Case 5: A System Design Assessment at Westminster Company

David J. Closs and Christopher Kitchen

Westminster Company is one of the world's largest manufacturers of consumer health products;
its distinctive name and company logo are recognized throughout the world. Originally founded
as a family-owned pharmaceutical supply business in 1923, the company's corporate headquarters are still located in a scenic town of 60,000 people in the northeast United States. Westrninster also maintains regional offices in Europe, Latin America, and the Pacific Rim to support
overseas manufacturing and distribution.
Westminster's domestic operations consist of three separate sales divisions-each of which
manufacture and distribute its own product line. Decentralized divisional management is a
proud historical tradition at Westminster. According to President Jonathan Beamer. it is a
process that requires and encourages responsibility and self-ownership of the work process and
provides the key component of corporate success. Westminster's products are marketed through
a network of diverse retailers and wholesalers. Trade Class as a percent of sales is 37 percent
grocery, 3 1 percent drug, 2 1 percent mass merchandise, and I I percent miscellaneous.

Westminster Today
Pressure from domestic and global competitors, as well as large domestic Westminster customers, has recently forced the company to reevaluate its current distribution practices. In particular, attention has focused on the changes which will be required to effectively compete in the
marketplace of the twenty-first century.
Westminster just concluded several months of extensive research which focused on customers'
primary logistics concerns for the future. The research findings addressed a variety of issues, but
two key topics were identified: customer composition and customer service requirements.
The most significant trend with regard to customer composition over the past decade has
been the evolution of the company customer base into either very large or very small accounts.
This development is expected to continue at a comparable pace in the foreseeable future; however, the major shift in the mix of accounts is not expected to dramatically alter the historical
composition of product sales. Approximately 50 percent of domestic consumer sales volume is
concentrated within 10 percent of Westminster's customers. What may affect the composition
of product sales to large retail accounts is the rapid growth of private-label nonprescription
drugs and consumer health products. Cost-efficient private-label manufacturers offer large retail
accounts higher profit margins, willingness to quickly change or customize products, and the
ability to appeal to increasingly price-conscious consumers. Specifically, the private-label health
and beauty aids business totaled sales of $3 billion in 2000.
Research findings have confirmed top management's belief that these large accounts generally possess an intense commitment to increasing their firm's logistics efficiency. To maintain
and increase the percentage of sales volume Westminster derives from these important customer
accounts, the company has identified several key customer service concerns. These concerns
specifically address the second issue of customer service requirements. Company research has
also concluded that the formulation of supply chain partnerships between Westminster and its
large customers has now become a competitive necessity. In many instances, powerful retailers
now demand such arrangements and oftentimes have the leverage to dictate the conditions of the
arrangements. Westminster will have to maintain considerable flexibility to accommodate different solutions for a variety of large, powerful customers. Ideally, Westminster would like to
establish a position of leadership within these partnership arrangements where practical.
Westminster is well aware that successful retailers and wholesalers are heavily focusing
strategic effort on more timely, efficient, and accurate inventory positioning. Many large firms
have identified supply chain management techniques as a primary tool in achieving successful
inventory management and improving overall financial performance. "I visualize three impor-

tant changes for our operations with rezard to large accounts," says Alex Coldfield, Westminster vice president of logistics. "First, traditional inventory replenishment procedures will be replaced by POS driven information systems. Customers will transmit daily or biweekly product
sales movement to us in order to ensure timely inventory replenishment and allow production to
be scheduled according to sales-driven forecasts rather than marketing forecasts. We will also
establish and utilize customer support 'work-teams' that operate on-site with key customer accounts to better manage ordering and distribution. Second, order cycle times will have to be reduced from current levels. Large accounts will increasingly demand two rather than one delivery per week. In addition, many large accounts want to simplify their manufacturing contacts
and are questioning why we cannot provide consolidated order shipment from our three consumer product divisions when cost reductions are achievable. The demand for direct store delivery (DSD) may also significantly increase. Third, products will increasingly have to meet
specific customer requirements, such as assembly of individual store shipments, and customized
inner packs and display units. Bar codes will have to utilize industry standards such a s
UCC 128. Invoicing and payment, particularly with regard to promotional allowances and discounts, will become paperless transactions conducted via EDI. Our pricing will evolve to reflect
services provided, rather than purely traditional logistical order fulfillment, transportation, and
handling."
For the balance of Westminster's customers, distribution service will be provided much as it
is today. Although other customers may not be willing or able to initiate such close working relationships, they wilI be entitled to a high standard of basic service that provides timely and consistent performance. For these accounts, purchase price will remain the priority, although there
will be some increased pressure for improved order fill rates and decreased cycle times. Traditional purchase order invoicing and payment will also remain the rule.
In response to the issues raised by company research, CEO Wilson McKee directed the company's executive management committee to organize a logistics taskforce. The taskforce, which
includes top-level managers from each division's functional departments, has been directed to
identify potential changes within the three domestic sales divisions' networks that will achieve
improved distribution performance and responsiveness.

Westminster's Distribution Network. Table I outlines Westminster's existing distribution

network for the three domestic consumer sales divisions. Each division consists of a number of
company-owned-and-operated manufacturing plants and distribution facilities. Table 2 presents
a number of key demand and inventory statistics for the facilities.
Each manufacturing plant produces SKUs unique to that particular facility. All SKUs are
distributed on a national basis. Due to significant capital outlays and fixed costs associated with
each manufacturing plant, the logistics taskforce has already eliminated the possibility of relocating any manufacturing facilities from their present locations.
Manufacturing plants must route products through a distribution center before final delivery
to a retail or wholesale customer. Any distribution center may be utilized within its own division. Distribution centers may ship product to any region of the country; however, customers are
typically serviced by the closest distribution center based on Westminster's regional boundaries.
Transfer shipments between distribution centers are also permissible.
Most shipments from manufacturing plants to distribution centers are delivered via motor carrier on a T L basis. Air freight may be utilized for emergency shipments, but also must pass
through a distribution center before delivery to a final destination. Most shipments between distribution centers and retail or whoIesale customers are delivered by motor carrier on an LTL basis
and vary in size from a few pounds to nearly truckload quantities. Table 3 illustrates the three domestic sales divisions' shipments by typical weight brackets and the number of bills of lading issued within each bracket. The first weight bracket (&70 pounds) represents shipments typically
delivered by small parcel carriers; the majority of these shipments represent order fulfillment of
back-ordered SKUs. Approximately 67 percent of all shipments are 500 pounds or less.
Distribution center locations are based upon both market and production factors. The majority of distribution centers are strategically located throughout the country to service geographic

TABLE
1 Westminster Company Facility Locations
Division A

Manufacturing Plants
Los Angeles, CA

Percentage of Total
Pounds Produced

Distribution
Centers

Percentage of Total
Pounds Shipped

53%

Newark. NJ

28%

24
23

Atlanta, GA
Dallas. TX

4I

Atlanta. GA
Jacksonville, FL

31

Division B
Manufacturing Plants

Percentage of Total
Pounds Produced

Distribution
Centers

Percentage of Total
Pounds Shipped

Philadelphia, PA

39%

Philadelphia. PA

78%

Newark. NJ
Atlanta, GA

37
24

Los Angeles, CA

22

Division C
Manufacturing Plants

Percentage of TotaI
Pounds Produced

Distribution
Centers

Percentage of TotaI
Pounds Shipped

Chicago, lL
Houston, TX

75%

Newark, NJ

384

10

Chicago, IL

54

Trenton. NJ

15

Lor Angeles, CA

TAB=

Westminster Customer Demand 1992

Division A

Characteristics
Total Demand (000,o(K)Ibs)

150
475

Sales ($000,000)

Division B
72

60

920

27 1

Cases (000,000)

13.2

Shipments (000)
Lines Ordered (000)

80

88

1,060

683

Inventory Turns PIYr

6.5

Total SKUs

1,260

8.5

10.8
430

TABLE
3 Shipment Profiles
Shipment size
Package delivery
< 500 Ib

500 < size 6 2,000 Ib

Percent of Weight
6

8
13

2.000 < size 2 5,000 Ib

18

5,000 < size 6 10,000 Ib

22

> l0,ooO lb

32

Division C

Percent of Shipments

9.8
73
310
7.2
720

Ctrsr 5: A Syrerri Design A~ssessrrrenttrl Wrsrrriinsrcr Corr~potiy

TABLE
4 Westminster 2000 Distribution Costs ($000,000)
Division B

Division A

Division C

Transportation
Transfer freight
Custo~ncrfreight
Total Transportation Costs

Warehousing
Storage &handling
Fixcd
Total Warehousing Costs
Total Distribution Costs
Average Numher Days Transit
Tirnc (DC to customer)

TABLE
5 Hourly Wage Rate for U.S. Cities
City

Wage Rate ($)

City

Chicago, IL

Laredo, TX

Seattle, WA

El Paso, TX

Bufhlo, NY

Dallas, TX

Syracuse, NY

Detroit. MI

Pittsburgh, PA

Los Angeles. CA

Atlanta, GA

Minneapolis, MN

Houston, TX

Dcnver, CO

Phoenix, AZ
Kansas City, MO

Mcrnphis, TN

Philadelphia, PA

Wage Rate ($)

Ncw York, NY
San Francisco, CA

territories that contain the strongest demand for Westminster products. Demand patterns for
consumer products follow major population centers and are generally consistent across the
country for all three divisions. Several distribution centers are located near manufacturing plants
to reduce transportation costs.
Table 4 lists the current system's transportation and warehousing costs for each of the three
divisions. Freight rate classification for product shipments is different for each of the three divisions. Division A freight has a rating of class 60; Division B freight has a rating of class 70; and
Division C freight has a rating of 200. Transfer freight costs are based on TL rates from the
manufacturing plants to the distribution centers. Customer freight costs are based on LTL shipments from distribution centers to retail and wholesale customers. Average transit time (in nun)ber of days) from the distribution centers to the customer is the shipment time from the point an
order leaves the distribution center's loading dock until it reaches a customer. Any potential systems redesign must consider the effect of labor costs. Table 5 lists average hourly wage compensation for a number of major U.S. cities.

The logistics taskforce is presently considering these three options or alternatives:

1. Consolidating the current three distribution systems to a single distribution system

serving all three companies, using fewer warehouses than are currently being used.
2. Using public or third-party warehousing and third-party transportation rather than the
current system network.
3. Continuing with the current arrangement as is.

Questions
I . What effects would the two new alternatives have on transfer and customer freight
2.
3.

4.
5.
6.

costs? Why'?
What effects would warehouse consolidation have on inventory carrying costs,
customer service levels, and order fill rate?
How are warehousing costs affected by the decision to use public or private warehouse
facilities? What effect would this have on handling, storage, and fixcd facility costs?
What effect would shipping mixed shipments liom consolidated distribution centers
have on shipment profiles?
What factors should be taken into consideration when determining the appropriate
number of warehouses?
What selection criteria should be used when evaluating a service provider's (public or
third-party warehouse, or third-party transportation provider) ability to meet critical
logistical requirements?

Case 6: Michigan Liquor Control Commission

On a Friday afternoon in October 2000, Joseph Duncan, a third-year distribution systems analyst for the Michigan Department of Commerce, was sitting at his office desk reading through
some background material on distilled liquor distribution in Michigan. Prior to his current p s i tion, Joseph had worked as a distribution analyst in private industry for several years after graduating from a large midwestern university with a degree in materials and logistics management.
His direct supervisor, Donna Mills, had given Joseph his next assignment earlier that day. "Be
prepared to head u p a project team and prepare a proposal on distilled liquor distribution."
Donna said, "We'll meet Wednesday afternoon at 2:00 P.M. to lay out an initial plan." This was
Joseph's first "lead" project assignment, and although he was unfamiliar with the topic, he was
excited about the opportunity to demonstrate his ability. He placed the background material in
his briefcase and decided to reexamine i t at home over the upcoming weekend.

History of Michigan Liquor Distribution System

In the early 1900s, brewers in Detroit were the dominant force in the state due to efficiencies of
size, new bottling technology, and local "option laws," which restricted or outlawed in-county
production. This created a sharp division between outstate and Detroit brewers and prevented
the formation of a strong state liquor association. Prohibition forces also benefited from this divisiveness; by the year 1917, Michigan had 45 d ~ counties.
y
Michigan enacted a statewide prohibition on liquor in May 1918, approximately 18 months prior to passage of federal Prohibition
(the 18th Amendment). By the late 1920s and early 1930s, significant pressure existed throughout the country to repeal Prohibition. In early 1933, Congress passed a bill authorizing 3.2 percent beer. In the same year, a similar bill was considered in Michigan and along with it, the introduction of a state board which c a m e to b e known a s the Michigan Liquor Control
Commission (MLCC). In April 1933, Michigan became the first state to ratify thc repeal of federal prohibition and the present-day liquor distribution system was designed and put into place.