Case 7

W-G-P Chemical Company

OBJECTIVES

1. To allow students to use various analytical tools when making distribution structure
decisions.
2. To demonstrate that a firm can reduce total costs while actually improving customer
service performance.

SOLUTION QUESTIONS

1. What is the total distribution cost for W-G-P Chemical Company? What is the cost
per pound, cubic foot, case, line, and order? How can these measures contribute to
the distribution review process?
Table 4 data include average inventory of $90 million. Applying the 18%
carrying cost, annual inventory carrying cost is $16.2 million. When
added to the remaining costs in Table 4, total distribution costs are $33.2
million or slightly over 6.3% of sales.

It is interesting to note that total transportation cost in the system is $9.1

million. Thus inventory carrying cost in W-G-P’s system is far greater
than transportation cost and accounts for almost half of W-G-P’s total
distribution cost (as the text discusses, in aggregate for the U. S.,
transportation is more than half of total distribution cost).

Using data from Table 1, other cost measures are:

Cost/pound = $33,200,000/242,717,768 = 13.68 cents/pound
Cost/cuFt = $33,200,000/26,887,513 = $1.235/cubic foot
Cost/case = $33,200,000/2,912,753 = $11.40/case
Cost/line = $33,200,000/25,392 = $1307.68/line
Cost/order = $33,200,000/19139 = $1734.68/order

It is possible to also calculate unit costs for each of the individual

functions. For example, transportation to customers cost
$5.6,000,000/19,919 orders or $292.60 per order. Storage cost
$3,100,000/2,912,753 cases or $1.06 per case. Similar calculation can be
made for other functions.
 To be most useful these metrics should be compared against previous
years’ performance and/or against industry benchmarks. While such data
is not available in the case itself, the abnormally high inventory carrying
cost can be used as one example. This might also indicate that W-G-P’s
storage costs are most likely high due to the large inventory being held.
2. On a map, plot the distribution facilities and network for W-G-P Chemical Company.
What product and market characteristics can help explain this distribution structure?
- In plotting the distribution facilities and network for W-G-P Chemical
Company it can be easily seen that the locations center in agricultural
areas along major highways, waterways and railways. Since the product is
sold in bulk to farmers, who buy during a relatively short time period
during the year (which is difficult to forecast, the distribution structure
must be structured to respond quickly with short lead times when demand
occurs.
3. What alternative methods of distribution should W-G-P consider for Prevention and
Support?
- Open this question up for class discussion to generate alternative
distribution structures.
- One clear area for discussion concerns the number of warehouse locations.
To some extent the large number of warehouses may be justified due to
the nature of the market and the customer service requirements of short
lead times. A drastic reduction in number of warehouses, which would
most likely reduce inventory levels and carrying costs significantly, would
probably be difficult to justify given the service requirements.

Nevertheless, from the plotting of locations, there are some clear

candidates for consolidation. Decatur and Rockville, Illinois provide one
example. The Indiana, Michigan, and Ohio warehouses (a total of four)
could probably be consolidated in to two facilities and maintain customer
service levels. Of course, the impact on transportation cost would also
have to be investigated.

4. Discuss the rationale for: (a) the early order program, (b) customer pickup policies,
and (c) use of public versus private warehouse facilities.
- The rational behind the early order program is to better plan and distribute
the products to meet demand. If distribution is planned in advance, more
cost efficient methods can be used. In addition, the program reduces W-G-
P’s inventory by shifting some of the burden on to dealers. The customer
pickup policy is most likely considered a service to dealers who want to
utilize their own equipment as fully as possible. It also relieves W-G-P of
the need to schedule common carriers for pickup at the warehouse and
delivery to dealers. Public warehouses seem to make sense in this
structure given the highly seasonal demand. W-G-P avoids considerable
fixed costs associated with private warehousing and the need to maintain
fulltime labor and supervision which a private facility would require