, and distribution centers, considering the volume shipped and distances involved.

Assuming typical figures—for example, if total volume shipped annually is X pounds, and the known transportation rates are Y per ton-mile—total transportation costs can be computed. Handling and storage costs, based on local rates and warehouse throughput, are added to derive comprehensive logistics costs. Combining these components yields an estimate of total distribution expenditure, which might approximate $Z million for the reference year.

Calculating the per-unit costs enhances understanding of cost efficiency. For example, dividing total costs by total pounds shipped provides a cost per pound metric, while dividing by total cases or cubic feet provides alternative insights into storage and handling efficiencies. Cost per order and per line are similarly derived, facilitating comparative analysis across distribution channels.

These measures are instrumental in the distribution review process as they highlight cost drivers, identify inefficiencies, and support decision-making concerning facility utilization, transportation modes, and service levels.

Mapping and Explaining Distribution Structure

Creating a geographic map of facilities reveals the strategic placement aimed at optimizing coverage, transit times, and costs. W-G-P's distribution network comprises manufacturing plants in Alabama and Louisiana, nine contracted seasonal plants strategically located at key transportation gateways, three in-transit warehouses, and 28 full-line distribution centers concentrated primarily in the Midwest. This setup reflects product and market characteristics, such as highly seasonal demand for Prevention, concentrated sales in eight Midwestern states, and environmental considerations restricting plant relocation.

Market characteristics, including the seasonal nature of agricultural applications, influence the distribution network layout. The positioning of manufacturing plants near ports facilitates raw material inbound logistics, while regional distribution centers enable rapid product availability during peak demand periods. The concentration in the Midwest aligns with high agricultural activity and rainfall patterns that dictate application timings, reinforcing the geographic distribution structure.

Alternative Distribution Strategies

To enhance efficiency and meet service expectations, W-G-P should consider alternative methods such as decentralizing distribution centers, employing third-party logistics providers, or adopting cross-docking techniques. Decentralization could reduce transit times and inventory holdings, improving responsiveness during peak seasons. Third-party logistics (3PL) providers can offer flexible transportation and warehousing solutions, potentially lowering costs through economies of scale.

Implementing cross-docking—where inbound shipments are directly transferred to outbound trucks without prolonged storage—can decrease handling costs and accelerate delivery, particularly beneficial during the seasonal peak. Additionally, leveraging regional warehouses closer to key markets could mitigate seasonality effects and improve service levels.

Rationale for Key Distribution Policies

The early order program serves as a proactive approach to managing seasonal demand fluctuations, allowing W-G-P to schedule shipments efficiently, reduce transportation costs, and ensure product availability. Its design aims to balance inventory risk, incentivize dealer participation through discounts, and utilize transportation economies of scale.

Customer pickup policies, especially the expectation of overnight delivery during peak periods, are driven by the critical need for timely application and the premium profitability during seasonal peaks. Supporting dealer self-service reduces lead times and improves responsiveness, aligning with customer expectations.

The use of public warehouses offers flexibility and cost efficiency, especially given fluctuating demand and seasonal storage needs. Public facilities provide W-G-P with scalable capacity without the capital investment associated with private warehouses. However, the choice hinges on cost, control, and service considerations, with private warehouses offering greater control at higher fixed costs.

Conclusion

W-G-P's distribution system reflects a strategic alignment with market demands, product characteristics, and environmental constraints. While current operations perform adequately, there are opportunities to optimize costs and service through alternative distribution methods, refined policies, and geographic adjustments. A comprehensive review focusing on cost analysis, geographic placement, and policy rationale supports informed strategic decisions to enhance overall distribution effectiveness.

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