Inbound logistics and procurement

Inbound logistics is concerned with activities associated with receiving, storing and disseminating inputs to the production process. It encompasses materials handling, warehousing, inventory control, vehicle scheduling and returns to suppliers. It is responsible for bringing raw materials into the organisation and storing it ready for use. Standard window and bespoke window production pose different problems for the department.

In standard window production components tend to be bought in bulk and stored on-site waiting production. This incurs storage costs and there may also be costs associated with wastage and obsolescence. These costs are exacerbated by the problem of mixing standard and bespoke window production. The scenario suggests that bespoke production often displaces standard production, for example, in order to accommodate a customer’s increasingly urgent request. This means that components bought in to fulfil a planned standard production run can be left in storage for longer than was anticipated. However, standard window production does facilitate the bulk buying of components and so raw materials should be cheaper.

In bespoke production, there should be fewer storage costs, as the components are moved quickly through to production to fulfil a customer’s order. However, because component lead times are lengthier, buyers often pay more for the windows to secure quick supply and to reflect the lower order quantities normally associated with a specific bespoke order.

secure quick supply and to reflect the lower order quantities normally associated with a specific bespoke order. AT QTP, raw material costs are significantly higher for bespoke windows than for standard windows and this reflects the premium prices expected to be paid for low-volume urgent supplies. However, storage costs (part of which will be storage of raw materials) are much lower, suggesting that the order quickly moves through the QTP factory. However, the number of complaints raised by bespoke window customers perhaps suggests that for many, the order does not move quickly enough.

For both standard and bespoke production, the supply of timber is a problem. Prices are rising and there is an increasing shortage of specialist timber. However, from the perspective of QTP, inbound transport is not a problem. This is provided by the suppliers.

Production (Operations)

Production is concerned with the activities required to transform inputs into the final product. In this case it is the production line process of QTP, transforming timber, glass and fittings into standard and bespoke windows. As well as assembly, production also considers packaging and equipment maintenance.

In most organisations, production is most effective when producing long runs of standard products to inventory, minimising set up time and set down time (and associated costs). The production of well-understood standard products reduces the need for quality control and also minimises wastage. In contrast, bespoke production is usually associated with relatively short runs (reflecting individual customer order quantities) and higher set up and set down time (and costs). Specialised bespoke set ups have to be carefully quality-controlled and wastage rates (because of the unfamiliarity with the task) tend to be higher.

These general observations appear to be supported by the data at QTP. Set up and set down times for bespoke windows are much longer, meaning that the production line is idle for twice as long. The average production run is also shorter and wastage rates are higher. The number of customer complaints (per thousand units) is also higher. Some of these complaints are likely to be about the quality of the delivered window. Bespoke units have to be exactly to the specification of the customer, whilst standard units are to the specification of QTP. It is the responsibility of the customer to ensure that these standard units are fit for purpose.

The production manager’s enthusiasm for standard windows is understandable. It maximises production efficiency, at the same time minimising wastage and complaints.

Outbound logistics

Outbound logistics is concerned with the activities associated with collecting, storing and physically distributing the product to buyers. It encompasses finished goods warehousing, material handling, delivery vehicle operation and order processing. Again, different issues are raised by standard window and bespoke window production.

Standard production leads to higher storage costs as windows are stored waiting to be sold to potential customers. The storage of these finished windows may lead to wastage, as windows are made unsellable due to storage conditions: damp, extremes of temperature, fire, flood. Pilfering from employees and obsolescence, as demand dries up for a standard window, may also affect stored windows.

Once sold, customers expect almost immediate delivery of stored windows, making it difficult to plan the routes of the delivery fleet in advance, particularly as that fleet also has to deal with the urgent delivery of bespoke orders. The effective use and maintenance of its own fleet of vehicles is a clear problem for QTP.

In contrast, delivery for bespoke windows produced to order can be planned well in advance and the customer given a specific delivery date. In general, the windows are delivered as soon as they are manufactured and so storage costs are lower. This is reflected in the QTP data where storage costs of bespoke windows are one third those of standard windows. Transport costs are also lower, reflecting the relative ease of planning the efficient delivery of bespoke orders.

Marketing and sales

These are activities associated with inducing the customers to purchase a product and then facilitating that purchase. It includes advertising, promotion, quotations and pricing.

At QTP, marketing and sales is rewarded on the basis of revenue per window sold. The data suggests that the average revenue per window is higher for a bespoke window than it is for a standard one. Consequently, there is an incentive to steer customers towards bespoke windows rather than standard ones.

Marketing and sales also argues that the bespoke approach means that customers always receive exactly the windows they want, rather than ordering standard windows which do not fit their exact needs. This pre-sales customer design service is perceived as an important strength of QTP and it is what distinguishes the company from its competitors. The marketing and sales director claims that ‘we have sales people who really understand the windows and what customers want and need. We are not trying to sell them windows off the shelf, just because we have them’ in inventory. Fulfilling exact requirements is an important part of building the customer relationship. It is claimed that some important customers purchase standard windows from QTP even when they could be sourced cheaper elsewhere, because of QTP’s past flexibility in developing bespoke windows for them. Thus there are important cross-selling opportunities between standard and bespoke windows.

However, the bespoke approach causes both internal and external tensions. Pressure from customers leads to the marketing and sales department putting pressure (in turn) on inbound logistics and procurement to secure the quick delivery of the required components. As noted already, this leads to high raw material costs. Once the raw material has arrived, pressure is put on production to expedite the order and postpone planned standard production runs. This leads to machine and labour inefficiency. Marketing and sales contend that bespoke orders are still more profitable than orders fulfilled from inventory, but the production manager disputes this.

The bespoke approach probably also demands the active management of customers. It is possible that the customer is constantly enquiring about the status of their order, and delivery on the planned date is essential if the customer is to achieve its own deadlines and profits.

Tutorial note: The analysis of standard window production might use the current pattern of machine utilisation or it might use a pattern where the production run is uninterrupted. Credit will be given for either and for both.
Financial analysis
Standard windows:
Machine utilisation (average day)

Switching completely to standard windows production

Inbound logistics: It should be possible to reduce the storage costs of components, as they should be stored for shorter periods as production is now based on a planned cycle, uninterrupted by bespoke work. Less time in storage should also reduce wastage and obsolescence.

There may also be opportunities for exploiting just in time (JIT) supply principles, moving storage costs to the supplier and so reducing inbound storage costs at QTP even further. The company might also consider backward integration, looking to acquire timber production facilities so helping secure the supply chain and also, potentially, reducing raw material costs.

Production (Operations): Production efficiencies should be gained from being able to plan production in advance. If set up and set down times remain the same (and this seems a reasonable assumption), then production can be increased to 102 units per day, before wastage. The calculation for this is shown in part (b) of this solution.

Outbound logistics: Planned production should lead to a better utilisation of the distribution fleet. However, this is an area where QTP might consider outsourcing to a specialist logistics company who can exploit economies of scale which are not achievable with a small fleet of vehicles. It can be argued that distribution is not a core competence of the company and would benefit from outsourcing.

Marketing and sales: There are opportunities for head count reduction in marketing and sales as sales switch to standard windows with specifications available in catalogues and on the internet. The focus is now on promotion and order taking, not the negotiation of individual orders. In standard window production, sales forecasting is paramount. This is an acknowledged weakness of the current marketing and sales team and this would have to be addressed.

Overall: In this approach, QTP is an order-obtaining organisation, obtaining orders from customers for goods which it has already produced. Standard window production to inventory should lead to a more efficient window production. However, it may also lead to the loss of customers who value the company’s ability to deliver a mixture of standard and bespoke windows. There is evidence to suggest that such customers currently place orders for standard windows even though they could be sourced more cheaply elsewhere. QTP might lose these customers in the future.

Focusing on standard production may also mean that QTP is focusing on a commodity-type market where there will be continual downward pressure on prices.

Switching completely to bespoke production

Inbound logistics: Because orders are definite, component storage costs should be relatively low, but components cannot be ordered in advance and bulk discounts negotiated. Thus in this case there seems an even stronger case for backward integration. Securing supply is even more vital in bespoke production where supplying the customer at the promised time is paramount. It is also acknowledged that raw material costs are currently high for bespoke windows and so owning the means of timber supply should help reduce this cost.

Production (Operations): Production is driven by definite orders from customers, not ‘made to inventory’ production runs based on forecasts. Freeing up capacity should allow the quicker production and delivery of bespoke orders. Production planning is now primarily concerned with scheduling definite orders to meet the agreed delivery date.

Outbound logistics: Inventory holding costs should be relatively low as deliveries can be planned around customer order dates. Because these are well known in advance, then a delivery schedule can be planned, although this is likely to be sub-optimal, based around the need to deliver to certain locations on certain dates, rather than planning an optimal route around standard delivery locations. Overall, fewer units will be produced and so it might be possible to reduce the size (and hence cost) of the delivery fleet. The certainty of deliveries might also make this a strong candidate for outsourcing. This could deliver significant cost savings.

Marketing and sales: Moving to bespoke production plays to the strengths of the current marketing and sales department. These could be perceived as core competencies which the company needs to exploit. Furthermore, because they are rewarded on average revenue per window, this will also appeal to the department from a reward perspective. The need to acquire new customers may make other elements of the marketing mix, such as promotion, increasingly important.

Overall: In this approach, QTP is an order-receiving organisation, producing windows for orders it has received. This is the preferred approach of the current marketing and sales team. Bespoke production will still allow QTP to fulfil standard windows (they will just be produced as bespoke items) and so customers’ needs will be fulfilled, although they may have to pay higher prices than before for such windows. QTP will be positioning itself as a niche provider, able to charge a premium for a specialised service. So, its market positioning will be quite different.