Good Example Of Case Study On Warehousing Strategy At Volkswagen Group Canada Inc.
The case of Volkswagen Group Canada’s(VGC) warehouse expansion, Kym Meisner (Director of Warehousing & Logistics) involves an aggressive growth plan that the company wants to execute to utilize the unused warehouse space and expand or opening a new warehouse. Alongwith her warehouse manager –Dave Cook, she considers exploring and debating out options of expansion, opening a new warehouse, leasing a warehouse for 20 years, handling operations to a third party. While executing the aforesaid she wants to upkeep the current workflow, keeping it out from any possible disruptions and ensures cost effectiveness before incurring any capital expenditures. The case is analyzed in the current competitive business environment for Volkswagen Group Canada.
While working on VGC’s warehouse expansion requirements it is necessary to analyze the capacityof the following points that are globally used while computing warehouse productivity on Warehouse Management System (WMS):
The challenge lies in countering unforeseen macro-economic changes which greatly impact an industry like the vehicle industry. Example: global recession of 2010, increase in tax or import duties etc.
Moreover, there are operational issues like interference caused to the existing processes and productivity levels owing to expansion plans, increase in the volume of inventory leading to growing warehouse expenses, overall increase in capital expenditure while setting up,leasing out or handling over a new warehousing unit to the third party.
Need for Expansion
With the year on year growth, whether over all or particularly in passenger car segments, it is clear that the demand for the Volkswagen group’s car is poised for greater growth and ‘Strategy 2016’ has a high probability of success. To accommodate the additional car units and spare parts VGCA needs to expand.
The following options are available for Volkswagen Group Canada warehouse expansion:
Expansion of existing warehouse
Leasing a new warehouse
Expansion Option that Makes the Most Sense Logistically, Operationally, and Financially
Amongst the options provided for expansion the second option of building and leasing a new warehouse in British Columbia- Western Canada is appropriate logistically, operationally and financially for long term.
Advantage from a Logistical Approach
Canada is a big land mass and observing the steady and growing demand of Volkswagen cars only one warehouse in Toronto will not be able to service the demand of the dealerships even when considering the next 5 years.Warehouse located close to Dealerships would ensure faster and cost effective delivery of spare parts.
Advantage from an Operational Approach
Operationally the pressure to service the dealerships spread across Canada would now be shared between two warehouses. The new warehouse in Western Canada can service demands of British Columbia, Alberta, Saskatchewan while the Toronto warehouse can service Ontario, Quebec, Nova Scotia etc. They can concentrate on increasing their performance and capacity utilization better while distributing to dealerships located in proximity.Moreover, as the new warehouse set up at a distant geography will not disrupt at all with any existing workflow and processes of the Toronto warehouse so Kym’s concern for the same is taken care of. In fact the Toronto warehouse i.e. currently operating at 93% service levels can match the targeted 95% service level for filling orders within 24 hours.
Lastly, as the Toronto unit stocks up 60 to 80% of the spare parts (fast moving ones) and had to order inventory beyond the fast moving ones from the Newark warehouse, so setting up a new warehouse in Western Canada can enable the Toronto warehouse to stock up exclusive inventory and quickly supply their dealerships with it when required rather than waiting for the same to be shipped from Newark.
Advantage from Financial Approach
The expansion will lead to a cost of $120 per square foot. Though this is $40 more per square foot than expanding the existing warehouse in Toronto, the capital expenditure and time investment of two years, is logical as the space leased is for the next 20 years when the demand for Volkswagen cars, facelifts and spare parts are going to increase manifold times within Canada. This investment will help reap better servicing, realizing capacity utilization, proximity delivery and increasing productivity.
Status Quo: Typical Flow of Parts from Production to Customer (End User)
Within Canada direct shipments are only being conducted for new vehicles from the Port of Halifax to the dealerships from where they are handed over to the new car owners. But vehicle parts are moving from Parts Distribution centre’s (PDC’s). Find below the flow chart for the same.
First the parts are supplied to 7 large PDC’s that shape the larger North American Distribution Center. The Toronto unit is 1 of the PDC’s supplying parts to dealerships in Canada.From the PDC’s the parts are supplied to the dealerships. The dealerships further cater to the end users i.e. the owners of Volkswagen cars.
In addition to the aforesaid the slow moving parts were only stocked in the biggest Parts Distribution Centre in Newark, New Jersey. While the other PDC’s like the Toronto unit stacked the fast moving parts. When these fast moving units received an order for slow moving parts they would procure the same from Newark, USA and then route it to the relevant dealership, who would then deliver it to the Volkswagen owner who requires the slow moving part.
The suggested expansion will lead to a cost of $120 per square foot. which is $40 more per square foot than expanding the existing warehouse in Toronto. Incase macro-economic factors works against such as an economic crisis hits the Canadian market thereby lowering the demand of cars in Canada, this would automatically impact the spare parts market. In that case the excess investment capital, time investment of 2 years and further the space that would be available for 20 years would all add overheads, eat into the profit of the PDC’s of VGC and diminish it.
Opportunities to Engage in Direct Shipments
As far as the question of whether there are opportunities to engage in direct shipments are concerned. The answer is negative as this would not be cost effective in the long run. But on the other hand the Port of Halifax is in proximity to the Toronto facility which is significantly closer than the Newark facility which possibly uses the busy New York or Charleston Ports. The Volkswagen mother units can directly ship the both fast and slow moving parts to the Toronto PDC and new PDC in Western Canada, instead of these units relying on the Newark facility. This way the turn-around-time would also decrease leading to efficient delivery of parts to dealerships and finally to end users.
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