Question

Case Study: PackCo

PackCo is an Australian-listed company that manufactures packaging products. PackCo services customers that are mainly food and beverage producers. The company currently operates in Australia, New Zealand and USA, and employs more than 6,000 staff. With its head office in Melbourne, Victoria, PackCo is listed on the Australian Stock Exchange and operates a number of production facilities in Australia, mainly in Victoria and South Australia. Since its inception, the company has grown steadily with revenues reaching almost USD $4 billion in 2016. The company has also acquired a number of other businesses to support its business growth.

PackCo sells its products and services to both local and overseas customers, and is reliant on third party logistics (3PLs) for transportation and forwarding companies to move its products. A newly appointed Supply Chain Optimisation Manager, Aras, has been tasked to oversee transportation and freight optimisation within PackCo. His responsibilities include conducting RFPs (requests for proposals) for the selection of carriers, and also implementing S&OP and CPFR projects to ensure that demand planning within the category is cost efficient and service effective.

Despite the implementation of an ERP system, management and replenishment of inventory to the right location has been a challenge.

Aras, in his first weeks of this job in overseeing one of the business groups within PackCo, recognised that due to forecast inaccuracies, it would be a big challenge to get the transport planning right. Despite the implementation of an ERP system, due to master data inaccuracies, management and replenishment of inventory to the right location has been a challenge. This has led to the demand planners in his team resorting to using spreadsheets to communicate demand requirements to the providers. Also, the lack of accurate data has resulted in higher inventories and accumulation of aged and obsolete stock.

Aras realised that his supply chain team has constantly exceeded its logistics budget to provide outstanding service levels for customers. Due to lack of clear sales strategy, expedited delivery or special production runs for low-order customers have further reduced the profit margins. For example, one of PackCo’s biggest accounts, Healthy Foods, spends only $2 million a year and, yet the logistics costs incurred servicing this client as a percent of revenue is over 25%.

Aras, prior to his first quarterly C-level management meeting, asked his team to run some analysis for the customer base and its use of 3PL provider services. The results were astonishing:

36.1% of the customer base accounts for 73% of the company’s operating profits.

24.9% of the customer base accounts for approximately USD246 million in losses.

the average DIFOT (deliver in-full and on-time) rate is 99.6% for the customer base.

the average logistics costs as a per cent of revenue across the customers is 16.3%.

there is no long-term contract with any 3PLs. Contracts tend to be 'arms-length' and negotiated with the 3PLs on ad-hoc basis.

68.2% of the outbound deliveries tend to be LTL (less-than-truckload).

special production runs lead to overtime wastage of more than USD $46 million in the last financial year.

Question:

Students are required to prepare a one-page executive summary (no more than 500 words) that describes the problem(s) identified from the case company and to prescribe recommendations to overcome the problems and take following elements in consideration.

1) Identification of key issues and their practical ramifications.

2) Rich recommendations (or recommended solutions).

3) Logical and coherent argument to support recommendations, substantiated, where appropriate, by credible, tested practices and/or well established academic paradigms or perspectives.

4) Indication of limitations or plausible pitfalls arising from implementation of recommendations.

Answer 1

The first issue faced by the company is the data inaccuracy. With incorrect data, there will be wrong forecasts which will lead to inventory pile up in some cases and stock shortage in others, ultimately leading to ill conceived planning, poor customer service and higher cost of operations. Another issue is the unclear sales strategy, which also has the origin in poor forecsting ability due to bad data, which leads to higher costs of logistical functions.

From the analysis it is evident that the company is not being able to utilise the ERP due to reasons listed above. Few customers are profitable, while others contribute to small fractions or loss.The 3PL systems has no strategic partners and the engagement is on ad hoc basis, often leading to delivery of LTL, resulting in increased costs. Special production runs for specific customers cause considerable losses. The cost of logistics as apart of revenue is 16.3%, much higher than the norm.

The recommendations are as given below.

(a) Corrrection of database should be on the topmost priority to enable the managers to make rational forecasts and sales plan to increase efficiency and cost effectiveness.

(b) Engagement of dedicated 3PL partners and work with them to solve the long standing problems related to logistics to make the processes efficient.

(c) Profiling of customers to identify those who contribute to profits and do away with the loss making propositions. Stop special production runs until long term strategic benefits are observable.

The recommendations should be implemented gradually and not in one go, starting fom the data correction. Once the company has the right information, it can go ahead with the changes.