Case 11-1: Deere Cost Management Name: Martin Sedtal, Mahzad Ahkala, Udit Dadwani, Amir

Farzam, Xiaohan (Serena) Wang Group: 11 Date: 11-Nov-2015 Situation  Neil Bennett is a
Warehouse manager at Penner Medical Products.  Penner is a medical supplies distributor and
retailer, supplying small and medium-sized medical practices for more than 50 years and has
approximately 120 employees.  Customer can purchase the Penner’s products through its five
retail locations or order from its central warehouse.  Stinson Distribution Company is Penner’s
important supplier based in Ontario, Canada o Stinson produces high quality products, and was
Penner’s only supplier of a wide variety of specialized equipment. o It has had a long term
relationship with Penner and supplied a wide variety of specialized equipment. Current situation 
Transportation costs were over budget  Senior management viewed inventory levels as excessive.
o Inventory holding costs were 15 percent.  2 days per week, Penner’s truck traveled to Stinson o
one-way trip took 9-10 hours o Empty in the first leg of the trip o Picked up cargo estimated at
$15,000 on its way back. o The operating cost of the truck was $55/hour. o Failed to share trips
with other businesses to cut down costs.  Fuel costs had increased dramatically recently  Delays
at the border from Detroit to Canada caused extended shipping times and costs.  25% delay from
incomplete paperwork problems.  The same truck was also in demand to supply materials to
Penner’s customers making scheduling deliveries difficult.  Penner had resorted to using UPS to
handle rush orders from Stinson.  $1000/month to rent space at a warehouse in Windsor used to
prepare shipments.  Ken McCallum, the general manager, had asked Neil to look into the
situation and get back to him with recommendations within 5 days. Basic Issues  Resolve high
cost logistics arrangement with Canadian supplier  Delay and incomplete orders resulting in
customer complaints and lost sales.  International transportation  Logistics service outsourcing 
Customer service This study source was downloaded by 100000836477284 from CourseHero.com
on 11-09-2021 16:10:50 GMT -06:00 https://www.coursehero.com/file/12943566/Case-9-1-
Penner-Medical-Products-2/ This study resource was shared via CourseHero.com  Customs
brokerage  Dead leg shipping  Missed deliveries and reputation risk  Increasing Fuel Costs 
Selection of mode and carrier  Reliability of the delivery service  Risk resulting from price
fluctuations  Restructuring the transportation policy  Understanding the issues related to FOB 
Delays at the border add to shipping costs.  Inventory management o Inventory levels at the
warehouse - $2 million - Not include inventory at other Penner locations o Warehousing and staff
costs alone are likely $200,000/year. o Total carrying cost rate represents $300,000 per year to the
company.  With 25 % of Stinson’s products delayed, the company is losing sales through stock-
outs.  Penner is expediting shipments from Stinson using UPS and paying a premium. o Current
shipping costs are already too high and this aggravates the problem further.  Neil had to use an
experienced stock picker as a driver.  Likely adds extra costs and creates further delays in
shipments to customers due to lack of personnel at the warehouse Tasks  Neil should consider
the current issues that lead to delays and add up the costs of these delays on business  He should
consider the following options: o Continuing the current methods but getting prepared for
anticipating delays o Changing the transportation mode/modes o Switching to another type of
carrier that offer different service options  Neil should evaluate the cost savings and the delivery
improvement of the options and their level of importance (he should develop a value criteria for
best method). What are the Alternatives?  Clearly this situation can’t be allowed to continue and
there are a number of options open to Neil: o He could ask the supplier to set-up a warehouse
with safety stock in the Rockford area. o Finding a new vendor is an option o Hiring a competent
customs broker would help address the paperwork issues and associated problems of unnecessary
delays and stock outs. o Direct shipments from suppliers to customers and retail locations, cross
docking and switching the mode of transportation to airfreight. Questions for Discussion  What is
the opportunity cost of using the Penner’s truck for picking up deliveries  Cost of expediting
deliveries vs. cost of outsourcing to trucking company  What is the reputation risk of delays to
customers This study source was downloaded by 100000836477284 from CourseHero.com on 11-
09-2021 16:10:50 GMT -06:00 https://www.coursehero.com/file/12943566/Case-9-1-Penner-
Medical-Products-2/ This study resource was shared via CourseHero.com  Is the additional
warehouse in Windsor necessary  Why do you think Penner handles its own inbound
transportation?  Why not simply find a new vendor that is on the American side of the border
and closer to Rockford?  Would you consider outsourcing transportation?  How complicated is it
to fill out customs forms? Why don’t they get a customs broker involved?  How much money do
you think this problem costs the company each year?  Since 9/11, the flow of goods across the
U.S.-Canadian border has been subject to delays and backlogs. How impact of changes in the social
and political environment can impact supply chains? Actions  Analysis for cost: o 2
shipments/week $15,000 each, or approximately $1.5 M/year. o $30 million in sales - Assume 50
percent cost of goods - Stinson -10% of total supply costs - a major supplier to Penner. o Assigning
costs to delays - Security at the border adds 30 minutes to several hours at $55 an hour -
Incomplete paperwork causes -$3,750 in delays of goods (25% of $15,000) - $1000/month for
warehousing - 15% holding costs i.e $2250 (15% of $15,000) per week - UPS premium charge for
deliveries - Increasing fuel costs which is pretty large percentage for this kind of product - Shipping
costs - $2,200 per week => $110,000 per year (7.3% of the product cost) Truck operation cost
(including driver) $70/hour Typical hours of operation 19hr (Variable of 0.5-3hr) Non-operating
cost of truck (driver pay) $15/hour Estimated non-operation time 8 hours Delivery Cost (per
delivery) $1,485 - $1,660 Number of deliveries per year 26 Yearly Cost of deliveries $38,610 -
$43,160 Windsor Warehouse Rent (yearly) $12,000 Total Cost per year $48,610 - $53,160 
Analysis geographical position: o Sourcing other suppliers nearby Penner o One of the main issues
is increasing cost of transportation, not goods sold, continuing the relationship with Stinson should
be pursued if there are no equivalent suppliers closer to Penner.  Identify the opportunity cost of
utilizing Penner’s truck for picking up deliveries. This study source was downloaded by
100000836477284 from CourseHero.com on 11-09-2021 16:10:50 GMT -06:00
https://www.coursehero.com/file/12943566/Case-9-1-Penner-Medical-Products-2/ This study
resource was shared via CourseHero.com  Invite a few 3PLs to submit proposals o Talk to
shippers and 3PLs about options and costs  Ultimately, Neil should look at his entire supply chain
and decide what activities should be outsourced o Warehousing - Penner should request Stinson
to prepare delivery wrapped and palletized for pickup from freight company - An agreement could
be worked out, it will save an additional $12,000 in warehouse rent, plus additional amount in
overhead o Deliveries to retail operations and customers o Customer order processing o It is
better that he starts the ball rolling rather than someone else who might see the entire Penner
logistics group as a candidate for outsourcing  At the end of the day, there is little Neil can do to
control delays at the border. However, he can control a number of other factors, such as o The
mode of transport, o Outsourcing of logistics services, o Safety stock levels and location, o
Efficiency of the process - Including having the paperwork completed properly. o He needs a plan
that has both a short term and long term component.  Accounting for an inflation rate of 1.06
from 2011 (Book publish year) to 2015 (current year for cost comparison). This inflation number
was obtained from the CPI Inflation Calculator. Yearly Cost of deliveries $40,927 - $45,750 Total
Cost per year $52,927 - $57,750  A quote for shipping was obtained from Old Dominion Freight
Line (online rate estimator, screenshot included below) o Estimated payload was 10,000 lbs. o
Class was assumed to be “50” Clean Freight, which is palletized and wrapped o LTL Standard
Service was quoted at $2,368 with service days of 3 business days o This quote includes ‘Border
Documentation Fee’ and ‘Border Security Charge’ o With 26 shipments per year, cost is estimated
to be $61,568 This rate is a single point quote for a one time service. Penner could further reduce
the amount if they enter into negotiations with several trucking companies for a yearly contract.
They could further reduce the cost by combining shipments into weekly requirements. This study
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This study resource was shared via CourseHero.com  Keep same method with more preparation o
Purchase a second truck meant for deliveries to customers o Implement an internal transportation
audit process to provide proper paperwork o Hire cheaper drivers instead of asking warehouse
workers to drive  Switching to a different mode of transportation o Reach out to air and rail
forwarding agents that provide transportation from Canadian supplier to Rockford o Increase the
effectiveness and efficiency of transportation deliveries from the central warehouse to the 5 retail
locations and customers by hiring more drivers o Use intermodal transportation: rail for
international transportation and road for local delivery  Use a different carriers to increase the
variety of service options o Quite using Truck Load(TL) and sell the company’s trucks, instead
purchase smaller truck to be able to use Less-Than-Truck Load (LTL)for local deliveries o Start
working with service providers such as freight forwarders or brokers  Combination of both
different method of transportation and freight forwarders Results  If use same method with more
preparation o Results in Extra costs (more fuel consumption) and more man hours in deliveries o
More fixed costs (more assets purchased) o Greater flexibility and responsiveness o Increasing the
chance of delivery improvement resulted from better documentation  If use a different mode of
transportation: o Reduction in delays (reduction in border crossing) o No delay issue in paper work
o Fuel cost and overhead cost reduce for long trip, increase for local deliveries  If the combination
is selected: o Employing third party such as service provider will reduce costs/rates This study
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This study resource was shared via CourseHero.com o A third party can adhere to a strict delivery
schedule, as soon as an schedule has been agreed upon o Using intermodal rail/road for
transportation could further cut costs o Third party can also manage delays in crossing the borders
and related paperwork  If he ask the supplier to set-up a warehouse with safety stock in the
Rockford area. o As part of this arrangement, Stinson could be asked to be responsible for delivery
FOB Penner’s warehouse. The difficulty is that there are no guarantees that Stinson will be any
better at managing shipping than Penner. This solution also adds to total supply chain costs by
increasing total inventory levels.  If finding a new vendor is an option o It is also not very
attractive. Why lose a good supplier just because you can’t manage the shipment process
properly?  If hiring a competent customs broker o would help address the paperwork issues and
associated problems of unnecessary delays and stock outs. This option is also relatively
inexpensive.  If outsourcing transportation to a third party is also a viable option. o The right
supplier can likely reduce shipping costs dramatically through the use of full truckload shipments
using standard highway trucks rather than using Penner’s 2-ton truck, arranging backhaul
opportunities and completing paperwork properly. Penner’s core competency is not
transportation and outsourcing this activity makes sense. The interesting question for Neil is how
far to expend such a relationship. Theoretically, a competent 3PL could also handle the warehouse
and customer deliveries. o Less delays for paperwork, border crossing o Low fuel consumption and
overhead o Higher fixed costs to third party o Greater risk associated with terms defined (FOB,
INCO) Priorities 1. Maintain reputation with customers 2. Decrease cost and delays of deliveries 3.
Link supply strategy to organization goals 4. Lower cost and achieve higher profit 5. Maintain high
level of customer satisfaction 6. ensure extra capacity to ensure uninterrupted flow of materials 7.
Determine a value criteria to support optimal logistics strategy Conclusion Penner should move
forward with outsourcing deliveries through a third party freight company. This will help budgeting
for the shipments, as well as decrease delays. The initial price quote is above the current annual
cost for shipment, but this cost is for a one time shipment. Further reductions in price can be
obtained with a yearly contract and reducing the shipments to weekly. Accounting for inflation,
the cost difference is $4,000 to $9,000. This additional cost may be offset by utilizing the truck for
better on time deliveries to trucks and unanticipated cost and time with border crossings. This
study source was downloaded by 100000836477284 from CourseHero.com on 11-09-2021
16:10:50 GMT -06:00 https://www.coursehero.com/file/12943566/Case-9-1-Penner-Medical-
Products-2/ This study resource was shared via CourseHero.com The necessity of the warehouse
in Windsor, if evaluated as unnecessary, will further decrease the cost by $12,000 plus operating
cost.