John White, vice president of distribution for W-G-P Chemical Company, was preparing for the annual strategy review session conducted by the firm’s executive committee. He was charged with the task of evaluating his firm’s logistics costs and customer service capability for his firm’s packaged dry and liquid agricultural chemicals.
W-G-P Distribution Systems
Figure 1 outlines the existing logistics system for W-G-P Chemical Company. Four types of facilities: (1) two continuous, company-owned manufacturing plants; (2) nine seasonal contracted manufacturing plants; (3) numerous in-transit distribution centers; and (4) 28 full-time distribution centers. Growing environmental activism has influenced management to reject any relocation of the manufacturing plants.
W-G-P distributes 129 different products or SKUs on a national basis. For distribution considerations, the products may be grouped into two different categories. Category A consists of 13 SKUs of a product called Prevention. The sales of Prevention are highly seasonal and account for 85 percent of W-G-P’s total revenue. The 116 Category B products (called Support) sell throughout the year but also have a seasonal pattern similar to that of Prevention’s sales. Although the sales volume of Category B is only 15 percent of W-G-P’s total revenue, this group of products contributes approximately 30 percent of total before-tax profits. The typical end user of W-G-P’s products purchases a variety of both A and B products. In many cases, the products are used jointly in agricultural applications.
W-G-P’s total product line is marketed through a network of agricultural dealers. The company sells to the dealers, who then resell the products to farmers. The typical dealer provides farmers with a broad line of products, including those that are directly competitive with W-G-P products. Historically, farmers tend to purchase both A and B products 1 to 2 weeks before field application. Application occurs at different times in different parts of the country and is directly related to the intensity of rainfall. Thus, W-G-P’s products must be available precisely when the farmers need them. Likewise, the quantity needed per acre varies depending on the rainfall received in an area. Therefore, although W-G-P produces Prevention and Support all year, sales to farmers take place during a very short time period. Farmers’ requirements vary in time and duration of use throughout the country.
To even out distribution to dealers across the year, W-G-P offers discount incentives and warehouse allowances to dealers who purchase at least 90 days in advance of estimated application dates. This early-order program accounts for 30 to 40 percent of the total annual sales of Prevention and Support. For the dealer, placing an early order means taking an inventory position on Prevention in advance of farmer purchases. However, since both Prevention and Support products are available, in effect, the early-order warehouse allowance means a special discount of the Support products which sell all year. To avoid abuse of the program, W-G-P requires that a proportional amount of Prevention products accompany each order. W-G-P also agrees to accept returns up to 15 percent of the total quantity of early-ordered Prevention products. The return policy requires a refund of the full purchase price providing dealers repay the return freight to W-G-P’s warehouse. The advantages afforded W-G-P through the early-order program are two-fold.
1.W-G-P can schedule shipments at its convenience to achieve the lowest possible transportation cost. 2.Dealers are given an additional discount if their own transportation equipment is used to pick up early orders, provided the cost is less than transportation paid for by W-G-P.
Seasonal sales, those sales which dealers buy within 90 days of estimated application dates, account for 60 to 70 percent of sales....