Question

Case: Polaroid Corporation: European Distribution System HBS 9-695-038

1. How does Polaroid’s distribution needs vary by subsidiary in Europe? What are the implications of these differences? You must consider the cultural diversity of the countries in Europe where Polaroid operates.

2. Should Polaroid implement a direct distribution strategy in Europe? If not what alternatives do you recommend?

3. How should your recommendation be implemented? What implementation challenges do you foresee? How would you address those challenges?

4. What other changes do you recommend Polaroid make to its European logistics system?

Polaroid Corporation: European Distribution System

In early 1990, Tom Carroll, Director of International Distribution and Customer Service at Polaroid Corporation, considered strategies to implement Polaroid’s corporate goal of centralizing inventories in Europe. The company currently had 10 subsidiary warehouses in Europe and a central distribution center in Enschede, Netherlands. In the early 1980s, deregulation of the U.S. motor carrier industry had prompted Polaroid to reduce substantially the number of warehouses distributing its products in the United States; the consolidation had resulted in improved service levels as well as reduced costs. Throughout the 1980s, Carroll had repeatedly tried to convince top management in the United States and Europe that similar gains could be made by centralizing inventory stocks in Europe. Although reducing the number of warehouses in Europe had now been agreed upon as a company strategy and was supported by corporate management, the plan was strongly opposed by a number of senior managers in Europe, who felt that the benefits of centralized distribution had not yet been proved and that the decision to consolidate inventory stocks was still open to debate. Furthermore, no plan had been established yet about the sequence in which warehouses should be eliminated and inventories consolidated.

Polaroid Corporation

Headquartered in Cambridge, Massachusetts, Polaroid reported $1.9 billion in sales and net earnings of $145 million in 1989. (Exhibit 1 presents selected financial statistics for Polaroid). The company marketed a wide variety of instant photographic products to consumers and commercial customers around the world. So-called “amateur” products included “point and shoot” cameras in the $50 to $200 price range and film which retailed at about $1.00 a picture. Polaroid’s industrial market base accounted for approximately 46% of its 1989 sales, with products targeted primarily at medical, industrial, and professional photographic uses. The industrial market was more highly segmented and service-intensive than the consumer business, but also boasted much higher film “burn” rates (and profit margins) per hardware unit.

From 1948 to 1983, Polaroid had focused its efforts almost exclusively on instant photography, a business based on technology invented by the company’s visionary founder, Edwin Land. The company’s virtual monopoly drove increasing sales and profits through the 1960s and 1970s. In 1979, Polaroid made a strategic decision to increase its emphasis on its technical and industrial business in an attempt to lessen the impact on the company of the demand swings of the amateur market. The technical and industrial business benefited from this attention and grew at double-digit rates through the 1980s. The amateur business became a smaller portion of the company’s total sales.

In mid-1988, Shamrock Holdings, Inc., an investment firm controlled by Roy Disney, fired the first salvo in what was to be a nine-month battle for control of Polaroid. Shamrock’s hostile takeover bid was defeated in March 1989 by an aggressive stock buyback effort and an employee stock ownership plan that placed about 15% of the firm’s common stock in the hands of employees. However, the cost of the takeover defense was high. Polaroid assumed about $1 billion in debt and preferred stock obligations in addition to charging almost $200 million to 1988 and 1989 earnings.

As of 1989, the company was lean: head count had been reduced from a 1978 high of 20,000 to about 11,400, largely through voluntary severance programs. As the company approached the 1990s, management was confident that a “new Polaroid” would participate in exciting developments in the burgeoning visual communications industry. With competencies that included chemistry, optical science, electronics, computer science, marketing, and high technology manufacturing, management believed that Polaroid would thrive in a “new era of visual communications.”1

Polaroid in Europe

Polaroid’s operations in Europe accounted for over a quarter of the company’s total sales.Exhibit 2 provides data on Polaroid sales and profitability, subdivided by region. In Europe, the company was organized into twelve national subsidiaries, each headed by a General Manager. Polaroid’s largest subsidiaries were in France, Germany, Italy, and the United Kingdom, which together accounted for an estimated 70-80% of European sales.

Jean Pierre Dumont, Director of European Marketing Operations, was the most senior Polaroid official in Europe. Based in France, Dumont had been with the company for over two decades and formerly was General Manager of Polaroid France. Dumont was viewed as having played a major role in the growth and success of Polaroid’s European operations.

Facilities Network

Polaroid had manufacturing sites in the United States, Scotland, and the Netherlands. In addition, a small amount of Polaroid’s manufacturing operations were subcontracted in Asia, primarily in Japan. Polaroid’s factory in the Vale of Leven, Scotland produced consumer cameras and industrial film. The factory in Enschede, Netherlands manufactured film for consumer cameras and conducted chemical processing for operations in Scotland. Other types of cameras and specialty films were manufactured in the United States, near corporate headquarters in Cambridge, Massachusetts. The company had moved towards a strategy of focused manufacturing facilities; particular products were sourced from only one factory. Polaroid’s products encompassed over 2,300 stock keeping units (SKUs).2

Ten of Polaroid’s twelve European subsidiaries each operated a separate warehouse to serve its national market. (The warehouses that had previously served Belgium and the Netherlands had been closed recently). In addition, plant warehouses were located adjacent to the factories in the Vale and Enschede. The site at Enschede also served as a central distribution site and export center, known as the International Distribution Service Center (IDSC), that served many international subsidiaries as well as distributors in countries in which Polaroid did not have subsidiaries (Exhibit 3shows the location of the IDSC and the subsidiary warehouses). The IDSC reported directly to Tom Carroll in Cambridge (Exhibit 4 presents an organizational chart for Polaroid, with emphasis on the company’s logistics organization). Products produced in the United States and Scotland that were destined for markets in Europe were also routed through the IDSC. Exhibit 5 shows an approximate breakdown of the proportion of total freight sent from Enschede to each of the European subsidiaries. In addition, the IDSC exported products to Africa and the Middle East. Polaroid products had an average value of $85 per pound.

The IDSC was designed to be a bulk storage and transfer facility, where finished products were received, stored, and shipped in bulk, primarily in pallet quantities moved with forklifts. Using independent trucking companies, the IDSC shipped products to the four major national subsidiary warehouses in full truckload quantities several times a week. For example, shipments to the U.K. were made approximately twice a week, Italy and France averaged three weekly shipments from Enschede, and truckloads were sent to the German subsidiary 4-5 times a week. The IDSC shipped products to the remaining subsidiaries once a week; many of these shipments were in full truckload quantities, although less than truckload quantities were shipped when necessary.

The national subsidiary warehouses in turn would receive shipments from the IDSC, break bulk, and then pick and pack products into labeled boxes for customer-specific orders. The subsidiaries then arranged for products to be shipped via independent carriers to customer locations. The national subsidiaries had knowledge of customer-specific distribution requirements, such as special packaging needs, customer preferences about product delivery times and locations, and how to handle rush orders.

Major European Markets

France In France, Polaroid’s consumer products were distributed through three primary channels: 1) specialty photographic dealers that accounted for approximately 70% of sales; 2) hypermarkets, large chain supermarket stores that sold general merchandise in addition to groceries (Hypermarkets accounted for an estimated 20% of Polaroid’s sales and were growing in importance in France); and 3) wholesalers that constituted about 10% of sales.

Of the European subsidiaries, Polaroid France had the largest number of customers requiring shipment of products directly to individual retail establishments. This was due to the large proportion of volume channeled through photo-specialty dealers, and to some hypermarket chains’ practice of asking Polaroid to deliver products directly to individual stores rather than to the chain’s central distribution center. (In this way, the hypermarkets were able to reduce their inventory and the associated risk of product spoilage and obsolescence.) To complicate matters further, some customers wanted Polaroid to deliver certain products, such as cameras, directly to their retail outlets and other products, such as film, to their central or regional distribution centers.

Germany The German subsidiary was Polaroid’s largest subsidiary in Europe, generating roughly 30% of European sales. Wholesalers accounted for 10-15% of Polaroid’s sales volume in Germany; the balance went to retailers. Polaroid Germany typically shipped products to retailer’s warehouses rather than directly to retail outlets.

Compared to the customers of Polaroid’s other European subsidiaries, Polaroid’s German customers were characterized as being highly demanding with respect to both product quality and service standards. German customers strongly opposed late or incomplete orders. In turn, the German subsidiary’s customer service, including its ability to attend to special customer requests, was considered exceptional. For example, a retailer might request that Polaroid produce a special triple pack of film labeled with the retailer’s name. The German subsidiary could mobilize outside design and packaging services to fulfill such a request in a few days.

Italy In Italy, Polaroid’s consumer products were distributed through photographic dealers (45% of Italian sales); wholesalers (40%); hypermarkets and department stores (10%); and “special” markets (5%). (In Italy, consumer products accounted for approximately 65% of sales; 30% of sales were industrial products. Most of Polaroid’s industrial products in Italy were channeled through 20 distributors. In addition, some industrial products were sent directly to end users, such as hospitals.) In terms of service requirements, Polaroid’s Italian customers were characterized as being more flexible than Polaroid’s other European customers. Italian customers were considered to be relatively less concerned about shipments that were incomplete or late.

The Italian subsidiary and warehouse were currently located near Verese, Italy, close to the Swiss border. The subsidiary was a one and one-half hour drive along winding mountain roads from Milan; Polaroid’s headquarters were housed in a picturesque villa and the warehouse was at a nearby site. An unusual set of circumstances had led the Italian subsidiary to change its location, formerly in Milan, in the early 1980s. A series of attacks by the Red Brigade in Milan had led to concern about the safety of Polaroid staff. At that time, staff sometimes could not get to work because union activities disrupted public transportation. Polaroid felt that, in terms of the social and political climate, a location other than Milan would be more hospitable to an American company. In addition, a major mail strike in Italy went on for weeks; when the strike was resolved, mail that had been stored in railroad box cars during the strike was burned. By selecting a new subsidiary location near the Swiss border, Polaroid could receive mail at a Swiss postal address.

More recently, the Italian subsidiary had experienced major problems with product theft during the distribution process. Polaroid’s shipments from IDSC cleared customs in Milan prior to their shipment to Verese. In Verese, customer orders were picked and packed and shipped to a terminal in Milan, where they were sorted and shipped according to final geographic destination. Some Polaroid corporate staff had urged the Italian subsidiary to consider changing transportation carriers to address the significant cargo losses the subsidiary had incurred.

United Kingdom In the U.K. subsidiary, 45% of products were distributed through wholesalers. Polaroid directly serviced large national accounts accounting for an estimated 20% of sales volume. Particularly important accounts included the drugstore chain Boots the Chemist, which sold film, Dixons, which sold cameras, and Tesco, a grocery chain that sold Polaroid video tape. Smaller retailers ordering directly from Polaroid constituted 15% of sales. Major end users, such as hospitals, accounted for 20% of sales.

Some of Polaroid’s British national accounts were considered to be extremely demanding in service requirements. These accounts would specify the timing of product delivery, packaging, pallet size, and other features that conformed to their requirements (e.g., one retailer required that Polaroid use a nonstandard pallet size that suited the storage facilities at its central warehouse). The distribution practices of the large national accounts had changed over time. Whereas historically Polaroid had delivered products to each retail outlet of a large chain, some chains now had their own warehouses and preferred that Polaroid deliver products to a central point.

Direct Distribution—BackgroundCentralization of Domestic Distribution

In the United States, Polaroid’s warehouses had been consolidated from a total of 18 to 4. The domestic transportation group, then headed by Carroll, saw an opportunity for cost savings from a more centralized distribution system. The new distribution system resulted in savings of $5-6 million per year.

The new distribution system was accompanied by changes in delivery service. Polaroid formerly delivered shipments to U.S. customers within three days of receiving an order. Service was changed to once-a-week delivery; each customer was guaranteed delivery on a particular day of the week. Studies of Polaroid dealers found that they perceived the change in service to be an improvement. Furthermore, customer studies found that 85% of U.S. customers ordered from Polaroid once a month; 5% ordered twice a month; 5% weekly; and 5% twice a day. Carroll noted that Polaroid’s previous systems had been geared to the requirements of the most demanding customers.

In 1979, Carroll’s responsibilities broadened to include international distribution in addition to domestic transportation. In the international area, Carroll’s responsibilities encompassed the movement of raw materials to factories and the delivery of final product from the factory to customers, in all parts of the world outside the United States. Distribution was within the purview of marketing, and Carroll reported to the Vice President of International Marketing Operations.

Efficiency Improvements in Europe

One of Carroll’s first assignments as international distribution manager had been to study distribution processes in various international subsidiaries to recommend productivity improvements. At the time of Carroll’s studies, each subsidiary had its own procedures and measurement systems; in addition, formats and definitions were not standardized across the subsidiaries. For example, many subsidiaries used different stock-keeping numbers for products. Moreover, each subsidiary had developed its own computer systems; the resulting patchwork of systems had made it difficult to manage worldwide inventories. In addition, Carroll saw substantial opportunities for improving productivity, perhaps reducing subsidiary warehouse staffs by as much as 50%. For example, U.S. warehouses that serviced areas approximately the size of a large European subsidiary typically had a staff of five, whereas in Europe, the number ranged from 12 to 25.

Carroll’s study of efficiency improvement proved controversial with European subsidiary managers. Thus, Carroll decided that the best way to convince European managers of the opportunity for increased efficiency in distribution operations was to bring them to the United States to see analogous systems. In the United States, order entry and customer service functions were on- line and inventory tracking was automated. The European managers argued that the computer system was responsible for the effectiveness of the U.S. distribution process. As a result, in 1981, headquarters staff agreed to provide subsidiaries with computerized distribution capabilities if the subsidiaries agreed to adopt standard procedures and systems and to reduce staffing in the distribution area. New systems were given to the four largest subsidiaries, France, Germany, Italy, and the United Kingdom.

Implementing the computerized distribution system required the four major subsidiaries to agree on specifications, a process that took more than a year. The subsidiaries had to adopt uniform product identification codes. Because existing product identification methods were often tied into the subsidiaries’ individual accounting systems, adopting new approaches required changes to subsidiaries’ information systems. Furthermore, subsidiaries sometimes felt that their own methods for product identification (for product groupings, for example), were superior to those specified by headquarters. The Distribution Management System software used in the United States ran on DEC computers. The European subsidiaries insisted on IBM systems. As a result, the distribution management program needed to be rewritten. As the software was rewritten it was upgraded to include additional features. For example, the European upgrade had an automated system for receiving incoming product into warehouses, a capability that the U.S. system did not provide.

Systems were installed in the four major subsidiaries and the central distribution facility in Enschede in 1983. Carroll viewed the adoption of standard procedures as having many benefits:

When it went in, we could measure order fill rates3 for the first time, and the results were dismal. By working from a common platform, we were able to put in a distribution requirements planning system, rolling sales forecasts, and an inventory information system with standard pan-European definitions.

The average order fill rates in Europe moved from 50% before the efficiency improvements to 78% by 1988. Carroll viewed the adoption of a distribution requirements planning system and rolling forecasts, updated on a monthly basis, as especially important contributors to this improvement. The success of these systems in tying production to demand was evidenced by the fact that, on a weekly basis, no more than ten to twenty SKUs typically were out of stock at the IDSC.

International Direct Distribution—Initial EffortsProposal for Further Integration of Business Systems

In 1982, top corporate management in the marketing, distribution, and systems area prepared a proposal for supplanting the twelve separate warehouses at subsidiary locations with a single, central distribution center located at the IDSC in Enschede. The plan also called for the development of a common integrated financial reporting and planning system, and common accounting systems. According to the proponents, “adoption of this program would launch Polaroid into the longest and most ambitious project undertaken in the overseas marketing operations.” Implementing the proposal would require an investment of between $6.5 and $7.5 million and would reduce operating costs an estimated $5 million/year.

In the distribution arena, the proposed program, referred to as direct distribution, would separate the physical channels of distribution from the selling channels. Customer orders would continue to be received and processed at each marketing subsidiary. Each subsidiary would be connected to the central distribution center by a computer network; the system would enable on-line inventory inquiries, commitment of stocks from the central warehouse, and creation of shipping orders.

Under direct distribution, the IDSC would perform most functions currently being conducted at subsidiary warehouses. For example, if the Italian subsidiary adopted direct distribution, the Italian subsidiary would transmit information about customer-specific orders to the IDSC. The IDSC would then pick, pack, and label all orders received within a particular time frame. The orders would then be shipped from Enschede to the hub of a (yet-to-be designated) carrier in Italy, where Polaroid orders would be sorted by geographic location, grouped with other goods the carrier was transporting to the same area, and delivered to Polaroid customers. Direct distribution could also involve shipment of products directly from Enschede to customer locations.

Direct distribution from a central point was regarded by corporate management as having many benefits, including reductions in back orders, improved delivery reliability, improved stock availability, and reduced packaging costs. However, the 1982 study raised substantial subsidiary concerns about the proposed changes, including: losing control of the distribution process; possible customs strikes and border closings; the fact that small dealers depended on Polaroid for warehousing; handling of rush shipments; and problems the subsidiaries had experienced previously with the performance of central service groups. Marketing managers in the European subsidiaries were very concerned that the proposed changes required heavy reliance on computer systems. In their view, European communications networks were not advanced enough to support the integrated systems proposed. As a result of these concerns, the 1982 proposal was rejected.

Direct Distribution to Belgium and the Netherlands

Three years later, in 1985, the direct distribution proposal resurfaced when Lee Brewer, newly appointed Vice President for International Marketing, expressed interest in proposals for reducing costs. Brewer supported the direct distribution concept. In the mid-1980s, many subsidiaries were growing; some had requested additional office space. A decision was made to encourage subsidiaries to adopt direct distribution from Enschede if they planned to move from their current facilities (which often had adjacent warehouses) to new offices.

In 1986, the Dutch subsidiary’s warehouse, a small facility located outside of Amsterdam, was eliminated. This consolidation was not prompted by a new facility request, but made sense in light of the warehouse’s proximity to Enschede. In 1987, Polaroid’s Belgian subsidiary’s request for permission to move to a new office provided the first opportunity for a subsidiary to consider direct distribution in connection with moving to a new office location. In discussions with Belgian management about direct distribution, Carroll promised to match the service that the Belgian subsidiary currently provided.

The Belgian subsidiary headquarters was approximately a four-hour drive from Enschede. Although national borders would be crossed, arrangements would be made with customs agents to obtain “pre-clearance” for goods by transmitting information about shipments to customs prior to shipment. Hence, traversing borders was not viewed as a major problem, particularly for a company that had a good reputation with customs agents. Contending with customs procedures, however, was easier in some countries than others. For example, Polaroid transportation managers estimated that customs clearance from Holland to the U.K. typically took from 20 minutes to one hour, on average; in contrast, 4-8 hours were budgeted to fulfill customs procedures required to enter Italy.

According to Carroll, the Belgian manager believed that the new distribution system would prove effective. The elimination of the Belgian warehouse in 1987 was considered a success. Carroll’s group was able to provide the same level of service formerly offered by the local warehouse. In addition, elimination of the Belgian warehouse cut the subsidiary’s operating costs by $150,000 per year.

European Integration

Another impetus for direct distribution was the forthcoming economic integration of the European Community (EC). In preparation for a more integrated European market, many companies were shifting from nationally-based strategies to more regionally-oriented approaches. The planned elimination of border formalities between member countries clearly would affect logistics strategies.

The transportation industry in Europe was highly regulated, although the extent of regulation differed considerably among countries. For example, the United Kingdom had deregulated many aspects of its transportation industry; in contrast, significant regulation of the German market caused rates to be as much as 20% higher than estimated free-market rates. Laws governing cross-border trade were changing in preparation for European integration. In June 1988, the European Community Council of Ministers agreed to eliminate all quantitative restrictions on transport between member states by January 1993. Until then, transportation licenses, limited in number, were required for operations between member states. It was expected that liberalization would be extended to cabotage (trade between two points within one country), so that carriers based in one country would be able to transport goods within other member states. Existing restrictions on cross-border transportation resulted in an estimated 25% of trucks returning empty after completing international deliveries.

The forthcoming liberalization of cross-border transportation led carriers to begin forming integrated networks, developing alliances, and acquiring other carriers. A number of third-party logistics providers, such as Nedlloyd, Frans Maas, and United Parcel Service, were making efforts to develop pan-European service capabilities. The state of development of third-party logistics providers in Europe, however, was considered to be less advanced than that of providers in the United States.

Some industry observers felt that the cost of transportation in Europe would fall considerably post integration; estimates of 5-25% reductions in cost were cited. Others, however, were concerned that increased traffic within Europe could eventually lead to higher prices if countries imposed road- user fees or fuel surcharges. Furthermore, there was concern that growth in road traffic could cause substantial traffic congestion.4

1989 Study on Centralization of European Distribution

In 1989, the proposal to centralize all European inventories reemerged as a priority as top management increasingly stressed inventory reduction as a means of improving cash flow. Although the changes proposed in 1982 also addressed data processing and financial accounting systems, the 1989 study was restricted to the centralization of the physical distribution system and the elimination of separate national warehouses.

Cost-Benefit Analysis

Major cost savings from centralization were expected to occur as a result of staff reductions in warehousing, shipping, and traffic management. Exhibit 6 shows the current staffing in each subsidiary and the projected annual savings under direct distribution. The study made the assumption that the larger subsidiaries would require only one person for shipping and the smaller subsidiaries would require only half of one person’s time. Severance costs would need to be paid for all the staff who were terminated. Inventory carrying costs, estimated to be 9% of the value of the inventory, were the second largest area for savings. Exhibits 7 and 8 present data on inventory levels in Europe. According to the study, 75% of all local inventories would be eliminated and the balance would be pulled back to the IDSC. Substantial savings were also projected from eliminating warehouse rental or ownership costs, shown in Exhibit 9.

The study estimated the up-front cost of centralizing distribution to be $5.3 million, with annual savings estimated at $5.7 million. Exhibit 10 provides a cost-benefit analysis for the centralized distribution project.

Service

Proponents of the 1989 direct distribution proposal cited a number of benefits, in addition to cost savings, that would result from implementing the proposal. As a result of improvements in the early 1980s, the average order fill rate in the European subsidiaries had risen to 83% in 1989 (Exhibit 11 presents average line fill and order fill rates for the four largest European subsidiaries). Champions of direct distribution argued that the new system would raise the order fill rates even further; for example, direct distribution would improve service levels by solving the problem of having inventory available, but in the wrong place. A 1989 study found that for 69% of backorders, inventory was available in Europe, but not at the needed location. Senior management viewed backorders as very costly to Polaroid: backorders were frustrating to dealers and deprived customers of Polaroid products when they wanted them. To reap the benefits of centralized stocks, it was important that most subsidiaries be serviced through direct distribution; otherwise, inventory would remain spread out at many locations.

To address the backorder problem, the IDSC tried to have subsidiaries transfer inventory to other locations when needed. It often was difficult to persuade subsidiaries to relinquish inventory; protecting the interests of a subsidiary’s own customers was the first priority. Furthermore, it was increasingly difficult to transfer inventory across subsidiaries due to differences in packaging. Although Polaroid’s standard packaging for cameras had instructions written in multiple languages, some subsidiaries had started to repackage products labeled only the subsidiary’s national language. This practice came to management attention when flexible packaging lines were started and subsidiaries requested “languagized” packaging.

Currently the IDSC had one daytime shift. If the IDSC received a subsidiary’s order on Monday, for example, the order would typically be packed and shipped out Tuesday afternoon. To service additional countries with direct distribution, the IDSC would need to start a second, and possibly a third, shift. Having an additional shift at the IDSC had the potential to improve service; it would be possible to pack orders the evening of the day they were received and ship them out the same night.

Other Efficiencies

Polaroid’s distribution group in Cambridge also thought that there was potential for reducing transportation costs within each country by more carefully scrutinizing and better negotiating rates. Most subsidiaries did not have professional transportation staff. After Dave Fernandes, Polaroid’s international traffic manager, found that subsidiaries were not tracking and measuring transportation costs, he initiated a program to do so. Often subsidiaries used the same carriers year after year. Although Fernandes thought there was room for improvement in the rates negotiated with carriers, subsidiaries usually felt that they knew the service capabilities of the available carriers and believed they were securing the lowest rates for the services provided.

Implementing direct distribution would facilitate a reassessment of carriers being used by subsidiaries. Furthermore, as carriers developed pan-European transport capabilities in preparation for 1992, it might be possible for Polaroid to consolidate carriers and receive volume discounts as a result.

Implementation of Direct DistributionAlternatives Considered

The primary plan considered for direct distribution was to service all European subsidiaries from Enschede. The IDSC warehouse would first need to be upgraded. To handle direct distribution, investments would be required to set up new systems for picking and packing. Furthermore, the staff at Enschede would need to be trained in new procedures. In addition to handling pallets, the IDSC would need to develop capabilities for identifying and moving smaller quantities of product in cases and less-than-caseload quantities in order to pack customer-specific orders. To service the Netherlands and Belgium, a small “Direct Shipping Area”, equipped with a conveyor line, was set up. Direct distribution on a larger scale would necessitate changing the physical layout of the IDSC to have, for example, separate areas for fast-moving and slower-moving goods. Other changes could include installing new racking systems and additional conveyor lines. To handle customer-specific orders, it would be useful to develop algorithms that would specify which combinations of items would fit into packing cartons.

The 1989 cost-benefit analysis shown in Exhibit 10 included a $3 million investment in computer equipment. Although this equipment was considered necessary to support a comprehensive plan for direct distribution, it was expected to be possible to start serving some subsidiaries directly from Enschede by modifying the existing computer systems.

An alternative proposal to having direct distribution exclusively from Enschede was to have a central warehouse in Enschede and two satellite regional warehouses. For example, a warehouse in southern France could service Spain and Portugal, and a facility in Denmark or Sweden could serve Scandinavia. Both distance and transportation costs played a role in the proposal to have regional warehouses.

In addition, the transportation group in Cambridge considered the possibility of having a third-party logistics provider assume responsibility for direct distribution and warehousing. Polaroid currently used third-party carriers for transportation; in contrast, a proposal under consideration would entail having a third-party provider involved in all aspects of distribution, including warehousing and sorting products for customer orders. The third-party provider would take over the responsibilities currently performed by the IDSC and the national warehouses. This option would obviate the need to make substantial investments in reconfiguring the IDSC for direct distribution. (Currently there were limitations to expansion or redesign of the facility at Enschede; there had been substantial population growth over the years in the area around the IDSC and the community placed significant restrictions on Polaroid’s growth potential at Enschede.) Some argued that the ideal location for Polaroid’s distribution center, in terms of port access, would be in western Holland.

Under the third-party scenario, Polaroid envisioned its products being kept in a dedicated area in a third-party provider’s warehouse, with staff who worked only with Polaroid products. Using a third party to provide logistics services was viewed as having several advantages, including the fact that a third party would be able to invest in and maintain state of the art warehousing facilities that Polaroid would be unable to provide. Furthermore, Polaroid would not have to bear the costs of maintaining warehouse staff needed solely to handle peak periods.

Although the prospect of outsourcing distribution seemed very appealing, there was concern that convincing subsidiary managers of the benefits of third-party logistics management, in addition to direct distribution, would involve waging a “second war”. Others, however, felt that since some subsidiaries were dissatisfied with Enschede’s service, it might actually be a benefit to have a third party handle direct distribution. The discussion of third-party distribution included a number of practical considerations. The plant at Enschede had a layoff earlier in the year and the plant manager was worried that another layoff of staff at the same location could cause a manufacturing strike. Furthermore, laying off staff in the Netherlands was considered very expensive in severance costs; if Polaroid went to third-party logistics, Polaroid management ideally wanted the third-party provider to hire the majority of Enschede’s distribution staff.

Subsidiary Reaction

The proposal Carroll presented to European general managers was to have direct distribution to all subsidiaries from a central distribution point at Enschede. The strategy was met with opposition from most European general managers, notably Jean Pierre Dumont, Director of European Marketing Operations. In the opinion of one country general manager, Dumont was genuinely concerned about whether Enschede would be able to provide the required customer services.

Subsidiaries worried that losing their warehouses would diminish their flexibility to respond to changes in the market. In discussions with Tom Carroll, Jean Pierre Dumont attributed a large part of his success as marketing director to having quick response capabilities, such as the ability to change marketing programs, including packing and promotional materials, at very short notice. Such changes to product packaging had typically been made at subsidiary warehouses. As a consequence of these concerns, Carroll had launched the flexible packaging lines in the factories in both Scotland and the Netherlands to enable them to produce packaging tailored to different marketing programs. When the lines were first introduced, the lead time for new packaging could take several months (including the time needed to get multiple subsidiaries interested in the same program, design the package, obtain approval for the design, and manufacture the packaging). The turnaround time was becoming shorter; the flexible packaging lines were expected eventually to be able to produce new packaging for a subsidiary within a week’s time. Despite this effort, subsidiaries were reluctant to relinquish control over a part of their marketing operations that contributed to their success.

Subsidiaries were not charged for inventory carrying costs and hence would not see direct financial benefits from reducing inventories. There was considerable skepticism about whether the cost savings quoted in the 1989 proposal could be realized; subsidiary managers felt that they were being asked to make major changes in the way they conducted business while the financial benefits of the change were highly uncertain. For example, it might prove difficult to rent or sell warehouse facilities, which were usually adjacent to a subsidiary’s office facility.

European general managers were accustomed to having warehouses nearby and being able to control the outflow of products. According to a Polaroid corporate officer, many country managers saw the loss of a warehouse as a substantial diminution of their responsibilities. Furthermore, the layoffs of warehousing and distribution staff prompted concern; managers argued that unions would make laying off staff very difficult. And, although attrition would occur in the subsidiaries, direct distribution required staff to be added in Enschede. Some subsidiary managers felt that their customers, particularly large accounts, would need to be informed of the changes in distribution methods.

Many subsidiary heads thought that the IDSC did not have the capabilities to provide the level of services their customers required. Direct distribution would place Enschede in a much broader and more visible role than it had previously assumed. All of the subsidiaries had had significant contact with Enschede, and some had experienced service problems, such as shipment delays, in the past. Some felt that the quality of the IDSC management was weak. By going to direct distribution, subsidiaries would lose a buffer between the central distribution center and their customers. In response to these concerns, advocates of direct distribution argued that although Enschede’s service record could be better, the IDSC was often blamed for problems that occurred earlier in the supply chain, such as manufacturing or inbound transportation delays.

A number of the subsidiaries raised country-specific objections to direct distribution. Managers in the Italian subsidiary, for example, felt that the idiosyncrasies of the trucking industry in Italy would make it difficult to do business differently. And, although direct distribution to Belgium and the Netherlands had worked, subsidiary managers argued that these countries had small sales volumes and were located close to Enschede.

The manager of Polaroid’s subsidiary in the United Kingdom, Rod Bishop, however, had a different perspective on direct distribution. Bishop joined Polaroid in 1987 and formerly worked for General Foods and Cadbury Schweppes. In the food industry, centralized distribution was more readily practiced. When he joined Polaroid, Bishop’s reaction to finding a local warehouse was “I don’t know why we’ve got it.” In Bishop’s view, “the strength of my company in St. Albans is our marketing and sales expertise, not distribution.” As a result, Bishop noted, distribution was always run “back of mind;” it seemed clear to him that the warehouse could be run more professionally.

U.K. customers, however, were accustomed to having a nearby warehouse as a convenience. For example, one of the largest U.K. customers periodically submitted rush orders to be delivered the same day. Some customers felt that direct distribution would be a mistake because they had seen other companies embark on similar efforts and were not impressed with the results. Customers anticipated that service levels would drop with direct distribution. According to a U.K. manager, when the possibility of moving to a system of direct distribution was mentioned to one large retailer, the customer had a “look of horror” and insisted that the U.K. subsidiary hold special stock in St. Albans for the retailer.

Bishop believed that the concept of direct distribution was right for Polaroid in Europe and he was willing to have the U.K. subsidiary considered as a candidate for direct distribution. At the same time, he had serious reservations about the quality of the warehouse operations and the management at Enschede, which would need to be improved in order for direct distribution to the U.K. to work.

First Candidates for Direct Distribution

As Carroll considered his next steps to further the goal of direct distribution, he knew that any action would be scrutinized very carefully by European general managers. He believed that it was critical that the next subsidiary or subsidiaries served directly from Enschede demonstrate unequivocally that inventory could be reduced and service improved at the same time. To do so, substantial effort would need to be devoted to quickly upgrading the systems at Enschede.

One plan of action would be to start with the U.K., in light of Bishop’s willingness to be considered for direct distribution. However, serving customers in the U.K. directly from Enschede was considered a more difficult and risky first step because ocean transport would be required. In addition, although Bishop was ready to eliminate his warehouse, he had specified stringent service requirements, including daily shipments from Enschede to the U.K. The proposed plan for direct distribution involved first shipping packed U.K customer orders from Enschede to the U.K.5Customer orders would be sorted according to geographic location at the hub of a second carrier (having expertise in U.K. transportation) and sent to customers. Exhibit 12 shows the current service provided by the U.K. subsidiary and describes the proposed system for direct distribution from Enschede.

An alternative candidate for direct distribution, which had the support of the European regional office, was Austria. European management saw servicing Austria, located further from the IDSC than the first subsidiaries served by direct distribution, as an additional challenge for Enschede. Because of the concern about the IDSC’s capabilities, there was debate about whether it could initially handle a large subsidiary; serving a small subsidiary first was advised as a result. In contrast, others felt that Enschede would fully develop the appropriate capabilities when it was put to the test. Furthermore, the larger subsidiaries offered far more substantial savings.

Italy was also viewed as a promising candidate. Some consideration had already been given to the possibility of using third-party distribution services in Italy. Technicard, a Polaroid-owned company that produced plastic credit cards, needed space for manufacturing operations; using the current warehouse for the needed space had been offered as a potential solution. A memorandum concerning the proposed changes in Italy is shown in Exhibit 13. In spite of the concerns mentioned in the memorandum, Italy was still regarded as an attractive candidate for direct distribution, in light of the current location of the Italian warehouse, the problems with product theft, and the less demanding service requirements of Italian customers.

Dave Fernandes, Polaroid’s international traffic manager, wanted to start with a major subsidiary close to Enschede, which in his view, would be the easiest to service with direct distribution and would offer large cost savings. Enschede was located 3 miles from the German border. Tom Carroll noted the irony of the distribution path for product delivery to a German dealer in Gronau, three miles from Enschede. Product was shipped from Enschede to the German warehouse near Frankfurt and then back to Gronau.

Conclusion

As Carroll considered the alternatives, he knew that it was important to have the support of the European general managers. Carroll wanted to establish appropriate criteria for selecting the markets that would first be served by direct distribution. He wondered if there were other methods he should use to better accomplish his goals. Carroll felt that many benefits of direct distribution would be experienced by Polaroid over a longer-term period. At the same time, his challenge was to enlist the support of individual subsidiaries to adopt new systems that would substantially change their operations in the near future.

Answer 1

1. Polaroid’s distribution needs vary by subsidiary in Europe because plant warehouses were located adjacent to the factories in the Vale and Enschede. These site at Enschede also served as a central distribution site and export center. The export center also known as International Distribution Service Center (IDSC). This center servers the countries where Polaroid does not have subsidiaries. The product manufactured in other countries are also routed through IDSC.

The implication of these difference is that different counties have different rules and regulations. The polaroid distribution has to follow each county legal aspects. This is different because of the reason that the polaroid has different warehouse locations adjacent to the factory which serves the various centers across the nation. These centers in turn serves the customers needs. So, it is a kind of interlinking of the distribution of the product from the factory to the customer end.

The cultural diversity is among the countries vary as per the values of the people, their belief, perspective towards the product usage, working pattern, etc. There is very vast difference between the working pattern of the employees of Europe and United States. The European employees keeps the relationship oriented and trust building workings where as the US employees mainly focus on the goal by any means. This difference changes the mind set of the business employees or changes the perspective according to the country. The cultural diversities are more as the customer preferences also changes with the diversity. Product delivery times and locations, special packaging needs, handling of rush orders are varying with the culture.

2. Yes, the Polaroid should implement a direct distribution strategy in Europe because it saves $5-6 million per year. In France, polaroid had the largest number of customers requiring shipment of products directly to individual retail establishments. In countries like Germany, Italy and United Kingdom also has the largest retail business share contribution. It actually reduces the conflicts between the distribution channels.

3. The direct distribution strategy would be implemented by the Background Centralization of Domestic Distribution. The centralization process has the single line of control which actually directs the flow of the information. This in turn enhance the accuracy in the business operations. But the challenges I foresees are:

1. The line of control reduces from higher level to the lower level.

2. The information would be hidden sometimes if any conflict arises.

3. This process takes time for performing the business activities.

In order to address these challenges polaroid should have the divide of line of control although it is centralized. This would help polaroid to have the proper line of control. The company should have to focus on the contribution of ideas of all employees not only their own strategies. A proper management leads to the steady flow of business.