A company that produces small- and medium-sized coolers, many of which are used for outdoor picnics, is having difficulty reaching customers on the West Coast. The current process is to ship to customers from the East Coast and maintain the same shipping costs for the end customer nationwide, but this is affecting the margins negatively. The three main options for the company are to keep using this process, contract a distribution facility on the West Coast and periodically ship truck loads to the distribution facility, or to establish a production company and distribution company on the West Coast, whilst maintaining the raw materials from the East Coast.
There are several advantages and disadvantages to operating multiple sites as in this case. One issue is the overhead: the cost of labor may be higher or lower in the second location, which means this could be an advantage or disadvantage depending on the operating cost of the new site. An advantage is that it offers contingency planning: if the East Coast facilities are affected by a natural disaster, the West Coast location can be used temporarily (Christopher, 2016). Another advantage here is for distribution, as it would be easier and cheaper to ship to West Coast customers from this secondary location. The main disadvantages are that the raw materials are still coming from the East Coast, there will be an initial construction cost from opening a new site, and there may be difficulties in maintaining quality standards between the two sites (Maggan & Lalwani, 2016).
There are several different manufacturing operations flows in this environment, largely based on whether it is a make-to-stock (MTS), make-to-order (MTO) or assemble-to-order (ATO) product. In a MTS operation flow, the raw materials are assembled into the finished product before any orders or customer need has been established (Maggan & Lalwani, 2016). This part of the timeline varies based on the type of product offered and its complexity, but an estimate for this cooler can be set at around one day due to the fact that it is a simple, low-variety company (Christopher, 2016). In a MTS operation flow, the order can be shipped immediately following the customer placing the order, which means that there is less interference from manufacturing errors on the delivery time for the customer.
In an ATO operation, the components of the product are manufactured before the customer has placed the order. This is likely to take less time than a MTS approach in the initial stage. The second part of the operation flow in this instance is receiving the customer order and assembling the parts that make up the cooler. This should be a time-limited activity, and in a simple product such as a cooler could take less than an hour. The time taken to assemble will remain the same, but the time taken to start assembly will vary depending on the volume of orders and available staff members (Wisner, Tan & Leong, 2014). The order is then shipped to the customer, the timeline of which would vary depending on their location: between one and seven days. The main risk here is the lack of one part required for assembly, which would slow down the timeline.
In a MTO approach, the entire product must be manufactured, assembled, and shipped upon receipt of a customer order. This is the most cost effective approach if there is no established customer base, but is likely to be unnecessary for a company that only makes one product (Fawcett, Ellram & Ogden, 2014). The first stage will be manufacturing the parts from the raw materials: this could take up to a week depending on their complexity. The second two parts of the manufacturing flow will be the same. The main danger in terms of the end customer is that the raw materials will not be available, delaying manufacturing and the subsequent parts of the process (Fawcett et al., 2014).
There are several reasons to measure the performance metrics. They can be used to understand where in the manufacturing operations flow there are areas that can be improved, and areas that are doing well. This can in turn be used to finesse the operation to ensure the best result for the end customer (Fawcett et al., 2014). In this case, there are several metrics to assess success that can be used. The first is the total time taken from receiving the order to arriving at the end customer. This can be measured by assigning a code to each customer and tracking through the postal service and manufacturing process. The second is to track the cost of shipping from each facility based on customer location. Two qualitative metrics can also be used. One would be the satisfaction that the end customer has with the entire process from ordering: online questionnaires are useful ways of collecting this data. Another qualitative metric is the subjective view of employees about the changes. This information can be shared with employees to improve morale (Fawcett et al., 2014).
The quantitative metric that would be most useful here is assessing raw material to end customer time, as the purpose of the change is to improve this in line with reducing costs. Customer feedback is the most useful qualitative factor because it will highlight potential future areas for change.
There are many factors that can affect demand for this project. The first is the weather: cooler boxes for picnics are likely to be used only in summer and warm weather. The second is expansion of existing competitors or new competitors on the West Coast.
International influences can have a large impact on logistics. Evidently, the introduction of sources that fall outside the national remit can make things more complicated in terms of the supply chain. There needs to be an awareness that international laws, levies, and taxes need to be taken into account when assessing whether this is a viable option for this company (Maggan & Lalwani, 2016). Import tax can apply to raw materials which will increase the gross manufacturing cost. Manufacturing parts outside of the United States can reduce costs due to labor being much cheaper, but shipping and freight may negate this saving (Maggan & Lalwani, 2016). Managing a supply chain that stretches internationally is more complex than nationally due to these considerations: the manager of the supply chain must be well-versed in international law, potential risks of using this approach, and the impact of using foreign raw materials or manufacturers (Maggan & Lalwani, 2016).
There are, of course, opportunities of using this route. Going international may open up new suppliers of the raw materials that can reduce the total manufacturing cost. In this scenario, this would allow the company to consume the increased cost of shipping that arises from end customers on the West Coast without opening any new locations in this area (Maggan & Lalwani, 2016). It may also allow the company to expand their sales internationally more easily, having established a trade partnership with sources abroad. This can help to increase the company’s visibility and to increase profits overall (Maggan & Lalwani, 2016). As noted above, there are also potential savings to be made in terms of raw materials and labor if an international supply chain is opened.
There are also risks in this approach. The main risk relates to international politics. If there is some delay caused by changes to international trade laws or relationships between countries, then this can have a negative impact on the company and the end customer (Maggan & Lalwani, 2016). Changes in taxes and levies applied to raw materials or parts can significantly affect the overheads, and the risk taken here is that these may change and affect the supply chain. International considerations may also increase the shipping time, particularly if the product is MTO: the manufacturing plant has to wait for the arrival of raw materials before it can start manufacturing, assembly, and shipping (Maggan & Lalwani, 2016). International shipping does not have the same reliability as national shipping, although this depends somewhat on the initial location of the raw materials or parts.
It is noted in the scenario that the raw materials for these coolers can only be obtained on the East Coast. Opening an international supply chain may help to negate this affect and positively influence the decision that is being made in the scenario. If the supplies can be found in countries that ship more cheaply to the West Coast, opening a new manufacturing plant and distributor may be a more cost-effective approach than the Excel calculations suggest. This needs to be factored into the final decision-making process.
The most cost-effective approach in this instance would be to hire a distribution plant on the West Coast. The overheads of starting an entirely new process in this new location, especially when there are known local competitors, suggests that the final option may be too risky financially. The CEO should consider opening this distribution plant and shipping 10,000 units to the plant in five freight compartments over the course of a week. This will help keep overheads low whilst meeting demand in the West Coast Location.
The most important points to consider in this decision-making process are the time effects on the customer, the total cost of shipping and distribution based on each of the three options presented, and the overall ease with which the supply chain could be changed. In essence, the simplest and most effective approach in each of these three areas is to open a new distribution plant on the West Coast and using a MTS approach for this area of the country, with no international additions to the supply chain.