Strategic Logistics - Pedigree Petfoods - Case Study Example

STRATEGIC LOGISTICS With your knowledge of Logistics and Distribution, discuss the reasons for Pedigree distribution arrangement to manufacture Petfood that will be sold to UK consumers in Spain. Are there any dangers associated with the distribution arrangement If there are, what are they Designing physical-distribution systems to meet market needs is a dynamic problem, for continuous changes in markets, products, and processes bring about new physical-distribution techniques and patterns. Competition and pressures to reduce costs are also stimuli. But the development and location of a distribution center itself is a "semipermanent" commitment. Demand characteristics are directly related to physical-distribution systems. Where demand is widely variable, then distribution facilities are usually concentrated in fewer locales. Where demand is continuous and rather consistent, as is the case for some food products, distribution facilities can be decentralized. A highly variable demand makes it difficult to design effective physical-distribution systems and control costs, while a stable demand permits it. In between these extremes, where demand patterns can be discerned through analysis, as with seasonal products, reasonable distributions systems may be approximated. Product characteristics help to determine the optimal design and type of physical-distribution system. The ability of products such as luxury items to absorb costs is particularly important. High-value items, if heavily stocked, mean a heavy inventory investment and hence increased costs. Their storage is often minimized. For them transportation is a modest amount of the total price. Physical-distribution systems are geared to the optimization of the system as a whole rather than of any part of it (Simchi-Levi et al 2008). The case of Pedigree Petfoods shows that a manufacturer is confronted with making a choice from among a variety of distribution alternatives. Although generalized solutions to all distribution channel decisions cannot be formulated, general guidelines can. In theory, the economic functions of channel members can be analyzed, significant factors and forces shaping distribution systems can be assessed, and the variety of channel arrangements currently employed to overcome distribution barriers can be classified (Slack et al 2002). According to Baudin (2005), the overall function of distribution channels is the concentration and dispersion of products in relation to market needs. Four sorting processes are fundamental to the activities of these channels: (1) sorting out: breaking down heterogeneous supply into separate homogeneous stock. (2) accumulation: bringing together similar stocks into a homogeneous supply. The channel functions, concentration and dispersion, are related to the homogeneity and heterogeneity of supply, and the appropriate sorting process must be provided. Successive channel stages attempt to overcome any discrepancy between product assortment and market requirements. Customer requirements of one or two units are at variance with supplier requirements of mass production. The case of Pedigree Petfoods allows to say that physical-distribution activities are performed as a number of dependent functions. To plan, direct, and coordinate physical distribution activities, it is desirable to group them all within a single department. This is usually achieved in retailing and wholesaling under the operations department. Manufacturing generally lacks such coordination. Physical distribution as a concept sees the physical movement of goods as a set of related activities carried on by a number of firms at various levels, linked together to form a total distribution system. Logistical decisions and the design of a company's movement-and-storage system result from cost-market requirement analysis of alternatives. It involves a balancing of transfer costs, operating costs, and marketing factors (Stroh, 2006). The main problem apparent for m the case study is that the breakdown of one system can result in breakdown of the whole system of distribution and products. Pedigree Petfoods depends heavily on suppliers and its factories. The main problem is that Pedigree Petfoods concentrates on a narrow range of lines requiring standardised inputs. Product characteristics affect physical-distribution activities. If the markets for products are highly competitive, then physical-distribution demands are great because of product substitution, the necessity of offering adequate stocks and prompt delivery, and competitive pricing. The value characteristics of products should also be considered. Valuable items such as jewels and precious metals can bear these costs more easily than can low-value items such as lumber and coal. Variations in product lines and such features as packaging, color, size, style, and variety place a heavy burden on the distribution system. Now more products have to be handled with lower volume per item and higher costs of storage, inventory, and handling. Transportation and handling costs, distant locations, and time are barriers to the development of markets. Through physical distribution, costs are reduced and time and geographic barriers are hurdled, thereby enabling companies to cultivate additional markets profitably. Logistical costs have, in fact, forced firms to withdraw from previously served markets. The standard of customer services offered is determined by the consideration of both customers and competitors (Stroh, 2006). The services offered by major competitors establish a general standard. Nevertheless, management must also think of the particular impact of service variations on customer response and profitability as a guide in considering alternative physical-distribution strategies. For example, a manufacturer may decentralize processing plants to bring them close to customers where items are low in cost and price and have relatively high handling and transportation costs, as has been done with breweries. But if customers will accept longer delivery times without shifting their business to competitors, then more efficient use might be made of centralized processing facilities, and less efficient ones could be closed (Beckford, 2002). The other danger is that there is little stock and storage capacities, so if one of the suppliers or distributors fail, the whole system will be affected. Further, physical distribution is the area of marketing in which quantitative methods have been applied most successfully. Linear programming, simulations, and waiting-line theory have been used to solve problems. For instance, linear programming has been used to minimize costs of shipments and to locate warehousing facilities. Simulations have been applied to solve problems of the number and types of warehouses. The use of mathematical models may be due to the concreteness of the factors, the availability of data, and the approximate linearity of relationships as contrasted with other marketing situations (Drensek and Grubb 1995). Effectively organizing physical-distribution activities is a difficult task, because it involves such technical matters as transportation rates, materials handling, scheduling movements, and laying out warehouses. Thus, it has general relationships with manufacturing, marketing, and purchasing functions. Physical distribution does not lie exclusively within the jurisdiction of any one of these divisions; it is affected by and affects all of them. Organizationally, however, it is more closely allied to marketing in most companies (Stroh, 2006). Pedigree Petfoods shows take into account that the fundamental activities performed by a physical-distribution system are concentration and dispersion. They can be performed several times in the distribution of a final product as products are assembled and stored and bulk is broken. Terminals are located at points to balance market requirements with the movement and shipment size. The latter are dictated by movement-and-handling technology. The size and scope of a market are significant. For Pedigree Petfoods, decentralization of distribution tends to be the practice in companies with the following operating characteristics: a large number of small shipments are made, production facilities are decentralized and widespread markets exist, the products transported and stored are heterogeneous and shipments cannot be consolidated, and different geographic areas require different services. The elements of a physical-distribution system include market segments, manufacturing, distribution to wholesaling and retailing points, and transportation and storage links (Eboch, 1998). The systems design is affected by the predictability of product flows through the system, the distances between points, and the bulk and perishability of commodities. In essence, the same elements affecting such marketing areas as advertising, personal selling, and products affect physical-distribution decisions. Plant and warehouse location, competition, markets, transportation facilities, service requirements, the location and size of customers, product characteristics, distribution requirements, inventory forces, and production requirements establish constraints for physical-distribution systems. While demand-creating forces attempt to generate sales and cultivate markets, physical distribution is concerned with developing the supporting logistical system that will move and locate products to permit the most profitable exploitation of markets (Calingo, 1996). Distribution facilities are often clustered by market potentials. But markets are variable, unevenly distributed, and separated from a company in space and time. To cultivate them, companies require different distribution policies. For example, decentralized distribution points can serve large markets profitably. Smaller markets may be serviced by direct shipments. Accurate estimates of demand are critical in designing distribution systems, for they help to establish the feasibility of capital expenditures on plant and warehouse additions, which in turn shapes the distribution network. There is some fragmentary evidence that the average shipment size has been decreasing. 2. Describe some of the ways in which technology might assist to add value to Pedigree Petfoods distribution system. Technology can help Pedigree Petfoods to restructure its activities and ensure ontime delivery and supply. To achieve this requires analysis of the total logistics pattern, for changes leading to cost reductions or improved services in one part of the system often result in increased costs in other parts. Thus, trade-offs occur. For example, increased customer services can put pressures on inventory, warehousing, and transportation costs. The design of effective distribution systems requires totalcost analysis, which takes into account all costs affected by changes in the logistical system. It requires the identification of physical-distribution activities and their related costs, the development of cost information and cost estimates, and the analysis of system performance under various conditions (Cohen and Roussel, 2004). To prevent stock-outs due to unexpected variations, companies build some safety stock into their inventory levels. This is especially true for so-called emergency items that are critical to customers. Thus reorder points are a result of the assessment "costs" of stock-outs against "costs" of overstocking. New technologies have opened up opportunities to cultivate widespread markets with fewer and larger distribution points, reducing inventory costs and permitting automated handling and better utilization of storage space. One analysis showed that distribution points could be cut from 50 to 25 with a 7 percent increase in transportation costs, a 20 percent cut in inventories and an 8 percent cut in physical-distribution costs. Such mechanization may lead to reduction of the number of warehouses, the development of total movement and storage systems, and the evolution of new forms of storage and transportation.Computers are useful in physical distribution. They help in balancing inventories with needs, forecasting sales, determining the best locations, allocating inventories among warehouses, and directing shipments and production. They also make it possible to use simulations to design physical distribution systems (Chase and Jacobs 2003). Following Christopher (2003) the efficiency of the total physical-distribution system is measured in terms of cost of inputs as they relate to outputs. If the costs cannot be reduced further without reducing the level of service, then obviously the system is highly efficient. It should be noted that various functional centers, such as inventory, traffic, and warehousing can be efficient -- they can keep their individual costs low -- while the total costs and total service are inefficient. For Pedigree Petfoods, different functions have different and sometimes competing objectives. Thus, inventory managers might like to reduce inventory costs even if this increases transportation costs, while the traffic manager prefers the reverse. Ideally, a systems approach should be adopted that balances costs and benefits from the perspective of the whole organization (Harris 1989). Pedigree Petfoods distribution channels show that marketing factors also can influence location. If product differentiation is established to the point that there is differential advantage and hence a price premium commanded, then products can enter distant markets and meet lower-cost competition. Similarly, space factors have an influence on the elasticity of demand confronting a firm. For transfer costs prevent elasticity of demand from being perfect. Both distribution-center and retail locations are chosen with attention to market considerations. Retailers, because of the very nature of their business and the impact of location on success, pay close attention to location analysis, and some sophisticated research and models have been developed. The process of locating supermarkets illustrates the application of analysis in reaching rational location decisions (Hage, 1999). The selection of distribution centers or storage facilities is a decision to locate inventory at various points. Where plants are concentrated for mass production while raw materials and finished product markets are geographically dispersed, then warehousing becomes extremely important. As plants are decentralized and located near material sources and markets, then warehousing requirements are relatively less important. The related point is the impact of market development; markets expand, volume increases, and plant decentralization is feasible. As the need for rapid service increases, the number of warehouses required will increase (Johnston 2003). Technological solutions will help Pedigree Petfoods to improve supply chain and distribution of materials, The most popular technological solutions are integrated software applications and data storage software. Ideally, the channel of distribution is a model for studying the links that facilitate the movement of products, services, and their title. In reality, total integration is not achieved, as competition, conflict, and lack of coordination appear. Businessmen do not tend to think of the total network -- the total system. Rather, they think of and deal with the adjacent stage in the channel. Equilibrium in a channel depends on the development of mutually satisfying marketing relationships and roles among manufacturers, wholesalers, and retailers. The tie that binds and coordinates channel activity is the community of interest and independence that these groups share. Often the relationship is one in which the manufacturer is the primary organization and other channel members are secondary. Since marketing channels link primary producers to markets, they must respond to basic market changes. For example, the concentration of people in cities and suburbs, coupled with socioeconomic trends, has influenced such retailing developments as shopping centers, supermarkets, and discount houses. But, in general, channel arrangements change rather slowly. Most distribution networks involve long-run commitments that tend to become institutionalized and perhaps inefficient. For although it is presently impossible to measure accurately, it is estimated that distribution has had a less rapid rise in efficiency than agriculture, mining, and manufacturing because of the relative sparseness of technological innovation (Kotler and Armstrong 2008). Technology will help the company to establish the arrangements and paths for the flow of product and title to ultimate users. They move products and information to markets and provide the funnel for the feedback of information to the producer. As networks of marketing agencies, they constitute a system-a loose but formal coalition of independent entities linked together to distribute products and services (Naylor 2002). Distribution channels are critical components of the marketing mix. As the links between companies and markets, they can impede or foster the effectiveness of the rest of the marketing mix (Murphy and Wood 2005). Distribution channels cover a wide range of situations. At one end are found the complicated linkage of manufacturers and their branches, agents and brokers, other wholesalers, and retailers for the movement of certain consumer goods. At the other is the direct distribution of heavy machinery. Between lie a variety of channel assortments. 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