Busn 6050 – Supply Chain Management Case Study Example
WAREHOUSING STRATEGY AT VOLKSWAGEN GROUP CANADA
The Volkswagen Group is one of the world’s leading automobile manufacturers. The company was founded in 1937 and its headquarters are in Wolfsburg, Germany. It has been the largest carmaker in Europe since the 1970s. It also has the largest assembly plant (Wolfsburg) and the best-selling car (Golf) in Europe.
Being a German company, Volkswagen Group positions its brands at the premium part of the market – Audi is mass premium, Volkswagen is semi-premium while Bentley, Lamborghini and Bugatti are prestige marques. Only the Spanish SEAT and Czech Skoda target at the lower end of the market, but they still share the high quality and engineering standard of the group because of extensive platform and component sharing. Each brand has its own character and operates as an independent entity on the market. The product range extends from low-consumption small cars to luxury-class vehicles. In the commercial vehicle sector, the product offering spans pickups, buses and heavy trucks.
During the recession, when other competitors lost dramatically, Volkswagen utilized excellent strategic planning to survive through the recession and earn profits. By expanding the business in the emerging market like China and Brazil, the company proved the strong growth, even outperformed other rival companies like Toyota or Nissan.
In fiscal 2010, the Volkswagen Group delivered 7,205,094 vehicles to customers worldwide, an increase of approximately 15 per cent from 2009, thus achieving a new record for the company.
Nowadays, Volkswagen Group became a global brand which sold and distributed vehicles in 153 countries, supported by 62 production plants in 15 European countries. Around the world, nearly 400,000 employees produced approximately 30,000 vehicles per day or were involved in other vehicle-related services.
In the analyzed case, Volkswagen Group is trying to implement an aggressive growth plan. They want to develop a plan to deal with their increased warehousing requirements. Volkswagen Group Canada (VGCA) operated one Parts Distribution Center (PDC) responsible for storing spare parts, located in Toronto, Ontario. The fast-moving PDCs, such as the one in Toronto, carried 60-80 per cent of the most commonly ordered stock-keeping units (SKUs).
“Strategy 2016” includes the aggressive plans to grow the volume of new car sales annually by 10 per cent per year over the next 5 years. The sales of spare parts to dealers are expected to grow at a similar rate. This increase includes the ability to service the demand of additional 17 new dealerships scheduled to open in Canada during this period.
VGCA 2016 Growth Plans includes four new models and four new facelifts each year for the next three years for a total of 12 new vehicles and 12 facelifts. Each new model would add 3,000 new SKUs, each facelift would add 1,000 new SKUs and approximately 75 per cent of all SKUs would be kept in inventory at the fast-moving PCDs (12 new vehicles * 3000 SKU’s = 36,000; 12 new facelifts * 1000 SKU’s = 12,000; (36,000+12,000) *75% = 36,000; 36,000 new SKU’s in the next 5 years).
The problem of Volkswagen Group Canada is that the Toronto Ontario Parts Distribution Center has enough space for an estimated 16,000 new SKU’s in inventory. During the next 5 years the division of VGCA’s warehouse will need to manage additional 36,000 SKU’s.
There are at least four factors which need consideration: First, Timing. A long delay could compromise service. Performance is slightly below target, so the company does not want to negatively affect performance at the existing facility. Second, Geographic Region. A warehouse in Western Canada might provide opportunities to improve customer service. Third, Inventory. Opening a new PDC could increase inventory levels. Finally, Cost effective. The auto industry is in a difficult period, meaning that every expenditure would be heavily scrutinized.
This paper is going to analyze what is the best option to improve the warehousing strategy at VGCA and to make the customer service better at the same time. According to the master service legal agreement signed between the VGCA and the Canadian dealerships, VGCA is obliged to deliver the parts to the dealership within 24 hours from the moment of receiving the order. The Toronto PDC has such contracts with 122 dealerships across the country. In order to fulfil its contractual obligations, at one time VGCA holds an average of $20 million in inventory. IVEY (2012) indicates that the Toronto PDC has a warehouse facility that has an area of 160,000 square foot. The length of the facility is 400 feet, the width also 400 feet and the height 30 feet. Twenty per cent of the total warehouse space is occupied by high racks. There are wide aisles between the racks which makes it possible for the staff to pick products. There are additional 40,000 cubic feet in the warehouse that can be used for expansion.
The parts are stored on the racking systems, which consist of two bin sizes – small bins which have the capacity of 10 cubic feet and large bins which have the capacity of 100 cubic feet. Seventy five per cent of all the bins are small ones, and the remaining twenty five per cent are large bins. One bin usually provides enough space for storage of all necessary parts for each type of SKU. At the moment, there are 80,000 bins available in the warehouse, 64,000 of which are occupied.
Regarding the capacity of the warehouse, expansion is one of the options which can offer more room. Expanding the new warehouse would increase the value of the companies fixed assets. Expanding the existing warehouse also offers the opportunity for customizing it since it is the company’s facility it and can model it to suit its needs (Sople, 2009). At the same time, the cost of expanding an existing warehouse will be considerably high, and the company will not be able to fit into the budget available to the project. Besides, the managers will have to control a bigger area, they will have to spend more time on that, and will be able to devote less time to other important issues. Apart from that, expansion requires time, and VGCA needs a quick solution in order to improve its customer service.
Leasing is cheaper in the short run, compared to expansion it does not cost that much to finance. Besides, the company that leases a certain property is able to utilize tax benefits that come with it (Ross 2003). Leasing the warehouse is a liability that is not reflected on the balance sheet therefore, it will not have any negative effect on the company’s ability to borrow money in the future. However, if the company leases a warehouse, it will need to relocate its resources there, which requires much time and money (Sople, 2009). Leasing a facility, the company does not become the owner of this facility, so it will not be able to customize it fully to its own needs, it will only be able to make some minor modifications. Apart from that, despite of being cheaper in the short run, leasing is expensive in the long run, as it is a recurrent expenditure – it will be necessary to pay the lessor a fixed amount each month.
Outsourcing has an advantage of the possibility to share the risk. The company can transfer some of its risks and responsibilities to a third party (outsourced vendor). Due to the fact that in the majority of cases such outsourced vendors have more knowledge and experience in the area, they have better strategies and plans how to avoid or reduce risk. With the help of outsourcing it is possible to reduce operational and recruitment costs. The disadvantage of outsourcing is that creates the risk of unauthorized utilization of confidential information. There is lack of customer focus since the company providing the service may be catering for other companies at the same time (Ross, 2003).
VGCA needs to examine all three available options critically. Considering all the three options have their advantages and disadvantages, VGCA should pick the solution that gives them optimum results at a relatively low cost.
After careful scrutiny of the issue at hand, the following options were evaluated to determine the best solution which could be implemented by the VGCA. This is shown in the tables below:
After careful reviewing of situation overview and case analysis, we recommend that VGCA should pursue Alternative 3 – Outsourcing part of the warehouse to a BC based Third Party Logistics (3PL) firm in order to achieve the goal of less time consuming, minimise disruptions to existing facility, improve customer service level and cost effective.
Rational 1: Partial not Entire warehouse outsourcing can increase the management control
If outsourcing the entire warehouse to a 3PL firm, VGCA will not have a high inventory control or management control, so it is not smart for VGCA in all perspectives, but if outsourcing part of the warehouse to 3PL, things will be a lot different in a good way. As ‘Inventory is a necessary evil’, a firm cannot have too much or too less of it; the more inventory control the firm has, the higher ROI the firm gains.
Rational 2: Total contract terms cost/ft is low
If leasing a new warehouse in Western Canada, the setup cost and holding cost is much higher than 3PL or existing warehouse expansion, the total cost will be high, the profit will be low, the stakeholder will not be satisfied. Furthermore, the lease time is 20 years, the total lease cost/ft is $15*20=$300, while 3PL’s contract time is 5 years, the total contract term cost/ft is $20*5=$100, which is much lower.
Rational 3: Less time consuming, higher service level
If expanding the existing warehouse, the time will be 6-8 months, it will compromise Toronto PDC’s service level; if leasing a new warehouse, the time will be up to 2 years, it is too long to achieve service level; if outsourcing all or part of warehouse to a 3PL, the time is immediate. It is not hard to see that outsourcing warehouse to a 3PL is much less time consuming and can achieve higher service level.
Rational 4: Environment friendly, more sustainable
If expanding the existing warehouse in Toronto, more inventories will be shipped from the great Toronto area either by truck or rail, which means more pollution will take place within Ontario. It will be extremely difficult for VGCA’s “strategy 2016- environmental leader” to come true. While outsourcing to a British Columbia based 3PL can reduce the carbon footprint in Toronto and will be more sustainable.
First, cooperate with experts or consultants to come up with bidding terms through website to approach potential BC 3PL firms;
Second, review multiple aspects value of the potential 3PL firms, and choose the final one from them;
Third, negotiate the new contract, make sure to stress all the positives in the new agreement, make sure to stress all the positives and negatives (if any);
Fourth, develop a direct communication information system, share warehousing sales information, maintenance and repair information, forecasting data information, etc to achieve better service level;
Last, keep an eye on the 3PL firm, and other potential 3PL firms, if everything is fine, keep the contract; if not, terminate the relationship and find a new 3PL partner or other doable solution.
In the analyzed case it was observed that in order to fulfil its rather aggressive growth plans, Volkswagen Group Canada, among others, has to solve the problem of additional warehouse area which will be required to store extra 36,000 stock-keeping units, and while doing that to improve the customer service as well. Three alternative options were proposed as possible solutions to this problem, and namely: expansion, leasing and outsourcing. Each of the proposed alternatives has its advantages and disadvantages, which were analyzed taking into account the particular peculiarities and needs of VGCA. After careful analysis of the advantages and disadvantages of the proposed alternatives, it was concluded that the best choice for VGCA will be outsourcing. It can be executed immediately, it is cheaper, it reduces the workload on management of the company allowing them to concentrate on other important issues. Outsourcing will also permit VGCA to share the risk with the third party company and to benefit from the third party’s better knowledge and experience in the area. Apart from that, outsourcing is more environment-friendly than expansion, and it will also make it possible for VGCA to improve its customer service. For these reasons, it can be recommended that VGCA should opt for outsourcing, and several steps for practical implementation of this option were suggested.
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