Case 5
Westminster Company:
A System Design Assessment
Overview
As its name implies, this case finds the Westminster Company assessing the efficiency and
effectiveness of its logistics system design. A number of internal and external influences have
made the firm reconsider its current system. As it stands, Westminster operates three separate
distribution systems, one for each domestic sales division. It may seem obvious that
consolidation of the systems can significantly improve efficiency, but there are a number of
constraints placed on the company to make the determination a complicated one.
Students are encouraged to consider the various pieces of cost information as well as numerous
qualitative factors in order to reach conclusions for this case. As with all case questions,
answers are not necessarily clear-cut though all responses should be adequately justified.
Solutions to Questions
1.
System consolidation would make it easier for transportation economies to be gained.
Truckload volumes would be more easily gathered to and from distribution centers, lowering
transfer and customer freight costs.
The effect of using third party warehousing and transportation on transfer and customer freight
costs is less apparent. It is likely that these costs would be higher in this scenario though
inventory costs should be lower without the fixed investments and overhead expenses of the
warehouse. Third party warehousing and transportation is often a good idea considering that
specialists can often provide better service at a lower total cost.
2.
Warehouse consolidation is likely to have the following effects:
Inventory carrying costs would be reduced with better utilization of facilities and
less duplication of effort. The company operates two warehouses in Newark, NJ
(one for Division A and one for Division C) and Los Angeles, CA (one for
Division B and one for Division C). These are clear candidates for consolidation.
Regardless of any changes in product volume, the reduction in facilities alone
represent significant savings.
The effect on customer service levels is less clear. Should all products still have
to go through a distribution center prior to final delivery to customers (perhaps for
light processing or packaging) the effect may be minimal. Customers generally
feel more comfortable when product is stored nearby. Without more details of
the planned consolidation, however, this is difficult to tell. The possibility of
mixed product shipments would likely be embraced.
Order fill rates could improve with inventory dispersed across fewer storage
locations. It is likely that fewer freight transfers will be required to meet
customer demand. Pending on the distance from new warehouse locations to
customer locations, delivery time may be a concern though.
3.
Public warehousing generally involves higher variable costs than private warehousing,
though fixed investment is usually not required. Storage and handling costs are usually greater
for high volume products distributed through public warehouses, though the quality of
performance may make up for this difference. Fixed facility costs are definitely more of a
concern with private warehousing. Outsourcing warehouse functions is often a good idea when
the product in question has a seasonal, cyclical, or uncertain sales nature. We can assume that
this is not the case, however, for Westminster’s line of health products.
4.
There is certainly greater opportunities for truckload shipping volumes with consolidated
distribution centers and mixed product shipments. This would require fewer outbound
shipments, with each in greater quantities for better transportation economies. The potentially
longer distances from distribution centers to customer locations might be the only detriment to
transportation cost in this scenario (and we cannot tell from the information provided).
5.
There are several possible factors.
•
•
•
•
•
•
damage)
An incomplete list includes:
Fixed costs associated with each facility
Customer Service (customers prefer several well-stocked facilities nearby)
Size and dispersion of sales markets
Efficient interface with manufacturing facilities
Transportation costs (inbound, outbound, and transfer)
Handling costs (a product handled more frequently is more likely to be
• More warehouses generally result in higher average inventory
• Labor availability and costs (Table 5 depicts the variability in costs)
• Environmental factors (legislation, zoning, and public opinion)
6.
As with any logistics decision, there are inherent cost/service criteria to be evaluated.
With regard to costs:
Can we do it cheaper ourselves?
Will the total cost of transfer and outbound transportation, product handling, storage, labor,
facility maintenance, taxes, and interest as well as opportunity costs (investment that could be
directed elsewhere) be lower than we can accomplish with our own resources?
With regard to service:
Can we do it better ourselves?
In particular, will fill rates be higher? deliver time quicker? order accuracy higher? product
damage lower? customer satisfaction higher?