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Claris & Co. is in the business of electronics and has a portfolio of 5,500 SKUs that generates $236,500,000 in sales and 37,950 orders per year from customers. What are your recommendation assigning priorities to the different sources of savings?
Subject: Logistics / Production & Operations Management
1 file attached:
(1) "Claris -- answers.xls" --- This file includes 3 different worksheets: one worksheet states some numerical facts from the case; another worksheet has my notes on areas of improvement I think Claris should consider; and the other worksheet has a spreadsheet of some cost calculations I`ve made for some of the logistics areas Claris could improve upon and the associated cost savings with said improvements.
Please read the the case, the questions to be answered. Do you have any other suggestions for Claris to improve its logistics?
QUESTIONS TO be addressed/answered:
? Prepare the answer that Mr. Smith will give to the General Manager related to the justifiable investment in the logistics project.
? Determine the saving sources that contribute most to the Return on Investment.
? What are your recommendation assigning priorities to the different sources of savings?
? If the Company has an Internal Rate of Return (IRR) Objective of 37%. How long will it take to accomplish that objective?
Hint: The source of savings are in labor productivity in order taking and warehousing, cost of lost sales, inventory turns, vehicle utilization, warehouse density, logistics cycle and inventory accuracy.
Assumptions: Assume independence between improvements and saving sources, i.e., improvements are not cumulative (at this point of planning).
Claris & Co. is in the business of electronics and has a portfolio of 5,500 SKUs that generates $236,500,000 in sales and 37,950 orders per year from customers. The current investment in finished goods inventory is $12,447,368 representing 362,915 boxes at the distribution center. Mr. Smith, logistics manager of the company has called a consulting company to develop a "logistics audit" to calculate some of the critical metrics at Claris & Co. The result indicates that the company has a cost of lost sales originated by the lack of inventory (of the right products) that amounts to $ 7,095,000 (with an actual fill rate of 97%). Other results indicate low labor productivity (1.4 orders/man-hour), low quality of the logistics function and slow response time (7 days/order).
The logistics manager has discussed with top management the possibility of finding internal financing to improve the performance indicators and be more competitive in the market. As a first step Mr. Smith has made a benchmark study that describes the performance objectives he should obtain. Mr. Smith wants to know the financial investment that would allow him to improve the productivity to 50 orders/man-hour, increase the inventory availability to 99.98%, increase inventory turns to 30 turns per year, and improve the vehicle utilization to 95% of the existing capacity for the 21,200 shipments/year currently processed. In the area of warehousing, Mr. Smith proposes to increase the warehouse density (in Claris` 22,000m2 warehouse) to 21 boxes/m2, improve the accuracy of deliveries to the level of Japanese standards, which is 99.998% (since the cost of delivering a box with any type of error is $10 per box). Finally, through new technologies he wants to increase the labor productivity from 27.01 boxes/man-hour to 40 boxes/man-hour.
Given the size of the project, the General Manager of Claris & Co. has asked Mr. Smith to use the current indicators together with the benchmark indicators to calculate the financial investment required to justify improving the logistics operation. The General Manager suggests to Mr. Smith to take a close look at labor utilization since its cost has increased to about $3/man-hour. At the same time he informs Mr. Smith that a capacity utilization of 60% in transport (vehicle utilization) is not acceptable in the long term. Mr. Smith has done his own analysis of external logistics providers in the region and found that to rent space would cost $39 per m2 and transportation cost would be $82 per shipment.
During the process of justifying the project, Mr. Smith found some parameters that would allow him to explain the maximum investment. An accounting report from the company established that the expected payback period should be 2 years and the opportunity cost of capital approved by the company is 27%. The marketing department established that the cost of lost sales is 2.8% of orders without inventory. From the customers` point of view, the marketing department suggests to analyze the implementation of an order cycle equal to 5 days (in order to better compete in the local markets). Additionally, the marketing manager has offered all the support to Mr. Smith given the connection between logistics and marketing performance. The closest example is the fact that currently 0.2% or wrong shipments start at the distribution center.