You have just been named “Logistics Manager” for Lexington Logistics Co., located in Lexington, KY. Lexington Logistics was just purchased from the family that originally opened it over 30 years ago. The new owners, a 4 member partnership, are very solid business people but this is their initial venture into logistics. They plan to use Lexington Logistics as a springboard to move them into a position of strength regionally and then nationally in the logistics industry. As the Logistics Manager, they are expecting you to help them streamline the current business by improving technology, infrastructure, personnel deployment, and capital expenditures. The previous ownership was marginally profitable (about 6% net income per year on revenues of $4.0 million annually) but the new owners believe this can be significantly improved. Current revenues amount to approximately $1.33 per square foot of warehouse space per month. The goal is to increase this to $1.50 (a 12% increase) per square foot and decrease costs by 15 to 20% over the next 12 months. Price increases may be an option but only if service at a given facility improves enough to warrant an increase. Significant increases will certainly give the customers the idea that they need to look at other options for their business, though that does not mean that they will automatically switch as they have received reliable service for several years.
The business currently consists of 2 warehouses, one in Versailles, KY and the other south of Lexington in Nicholasville, KY. Each warehouse has 125,000 square feet of storage space. The Versailles operation keeps an inventory of seats and steering wheels for J.I.T. delivery to Toyota in Georgetown, KY using Toyota’s own delivery trucks. The seats are manufactured and shipped in from Toledo, OH and Green Bay, WI via rail. However, there are times (usually about once a week) when seats have to be shipped in LTL to meet delivery schedules due to the rail line (CSX) failing to make the switch into the warehouse from the main line on time. This is expensive for the shipper and disruptive to your operation because the shipper simply cannot miss a delivery to Toyota due to the J.I.T. nature of the business.
The steering wheels are produced in Argentina and shipped in via ocean liner through the Port of New Orleans and then sent by rail or truck to the warehouse. Switches from the rail line into the warehouse have also been a problem for this supplier. Last month they had to ship 500 steering wheels in via DHL overnight airfreight from Buenos Aires. Delivery can also be a problem during the summer hurricane season as ships are sometimes diverted several days to avoid storms. The supplier would like to hold more inventory in Versailles (up to 30% more as a safety net) but the warehouse is full as currently configured.
The Versailles warehouse unloads the railcars, off of a spur that comes directly into the facility, via a forklift and stacks the pallets 4 high in rows on the floor (pallets are 48” x 48”). The weight of the pallets is not an issue but the forklift can only reach the 4 high limit safely. The ceilings in the warehouse are 42’ high and could accommodate 7 to 8 pallets high if a rack system were installed. This change would require capital expenditures for the racks, installation, and new handling equipment for the storing and picking of the pallets. It would, however, open up additional room in the warehouse for storage of other products or even possibly some cross docking operations as there are delivery and receipt truck docks on 2 sides of the warehouse. Currently, the 125,000 square feet of floor space is filled each month with these steering wheels and seats. There are 2 years left on the current contract and the company usually aims for 5 year contract extensions with up to 3% price increases each year based on the year over year increase in the U.S. consumer price index (CPI) for all products.
The workforce in Versailles has a lot of experience, but the numbers may be a little “heavy” due to the prior ownership’s refusal to downsize regardless of the economy. The operation runs 24/7, utilizing 4 shifts, 8 hours each with the operators averaging 4 hours per week of overtime. The average operator pay is $17.00 per hour. New operators start out at $12.00 per hour and more experienced operators “max out” the pay scale at $18.50 per hour. The previous ownership typically gave cost of living raises equal to 3% per year. Medical, dental, vision, life insurance, and disability insurance are available to employees and the company pays 90% of the monthly premium on each of these. There are 4 fork truck operators on each shift, running 4 of the 6 fork trucks in the facility. Each fork truck averages about 5.5 hours of running time per shift. They unload an average of 18 rail cars per shift and load an average of 10 trucks per shift. Each rail car takes approximately an hour to unload and sweep out. Each truck takes approximately 30 minutes to pick and load. Inventory currently turns approximately 12 times per year.
Each shift has a maintenance person to take care of the fork trucks, repairs and preventive maintenance, as well as any facility maintenance on the warehouse. The maintenance mechanics also average $17.00 per hour with the same benefits as all other employees. There is a maintenance supervisor/scheduler who works dayshift Monday through Friday scheduling maintenance, ordering parts, and doing minor repair work. He is paid $18.50 per hour but seldom ever works any overtime.
Each shift has a load expediter who goes through the warehouse verifying loads and marking the pallets that the operators need to put on each outbound truck. These 4 people make an average of $15.00 per hour. Each shift also has a load planner in the office that stays in touch with Toyota hourly via telephone and develops loads using an Excel spreadsheet program. Each of these planners makes an average of $15.00 an hour.
Each shift has an administrative person that puts load information into the system, prints out bills of lading, and processes receiving documents from the rail cars and inbound trucks. Each of these individuals makes $13.00 per hour. The warehouse also has shift supervisors on each shift making $20.00 per hour and a warehouse manager who works Monday through Friday and makes a salary of $55,000 per year. The warehouse is non-union and everyone just sort of does things the way they have always been done. No one seems super interested in finding new ways to do things or to streamline the operation.
The Nicholasville, KY operation works Monday through Saturday (2 shifts M- F, 8 hours each and 1, 8 hour shift on Saturday) doing a cross docking operation, similar to that of Amazon.com®. They bring in products that have been shipped from different regional warehouses and vendors around the country, separate them by size and zip code, and then ship out to end users, via UPS, Fed Ex, or a local courier within a 100 mile radius of Lexington. Shipments come in by truck and can be stored up to 24 hours, at times, on the dock before being shipped out to the customer. The company pays the freight inbound and outbound and bills the end user. However, they want the cross docking operation/warehouse to minimize freight costs as much as possible by being efficient, getting the right orders to the right end users on time every time, and avoiding returns costs due to errors. Seldom do more than 3 packages go to the same zip code on the same day so outbound truckload shipments are not a viable option. Most of the current square footage of floor space is used, making it impossible to use other parts of the warehouse for additional storage or operations for other customers. The current contract is up for renewal in 1 year. Things have been going fairly well but contract extension is not guaranteed and management is concerned with all revenue for this location being tied to one customer. Price increases are also tied to the annual increase (if any) in the U. S. Consumer Price Index for all products.
All inbound shipments are stacked in rows on the floor in a receiving area. They are then picked up and moved to “parking locations” on another part of the dock based on their outbound zip codes. Employees unload the inbound trucks with forklifts and then move the individual pieces of freight by hand trucks as it is separated and sorted into parking locations. Other employees then do the individual load picking and move them to outbound staging areas to wait for UPS, Fed Ex, or local courier. The warehouse has 8 unload/sort operators on each shift, making $16.00 per hour each with the same benefits as the workers at the Versailles facility. Each employee averages 4 hours of overtime per week due to the 5 ½ day schedule.
The operation also employs 4 customer service reps (2 per shift) to process faxed bills of lading from inbound shipments and develop outbound loads and pricing using excel spreadsheets and internet access to UPS and Fed Ex. They then print the load sheets out and give the hard copies to the warehouse employees to pick. Each customer service rep makes $15.00 per hour. Load picking and staging is extremely time consuming due to the rows on the floor and each “parking position” in the rows being designated by a zip code. No electronic means of inventory verification is used. During peak times of the year, such as Christmas, Thanksgiving, and Father’s Day, the warehouse uses several temporary employees to help, which causes some customer complaints due to delivery problems, lateness, wrong products, etc. arising from picking and loading mistakes.
The operation also employs 2 inspectors on each shift to verify correctness of outgoing loads. Each of these inspectors makes $16.00 per hour. Each shift also has a shift supervisor making $20.00 an hour and there is an Operations Manager who works Monday through Friday and makes $57,000 a year. The operation is non-union and sits about 45 minutes south of the Versailles operation. Some of the employees living in the Lexington area are about as close to one facility as they are to the other. The current workforce has only been with the company since it started this facility 2 years ago. They seem to be much more “flexible” in switching assignments, trying new things, and cross training than the Versailles employees. These employees have seen pay increases the first 2 years that rival the Versailles location.
Finally, management is also looking at a new business that would require building a warehouse in the Louisville, KY area, preferably near a major interstate on the east end of the city. The warehouse will be used primarily for storing car and pickup truck tires and must have access to rail as well as at least 20 inbound and 20 outbound truck docks. The tires will be stored in racks and the owners expect to use about 150,000 square feet of floor space. They are counting on your expertise to give them the type of construction, contractor recommendations, permit requirements, office layout, ERP recommendations, and staffing needs to run a 6 day a week, 20 hour per day operation bringing in 50 railcars of tires per day and shipping out 40 to 50 truckloads of tires per day to locations within a 500 mile radius of Louisville.
Given the information above, develop a detailed report and presentation for the company owners, outlining problems, opportunities, and recommendations on how you will implement a Total Cost Management to enable the company to save more money and become more efficient. Remember that the company is currently successful – so a lot of what you will find is how to enhance what is currently happening. Use realistic figures for cost savings, price increases, etc. Get realistic budgetary quotes for any capital equipment or building requirements needed, as well as lead times, installation and set up costs, and warranties. For each recommendation, do a cost-benefit analysis to show why you believe it to be a better alternative than what is currently being used.
The scenario will be graded in three parts, 20% on presentation, 40% on the viability and realism of the solutions presented, and 40% on the solutions themselves (level of detail, carefully considered, alternatives presented).
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