Caw 7: W-G-P Cliorticul Cornpotl\ 625

A number of state budget analysts and legislators, as well as academic and professional
consultants, believe that the state liquor distribution system is considerably less efficient than
private industry. They argue that, for example, mandated state delivery contracts and state em-
ployees with little job performance incentive hinder productivity improvement.
Lower volume retail licensees fear that redesigning the current system may hinder their abil-
ity to purchase small quantities of liquor, particularly if minimum order sizes or delivery freight
breaks are instituted. They believe that changing the current setup will severely disadvantage
them relative to larger, high-volume chains and retailers. Jerry Faust, spokesperson for a state
organization representing retailers says, "If the system ain't broke, don't fix it." Many consumer
advocates argue that the current distribution system of state-set, single pricing at all retail outlets
provides consumers with an economically equitable system.

Challenges of System Redesign

Before leaving the office, Joseph outlined two general objectives of distribution network re-
design: (1) increase the state's return from liquor distribution by reducing distribution costs and
inefficiencies and (2) improve inventory management by utili~ingManagement Information Sys-
tems (MIS) to further increase efficiency. He also identified four specific objectives: ( I ) maintain
the current service level; (2) increase inventory turns; (3) decrease administrative costs; and
(4) maintain the current level of control over a highly sensitive socioeconomic policy area.
Joseph realized he would need to contact a variety of people upon his return to work on
Monday in preparation for Wednesday's meeting. He sketched out plans to meet with represen-
tative MLCC staff and operations personnel, MIS staff, external industry experts in liquor and
custom delivery operations, and academics in marketing and logistics at the nearby state
university.
Joseph decided that any changes in distilled liquor distribution would have to reflect key op-
erational issues of pricing, service level, projected retail sales and tax impact, direct delivery
from distillers to major chain warehouses, and delivery cost considerations-not to mention a
host of economic and political special interest group concerns. He began to realize that the topic
of liquor distribution in Michigan was a much more complex issue than it had seemed a few
hours earlier.

Questions
I . What alternative designs for distilled liquor distribution in Michigan might be
considered'? Explain the rationale for your suggestions.
2. Discuss the benefits and risks of alternative designs for distilled liquor distribution.
Which political, economic, geographic or special interest group considerations would
exert the strongest influence on system redesign?
3. Are the historical conditions which the current liquor distribution system is based upon
still important today? What, if any, other factors exist that require consideration?
4. Does an inherent social conflict exist when state governments rely upon tax
contributions from liquor sales to fund educational programs?
5. How would you organize the final report on distilled liquor distribution in Michigan if
you were Joseph Duncan?

Case 7: W-G-P Chemical Company

John White, vice president of distribution for W-G-P Chemical Company, was preparing for the
annual strategy review session conducted by the firm's executive committee. He was chaged
with the task of evaluating his tirm's physical distribution costs and customer service capability
for his firm's packaged dry and liquid agricultural chemicals.
FIGURE
1
Manufacturing manufacturing
W-G-P chemical
channel flow

II In-transit
warehouses (3)
tH Fill-line
distribution
centers (28) h
Customer
pickup

* Dealer

W-G-P Distribution Systems

Figure 1 outlines the existing physical distribution system for W-G-P Chemical Company. Four
types of facilities: (1) two continuous, company-owned manufacturing plants; (2) nine seasonal
contracted manufacturing plants; (3) numerous in-transit distribution centers; and (4) 28 full-
time distribution centers. Growing environmental activism has influenced management to reject
any relocation of the manufacturing plants. W-G-P distributes 129 different products or SKUs
on a national basis. For distribution considerations, the products may be grouped into two differ-
ent categories. Category A consists of 13 SKUs of a product called Prevention. The sales of
Prevention are highly seasonal and account for 85 percent of W-G-P's total revenue. The 116
Category B products (called Support) sell throughout the year but also have a seasonal pattern
similar to that of Prevention's sales. Although the sales volume of Category B is only 15 per-
cent of W-G-P's total revenue, this group of products contributes approximately 30 percent of
total before-tax profits. The typical end user of W-G-P's products purchases a variety of both A
and B products. In many cases, the products are used jointly in agricultural applications.
W-G-P's total product line is marketed through a network of agricultural dealers. The company
sells to the dealers, who then resell the products to farmers. The typical dealer provides farmers
with a broad line of products, including those that are directly competitive with W-G-P prod-
ucts. Historically, farmers tend to purchase both A and B products I to 2 weeks before field ap-
plication. Application occurs at different times in different parts of the country and is directly
related to the intensity of rainfall. Thus, W-G-P's products must be available precisely when the
farmers need them. Likewise, the quantity needed per acre varies depending on the rainfall re-
ceived in an area. Therefore, although W-G-P produces Prevention and Support all year. sales to
farmers take place during a very short time period. Farmers' requirements vary in time and du-
ration of use throughout the country.
To even out physical distribution to dealers across the year, W-G-P offers discount incen-
tives and warehouse allowances to dealers who purchase at least 90 days in advance of esti-
mated application dates. This early-order program accounts for 30 to 40 percent of the total an-
nual sales of Prevention and Support. For the dealer, placing an early order means taking an
inventory position on Prevention in advance of farmer purchases. However, since both Pr~~vc~rr-
tion and Support products are available, in effect, the early-order warehouse allowance means
a special discount of the Support products which sell all year. To avoid abuse of the program,
W-G-P requires that a proportional amount of Prevention products accompany each order.
W-G-P also agrees to accept returns up to 15 percent of the total quantity of early-ordered Pre-
verltion products. The return policy requires a refund of the full purchase price providing dealers
repay the return freight to W-G-P's warehouse.
Cnse 7: W-G-P Chemicnl Cornpu~~y

The advantages afforded W-G-P through the early-order program are two-fold.
1. W-G-P can schedule shipments at its convenience to achieve the lowest possible
transportation cost.
2. Dealers are given an additional discount if their own transportation equipment is used to
pick up early orders, provided the cost is less than transportation paid for by W-G-P.
Seasonal sales, those sales which dealers buy within 90 days of estimated application dates,
account for 60 to 70 percent of sales. Thus, to a significant degree, seasonal sales volume de-
pends on W-G-P's ability to deliver products rapidly. During the seasonal period, dealers expect
Prevention and Support to be available for pickup at distribution centers within a few hours of
order placement. During this period, approximately 50 percent of the dealers pick up products.
When transportation is arranged by W-G-P, dealers expect overnight delivery. Although the ser-
vice level required during the seasonal period is high, these sales are very profitable for dealers
because the farmers who purchase the products are willing to pay the full retail price. The capa-
bility to provide products during the application period is one of the most important criteria
dealers use when selecting a chemical firm. Historically, sales have been concentrated in eight
midwestern states which account for 80 percent of annual revenue. A summary of 1997 data is
presented in Table 1.
-The distribution pattern for W-G-P products is relatively simple. Two company-owned man-
ufacturing plants are located in Alabama and Louisiana. The Alabama plant produces Support,
while the Louisiana plant produces both Pre\lention and Support. Both facilities are continuous-
process plants, and their location at dcepwater ports facilitates economical inbound raw material
movement. The nine contracted seasonal manufacturing plants have passed the environmental
audits and are strategically located at key transportation gateways.
The three in-transit warehouses are utilized because the manufacturing plants have only
enough storage space for 2 or 3 days' production. Table 2 lists the in-transit facility locations.
In terms of total system, the in-transit warehouses have three functions: ( I ) to provide stor-
age until forward shipments are required; (2) to postpone the risk of advance shipments; and
(3) to provide a combination of transportation rates that are lower to field distribution centers
than the sum of published rates into and out of the in-transit warehouse. In a sense, the in-transit
warehouses are economically supported by special transportation rates. All warehouses and dis-
tribution centers in the W-G-P system are public facilities. Therefore, W-G-P's costs are based

- -

TABLE
1 Annual Sales, 1997

Dollars 525,146,747
Weight (Ib.) 242.7 17,768
Cubic Feet 26,887.5 13
Cases 2.9 12.753
Product Lines pcr Order 25,392
Orders 19.139

- 2 In-Transit Warehouses
TABLE

Birmingham, AL
Memphis, TN
Alexandria, LA
- 3 Warehouse Locations
TABLE

Indianapolis. IN Brooklyn Center, MN

Memphis, TN Rock ford, IL
Ennis, TX Memphis. TN
Alexandria, LA Phoenix, AZ
Fresno, CA Orlando. FL
Baton Rouge, LA Milwaukee, WI
West Helena, AR Goldshoro, NC
West Sacramento, CA Des Moincs, IA
Greenville, MS Decatur, IL
Wcslaco. TX Columbia. SC
Omaha, NE Pennsauken, NJ
Evansville, IN Houston. TX
Albany, GA Lubbock, TX
Montgomery, AL Charlotte, MI
Birmingham, AL Lima, OH
Kansas City, MO

on volume throughput and duration of storage. The 28 full-line distribution centers are primary
facilities from which dealers are served. Although some early orders are shipped directly from
plants and in-transit warehouses to dealers, they represent less than 10 percent of the annual ton-
nage shipped to dealers. Ninety percent of all tonnage is either shipped from o r picked up by
dealers at the full-line distribution centers. Table 3 provides a list of distribution center loca-
tions. Replenishment of distribution center inventories is primarily on an allocation basis con-
trolled by central inventory planning. All orders are processed in an online basis at the central
office after they are received over a telecommunications network. The elapsed time from order
entry to shipment release from the distribution center is less than 24 hours. The primary method
of shipment from plants to in-transit warehouses and distribution centers is motor carrier.

The System Review

A primary objective of the physical distribution system review is to evaluate the cost and ser-
vice levels of the existing program in comparison with alternative methods of operation. Despite
relatively smooth operations, the fact remains that at the end of each application season, many
dealers' requirements have not been satisfied, while other dealers have returned inventory.
Thus, sales are lost that could have been enjoyed if products had been available to the dealers in
need. A critical element of customer service is forward inventory availability to accommodate
customer pickup. In preparing the study, John White asked the Accounting Deputment to pro-
vide standard costs. The following standards were developed:
1. Order processing at a standard fixed cost per month with a variable cost per order.
2. Inventory at before-tax cost of 18 percent per annum of average inventory per tield
warehouse location.
3. Handling and storage at actual local cost for each existing and potential facility.
Appropriate storage rate applicable at in-transit warehouses.
4. Inbound transportation from plants and in-transit warehouses to field warehouses based
on point-to-point rates.
The cost for the reference year 1997 are contained in Table 4.
Cnse 8: Western Phnrrnuclcc~utictr[s
(A)

TABLE
4 Distribution Cost, 1997

Storage $ 3.1 Million

Handling $ 1.3 Million
Ordering $ 3.5 Million
Average Inventory Level $90.0 Million
Transportationto Warehouse $ 2.3 Million
Transportation Transfer between Distribution Centers $ 1.2 Million
Transportation to Customers $ 5.6 Million

Questions
1. What is the total distribution cost for W-G-P Chemical Company'? What is the cost per
pound, cubic foot, case, line, and order? How can these measures contribute to the
distribution review process?
2. On a map, plot the distribution facilities and network for W-G-P Chemical Company.
What product and market characteristics can help explain this distribution structure?
3. What alternative methods of distribution should W-G-P consider for Prevention and
Support?
4. Discuss the rationale for:
A. The early order program,
B. Customer pickup policies,
C. Use of public versus private warehouse facilities.

Case 8: Western Pharmaceuticals (A)

David J. Closs and Christopher Kitchen

George Castro has a lot to be proud of. His company, Western Pharmaceuticals, has just
merged with the largest producer of over-the-counter (OTC) cold remedies on the East Coast.
The merger with Atlantic Medical should guarantee coast-to-coast market penetration for both
Western Pharmaceutical's upset stomach products and Atlantic Medical's cough syrups.
George has been selected to serve as CEO of the newly formed United Pharmaceuticals and is
rapidly becoming recognized as being one of the top Mexican-American business leaders in
the country.

History
Western Pharmaceuticals was founded by George's grandfather in postwar Los Angeles. Tony
Romero's reputation for hard work combined with his strong pharmaceutical background made
the introduction of his first antacid tablet an unqualified success in the booming downtown area.
The company grew quickly and soon became the largest producer of antacid tablets in central
and southern California.
George's father, Rudy, married into the Romero family in 1961. Although not a pharmacist,
Rudy received a degree in urban planning from Pepperdine University. After many heated dis-
cussions with his new son-in-law, Tony acted on Rudy's advice to expand the company outside
of the congested Los Angeles city limits. Tablet production would then take place in tiny On-
tario, some distance to the east of LA. The urban site, conveniently located in proximity to sev-
eral major freeways and a railhead, would serve only as a distribution center.