Supply Chain Question
The assignment will be available into 2 parts: Introduction and Report
The introduction part explains about the assignment details.
Format: A single file – word or PDF 1500-2000 word written assignment
Key Objectives
LO1. Understand the role of sourcing in supply chain management
LO2. Evaluate the outsourcing decisions and its impact on supply chain function
LO3. Understand different supply chain contracts
LO4. Apply models to measure the supplier performance in supply chain
LO5. Understand the impact of risk sharing on supplier performance.
The key topics include the role of sourcing in supply chain, designing supply chain contracts, contract coordination, revenue sharing and risk sharing. It will also cover designing innovative supply chain contracts and financial instruments to improve performance, coordinate costs and product availability.
Assignment details – Part 2
Your task is to develop a report for Mary to brief the board on feasibility of potential options on whether or not to outsource the company’s Melbourne warehousing to a third-party logistics provider:
1.Develop the business case with NPV and recommend whether to perform in-house or outsource.
2.Perform sensitivity analysis: is the solution sensitive to any key assumptions?
3.Recommend proposed contract types to explore with potential supplier(s).
4.Outline the measures you would put in place to ensure supplier performance.
Email communications for warehouse outsourcing project
Based on the following emails from the leadership team to Mary, answer the assignment questions.
The following email was sent to Mary from the Financial leadership team:
Hi Mary,
Your project sounds exciting. Here is some information I suggest you use to get it going for an initial feasibility check.
Our strategy is built around focusing on our core activities, so this seems like a good way forward.
As a pharmaceutical company, our key advantage in the market is ensuring we maintain high in-stock availability of items along with speed to market for new products. Logistics costs – albeit important – are not a primary business driver.
The current warehouse has an annual lease cost of $2m, plus 10 per cent oncosts. The property team have advised that we cannot exit this lease without penalty, up to the remaining lease cost (the lease has 12 months to run). There might be an opportunity to sub-lease, but this is slim, will take time and we have not yet run that past legal to even know if it is allowed in our contract. If we stay in this facility going forward, it is anticipated that our rental costs will increase by 2.5 per cent p.a., and that the facility has the capacity to handle future volume growth for the next 7 years.
Our variable costs per unit are currently $10.50. We forecast this to grow by 1.50 per cent p.a. if we remain in this facility.
We are liable for $0.25m for make good charges on exiting the warehouse.
We currently handle 388,000 units per annum through the facility, and this volume is projected to increase by 1.5 per cent per annum.
WACC – an interest rate of 10 per cent. This is to be applied to nominal cash flows. At this stage, do not include any taxation impacts into your analysis, and best to use a seven-year period for analysis
The Melbourne warehouse has $1.0m of equipment on the books, yet to be depreciated. It is unlikely that we could re-deploy this to other warehouses.
Finally, I have not spoken to the corporate risk team yet, but we would need to consider any risks, and any implications, not just in whether we outsource but for insurance, etc.
I think Mary has already mentioned too, that initial estimates from potential 3PLs indicate a unit cost of $13.5, if we choose to outsource (which would grow by 2.5 per cent p.a.).
Regards,
The Financial leadership team
The following email was sent to Mary from the HR leadership team:
Hi Mary,
Below is the information you requested:
We have a great workforce in Melbourne, so it is a sad to hear we are considering an outsourced option for the warehouse there (outsourcing would really be a big blow to our customers, who value our internal workforce).
To close the Melbourne warehouse, about 35 team members will no longer be employed. We will need to explore options – potential re-deployment in other warehouses, manufacturing sites etc. Ultimately, if this can’t be done, we will incur a payment of approximately $25,000 per team member that is made redundant. I estimate we would be able to re-deploy or retrain around 10-20 per cent of the team only unfortunately. It will most likely also result in some redundancies in our central office, possibly around $0.5m worth, unless we can re-train and redeploy some of this team to manage the new agreement. We will also need to consider what new skills we need in central office to manage the third-party provider and any training requirements.
Is there a requirement for a transition team to manage change? This might be a few people full time for six months. This may cost up to $200,000
I am concerned at this stage that there is risk of industrial action in our Sydney and Brisbane warehouses should this plan proceed. There may also be a risk of productivity loss in the Melbourne warehouse leading up to any transition. While all unlikely, it is probably worth your consideration.
Finally, we will need to ensure that all our safety processes are built into any proposed solution.
Regards,
The HR leadership team
The following email was sent to Mary from the Operations leadership team:
Hi Mary,
At first glance, the cost proposals from the 3PLs look quite ambitious to me. I am not confident that a 3PL can do this for a unit cost of $13.5. I would say you want to be working on at least $14. You may want to run some sensitivity with those estimates.
I would expect that it would take us 3 months of warehouse ‘double running’/overlap to transition all the inventory from one warehouse to the next without impacting customer service. We also estimate that it would cost around $0.5m to transfer all stock from the current to the new site.
We will need to ensure that any contract we have in place focuses on the right metrics to manage 3PL performance. Given they will have competing priorities, with other clients, we must make sure there is an incentive for the 3PL to provide a great service to us.
Our current warehouse is located in Dandenong, near our manufacturing plant. While close to our manufacturing plant, it is far from most our customers who are in the western suburbs. It is likely that an outsourced option, located in the Western suburbs of Melbourne, as proposed, could save us around $250,000 p.a.
Note – we also spent $2m over the past three years in improvement initiatives, training staff etc. We would not want this to go to waste.
Regards,
The Operations leadership team
The following email was sent to Mary from the IT leadership team:
Hi Mary,
Linking systems with an external 3PL will take some effort. It is likely to cost around $0.25m. This cost, however, would not increase much further should we choose to outsource our other warehouses to the same provider in future.
I am not sure if you already have this from the Finance team, but we do have an ongoing IT system cost for managing the warehouse (WMS). If we close the Melbourne site, we will most likely save $20,000 p.a. in fees.
Regards,
The IT leadership team
The following email was sent to Mary from the Sales and Marketing leadership team:
Hi Mary – we do not anticipate any impacts on revenue from moving to a 3PL model. We expect the same level of service and flexibility that is provided to us today, however. If anything, locating our warehouse in the western suburbs of Melbourne, near our main customers, may have an upside.
Regards,
The Sales and Marketing leadership team
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