Finish assignment
Light Up My Light, Inc
Memorandum
To: Elise Ennis, CEO
From: Student Name
CC: Tom Perkins
Date: 25 June 2017
The purpose of this memorandum is to answer your specific questions from this week’s meeting referencing warehouse operations and financials with the goal of improving the logistical functionality of the company. Each bullet corresponds directly to the questions you posed. This memo will also briefly talk about profits, ROA, and overall analysis of how the company’s warehouses are performing.
1. Greatest improvement over first five months of 2017. The Detroit warehouse showed the overall best improvement in performance. Figure A, below the third point, is a chart I developed to show the completion percentage of projections by May. Detroit showed an overall improvement of over 12 percentage points (33% to 46%) and was one of only two warehouses to show improvement over last year. The other warehouse was Portland (2.77 percentage points). The method I used to determine the performance measure for all warehouses was the percentage of shipments complete in the first five months over 2016 and 2017. The reason for using this data is twofold; it is the only information currently available for performance for this review, but also because it is a good measure of how well a warehouse is currently performing against its projections compared to the same point last year.
2. Poorest change over first five months of 2017. Using the same criteria as above, the Los Anna warehouse is by far the worst performer, with a reduction in almost 36 percentage points (92% to 56%) from this point last year. As seen in Figure A, although all but two warehouses have shown a reduction in performance since this point last year, the average loss is just over 6 percentage points.
3. Best overall performance. The warehouse that I determined is doing the best job is the St. Louis warehouse. The criteria I used was the cost per shipment by dollar that a warehouse spends. St. Louis spends $9.07 per shipment. The average spent is $9.91 per shipment, and the most was Cleveland with $11.95 per shipment. I used this criteria because the warehouses use shipments as their metric of performance, so I determined the best logical factor was the bottom line cost per shipment sent out. Figure B, below, shows a graph I developed showing the difference in cost per shipment from 2016 to 2017, which also shows that Cleveland also showed the highest spike in cost per shipment.
Figure A: Shows the percentage of shipments completed by the end of May each year,
with the difference in the far right column. (-) denotes a negative trend.
Figure B: Shows the cost per shipment by dollar by warehouse over 2016 and 2017
4. Contract termination possibility. As you know, terminating a contract is extremely serious and requires a plethora of information gathering and analysis. For this project I performed several points of data analysis based on the information provided to me (2016 balance sheet, 2016 income statement, and warehouse operations performance data for 2016 and 2017). Through this data, I determined the percentage of projection each warehouse completed, the percent of budget used so far in 2017 and the cost per shipment for each warehouse, all provided in Appendix. Through this analysis, and only this analysis, I would recommend the termination of the Cleveland contract. Through my analysis I determined that the Cleveland warehouse, although, relatively small (1.85% of warehouse budget for 2017) has shown a negative performance trend (over 8 percentage points), coupled with an increase in overall cost per shipment (from $8.14 to $11.95), and using the overall highest percentage of their yearly budget so far (56%). The data suggests that the Cleveland warehouse is not only spending more per shipment than any other warehouse, it also shows one of the highest negative trends in performance over the eight warehouses. Cleveland is also the smallest warehouse in terms of shipments sent out both in 2016 and 2017. To put this into perspective, the Detroit warehouse was on a strike for 15 days in March 2016, but still produced more than Cleveland in the first five months of 2016 in both raw numbers and percentage (45% to 40%) and also a dollar less than Cleveland per shipment in 2017.
5. Warehouse costs for 2017. The company will spend around $530,542 granted that all warehouses stay at their budget. With that stated, I believe that the Cleveland warehouse, given its performance and cost increases as detailed above will spend over its budget, and the figure remaining would be closer to $540,000. The company will probably spend close to $930,000 for warehouse operations for the year, including approximately $10,000 that may be over budget with the Cleveland warehouse. Figure C below is a compilation chart I created for 2017 budget information that details each warehouse.
Figure C: Shows the warehouse costs for 2017 by warehouse
6. Strategic Profit Model (SPM). The SPM is the Return on Assets (ROA) which is found by multiplying the net profit margin and the asset turnover. (Murphy & Knemeyer, 2015, p.46) As seen in appendix (third tab), the net profit margin is 14.49% and the asset turnover is $1.47 which makes the Return on Assets 21.24%. I believe the two key items that relate to logistics for the company is the costs of goods sold and total expenses. The costs of goods sold is nearly a quarter of our total sales at nearly a million dollars ($937,000). Logistics can influence this most through our procurement of raw materials, which is cheaper in bulk. This may result in in an overall higher upfront cost, but would cost the company less in the long term. The other important aspect is total expenses, which include the heaviest logistics functions for the company in transportation costs, warehousing costs, and inventory carrying costs. Right now, LUML is spending over $2 Million dollars in total costs. The biggest of those are the warehousing costs at $735,982. I believe significant savings are possible especially if we consider changing a contract. As you mentioned, this could spur other contractors to reduce their overall costs, which would reduce the company’s overall costs.
7. ROA with 10% reduction in warehousing and shipping costs. A ten percent reduction in these costs would result in ROA increasing to 29.63%. Transportation Costs would reduce to $501,590 and Warehousing Costs to $662,384, bringing total operating costs from $2,307,167 to $2,077,837, nearly $300,000 less. This also increases net profit nearly $230,000 from $580,283 to $809,613. Therefore, overall, a 10% reduction in warehouse and transportation costs would result in a nearly 10% increase in the ROA.
9. Overall analysis and recommendations. After comparing the limited amount of data I received I was able to do quite a bit of analysis. As a disclaimer, these recommendations are based solely on the limited information and data I had available to me. I believe that the company may be spending too much on costs of goods sold and operating costs (transportation, warehousing and inventory). I have also determined that all but two warehouses have shown a negative performance trend in the first five months of the year with an average trend of negative six percentage points. The warehouses are spending on average, nearly $10 dollars per shipment, which may or may not be too high, since the lowest price over the last two years was $8.14 by Cleveland in 2016. The attached appendix shows all analysis in detail. I would recommend a detailed look into our operating costs and costs of goods sold with the intention of reducing those costs. I would also recommend considering eliminating the Cleveland contract as a way of encouraging the other warehouse contracts to reduce their costs and improve their efficiency. I would also recommend that the company has each warehouse manager provide a full report on their productivity that includes their inputs (e.g. human capital) compared to their outputs. These reports would also better assist you and the management team in making a decision to cut a contract
10. Warehouse operations as logistics. Warehouse operations are absolutely a logistics activity. Warehousing activities include receiving, storing, picking, and shipping (Murphy & Knemeyer, 2015, p. 49). All of these things have to do with either the movement or storage of supplies from various locations which fits right into the definition of logistics, given in my previous memorandum dated 28 May 2017. Through my past experience as an Army Logistics Officer, I can attest that the United States Army considers warehouse operations or Supply Support Activity (SSA) as one of the cornerstones of Army Logistics. Central to the SSA is the provision of material to the Soldier on the battlefield (ATP 4-42.2) The SSA in the Army is central to the success of the Army’s ability to feed and clothe its forces, fuel its vehicles, arm its combat vehicles and soldiers, fortify its positions and replace major end items, and information systems (ATP 4-42.22)
11. How can Information Systems (IS) be applied in warehouse operations. Murphy & Knemeyer (2015) describe the several types of IS, which includes Office automation system, Communication system, Transaction processing system (TPS), Management information system (MIS) and Executive information system (EIS), Decision support system (DSS) and Enterprise system. The categories that could be applies to warehousing are Communication system, TPS, and DSS. Communication systems could specifically help the management with communicating with each warehouse, but more importantly in the aspect of Global Positioning Systems (GPS). If we install GPS systems on our company trucks, we could track exactly where each shipment is in real time, but could also help drivers with shortening their routes and help with reducing transportation costs by saving on gas. The TPS, or more specifically Radio-frequency identification (RFID) has a robust capability in the warehouse. RFID installations in the warehouses would allow the warehouse to simply scan an item or barcode and could give accurate data of inventory as well as where to find it in the warehouse. This could result in quicker turn-around times and reduced inventory carrying costs. In fact, the Defense Department has recently implemented RFID to its warehousing activities that has generally been well received and resulted in quicker order fills at their SSAs. With DSS, and more specifically Transportation management systems (TMS) and warehouse management systems (WMS) within DSS, has the ability to help our warehousing functions. Murphy & Knemeyer (2015) specifically mention TMS and WMS. They describe that TMS can help with getting freight to its destination in a more environmentally efficient manner and that WMS helps provide oversight of the storage and flow of materials within a company’s operations (p.31). The WMS specifically could result in reduced operating expenses, increased inventory accuracy and improved customer service. Improved customer service would inspire loyalty and perhaps increase sales. Any and all of these specific systems could help in your goal of reducing warehousing and transportation costs as well as save money in the warehouses which would reduce the range of costs that we currently have.
Individual Resources:
Headquarters, Department of the Army. (2014). ATP 4-42.2: Supply support activity operations. Washington, DC: Army Techniques Publication
Levine, David M.; Stephan, David F.; Szabat, Kathryn A. (2017). Statistics for managers using Microsoft excel eighth edition. Boston, MA: Pearson
Murphy, Jr., Paul R.; Knemeyer, A. Michael (2015). Contemporary logistics eleventh edition. Saddle River, New Jersey: Pearson
List of Figures:
Figure A: Percentage of Shipments in First 5 Months of Year
Figure B: Warehouse Costs (Per Shipment)
Figure C: 2017 Budget Information by Warehouse
Appendix