Number 1 Bdi Case

8/19/2019 Number 1 Bdi Case

1/19

Case Study: Brunswick Distribution Inc.

Foundations of Operations Management

Professor ei! Bis"op

#ennifer Fe!!inger

Morris $e!!y

%imot"y $itc"ing

&indsay Star

'!i (assin

1


2/19

5.1 Situational Analysis

#ames Brunswick "ad been emp!oyed at a ma)or freig"t company out in C"icago. *is e+perience

main!y came from t"at senior !ogistics position t"at "e "e!d wit"in t"at !eading distribution firm,

and c!ear!y it was a!! "e needed to form a company suc" as Brunswick Distribution Inc. '!t"oug"

"e was not a!one in any of t"is, Frank Pu!aski, -ice President of Operations, and &ew #ackson,

-ice President of &ogistics, were rig"t by "is side t"e entire time, since co!!ege, to be e+act.#ames Brunswick acuired t"e idea for Brunswick Distribution Inc., so wit" Frank, and &ew, in a

s"ed at "is grandmot"ers/ residence, p!us a sing!e !oan from t"e bank, t"ey c"anged t"eir !i0es

fore0er.

Brunswick Distribution Inc. or B12S3IC$ DIS%1IB2%IO IC., uti!i4es more t"an )ust a

network of manufacturers to imp!ement resa!e strategies, getting products from manufacturers to

retai!ers on time, and efficient!y. Simp!y put, t"ey are c!assified as sing!e distributors. %"eir

customer base spans from a!! o0er t"eir !oca! en0ironment. 3it" a focus on ua!ity and

producti0ity, in and around t"e city known as one of t"e agricu!ture capita!s/ of t"e wor!d,

Mo!ine, I!!inois "as appro+imate!y 56,789 resident/s current to 7;7 statistics.

income is a!most a!ways

beneficia!, e0en if it wasn/t muc".

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3/19

• Ot"er retai!ers may inuire about t"eir products direct from manufacturers or anot"er distribution

company if B12S3IC$ DIS%1IB2%IO IC. !oses competiti0e edge wit" t"eir financia!

resources.

• 3it" two distribution c"anne!s, and on!y two, a new strategy wou!d be t"e inte!!igent option.

• Direct competition decreased o0er t"e past fi0e years, and w"i!e Brunswick assumed t"e market

was going to bounce back, yet it sti!! ne0er "as.

• %"e orders are inconsistent wit" t"e market nowadays, as it does not pertain to t"e data in t"e

past. '!t"oug", t"is e0er=c"anging market means t"eir dependence on pre0ious "istory/s data and

its re!iabi!ity is ob)ectionab!e.

• Manufacturer reuires t"e customers/ orders in ad0ance, yet wit" t"e way t"e c!ients p!ace t"eir

orders, e+pecting an appro+imate ?=9 day, and up to ;7 days in ad0ance, is too muc".

B12S3IC$ DIS%1IB2%IO IC. is ob!igated to absorb@pick up t"e s!ack of t"e cost.

• In t"e past, B12S3IC$ DIS%1IB2%IO IC. maintained a safety stock of ;7 weeks of

in0entory wit" a A system and min@ma+ !e0e!s at week ? and > a!t"oug", genera!!y t"e targetturno0er of in0entory s"ou!d be roug"!y between and ; weeks. 's a resu!t, t"eir strategy

concerning in0entory turno0er must be en"anced to fit accurate and efficient standards, and

uick!y, as t"ey are !osing opportunities at an intense rate.

• %"is unnecessary strain on B12S3IC$ DIS%1IB2%IO IC./s financia!s "as been

consistent!y o0erbearing, common!y demand payment different!y, !ea0ing anyt"ing e!se t"at is

reuired to be acuired t"roug" a!ternati0e met"ods> "owe0er, due to t"eir situation, any uote

wi!! be a "ig"er payment on anyt"ing t"ey borrow. ' possib!e so!ution is to figure a common

date between t"e retai!ers and manufacturers/o Manufacturers: B12S3IC$ DIS%1IB2%IO IC. "a0e 6=? days to

pay.o 1etai!ers: Payment is due wit"in 58=8 days.

• %"e ;8 day gap between eac" cut off time e+ists, !ea0ing it to B12S3IC$ DIS%1IB2%IO

IC. to e+"aust t"eir on!y option of t"e credit faci!ity.

• %"e budget must be a more cost=efficient structure, w"ic" is concentrated on t"e manufacturers

and t"e retai!ers, keeping B12S3IC$ DIS%1IB2%IO IC. in t"e midd!e as t"e direct !ink.' "appy medium must be found t"at doesn/t reuire B12S3IC$ DIS%1IB2%IO IC. to pick up t"e s!ack as it is an immense burden, and massi0e reuirement on t"eir financia!s. 2n!esst"ey find a stake"o!der or ot"er means t"ey wi!! wind up in t"e same situation as t"eir

competition.

5.2 Problem Statement3


4/19

3"at can #ames Brunswick, C


5/19

Brunswick Distribution Inc. B12S3IC$ DIS%1IB2%IO IC.E finding itse!f wit" rising

sa!es re0enue a0eraging a0erage annua! increase but dec!ining et Income o0er t"e

preceding t"ree years must decide between an o0er"au! of t"eir e+isting operation by bringing in

new euipment and operating tec"niues or e+panding into a new faci!ity offering greater

opportunities for increased sa!es. 3"en reac"ing a decision #ames Brunswick must take a

number of factors into consideration, not on!y are t"e financia! metrics important t"e current

state of t"e marketp!ace must be e0a!uated and B12S3IC$ DIS%1IB2%IO IC./s p!acewit"in t"at market. 3it" regiona! competitors going out of business B12S3IC$

DIS%1IB2%IO IC. "as e+perienced a bump in sa!es but #ames Brunswick rea!i4es t"is is

temporary and wou!d !ike!y 0iew t"ese companies c!osing as a warning of sorts to be

conser0ati0e in "is p!ans for B12S3IC$ DIS%1IB2%IO IC. 3e!! aware of t"e financia!

position of "is company Brunswick must consider t"at !aying out !arge amounts of cas" does

come wit" risk, especia!!y w"en t"ese funds are borrowed. %"e fo!!owing c"arts and statements

wi!! s"ow t"e possibi!ities and imp!ications of t"e fina! decision Brunswick wi!! u!timate!y make.

DuPont Analysis

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6/19

Fig 8.6.;

Current ew

Infrastructure

C"ange Basic

'1@'S

C"ange Fu!!y

Integrated

'1@'S

C"ange

1O< 6.G 7. Down G. 2P 5.5 2P

1O' 6.7 7.5 Down 5.9 2P 6.5 2P

PM ;. 7.6 2P 6.6 2P 7.7 2P

%'%O ;9.? ?6.G Down G.9 Down 95.; Down

ROE (Return on Equity)

2sed to measure t"e profitabi!ity of company w"en compared to t"e in0estment into t"e

company.

3"en !ooking at t"e outcomes after a!! inputs "a0e been made in regards to operations of

B12S3IC$ DIS%1IB2%IO IC., 1O< ana!ysis fig. 8.6.;E s"ows t"at t"e Basic '1@'S

wou!d pro0ide t"e greatest increase in 1O< w"i!e t"e new Infrastructure wou!d see a dec!ine in1O< at !east in t"e s"ort term. 3it" a growing company it wou!d be assumed t"at a "ig"er 1O<

is preferab!e.

ROA (Return on Assets)

%"is metric is used to s"ow t"e profitabi!ity of a company in re!ation to its assets or "ow we!! t"e

company t"e company uses its assets to generate income.

2sing t"is metric we see t"at t"e ew Infrastructure brings down t"e ratio meaning t"at t"e

B12S3IC$ DIS%1IB2%IO IC. wou!d see a reduction in t"eir return on in0estment t"is

wou!d !ike!y c"ange o0er t"e !ong termE w"i!e an increase is s"own wit" bot" t"e Basic '1@'S

6.5E and Fu!!y Integrated '1@'S 5.9E wit" t"e Fu!!y Integrated "a0ing a "ig"er increase.

P! (et Pro"it !ar#in)

%"is metric is used to s"ow "ow muc" of sa!es do!!ars a firm retains.

%"is metric is one t"at B12S3IC$ DIS%1IB2%IO IC. wi!! need to address as it is one of

key issues t"at #ames Brunswick is concerned wit". 3it" a!! options et Profit Margin see

increases, wit" t"e Fu!!y Integrated '1@'S wit" t"e greatest gain at 6.6 wit" t"e Basic '1@'S

at 7.7 and t"e ew Infrastructure at 7.6. 3it" t"is information it is important to a!so statet"at an increase in PM is not a!ways an indicator of increased net income. et Income wi!! be

addressed !ater in t"is report.

$A$O ($otal Asset $urno%er)

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Fig. 8.6.7

Current ew

Infrastructur

e

C"ange Basic

'1@'S

C"ange Fu!!y

Integrate

d '1@'S

C"ange

Current

1atio

7.? 6. 2P 7.? 2P 7.?6 2P

In0entory

%urns

6.7 6.6 2P 6.; DO3 6.; DO3

3C to

Sa!es

6;.? ?8.8 2P 6;.? DO3 6.9 DO3

Fi+ed

'sset

%urno0er

8?.6 ;6.? 2P G.; 2P ;8.8 2P

'urrent Ratio

Is a metric t"at measures a companyHs abi!ity to pay s"ort=term ob!igations.

%"is metric is an important aspect of t"e decision making process, wit" regiona! competitors

c!osing up s"op and concerns regarding B12S3IC$ DIS%1IB2%IO IC is often cas" poor

positioning. '!! of t"e options t"at are being considered reuire an increase in debt t"at wou!d

!ike!y reuire an increase in sa!es or reduction in e+penses to accommodate. 3it" a!! options it

s"ows t"at an increase can be met fig 8.6.7E wit" t"e ew Infrastructure increasing t"e assets of

t"e company and increasing t"e new cas" coming in, t"e greatest increase is seen "ere wit" a

new ratio of 6..

n%entory $urns

%"is metric is used to s"ow t"e number of times turns per year.

#ames Brunswick e+presses a desire to "a0e an in0entory turn idea!!y at wit" a target of ;.

Current!y t"e company is seeing a turno0er of 6.7 turns. ' !ow ratio t"at t"e company is

e+periencing is indicati0e of e+cess in0entory broug"t on by !ow sa!es. 3"en ana!ysing t"e

c"anges in eac" option on!y t"e new infrastructure pro0ides an increase a!t"oug" margina! and

not to t"e degree t"at Brunswick desires. It appears t"at despite a pro)ected increase in sa!es at

t"e new faci!ity t"e increase in cost of goods so!d p!ays a significant factor. Bot" '1@'S options

see a reduction in in0entory turns to 6.;, t"is wou!d be !ike!y caused again by t"e increase in cost

of goods.

' to Sales (or*in# 'a&ital to Sales)

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9/19

%"is metric s"ows "ow efficient!y a company uses it working capita! to generate sa!es.

2sing t"is metric B12S3IC$ DIS%1IB2%IO IC. sees on!y t"e ew Infrastructure

yie!ding positi0e resu!ts wit" 3orking Capita! increasing to ?8.8 compared to t"e 6.9 and

6;.? for t"e Fu!!y Integrated '1@'S and Basic '1@'S respecti0e!y.

Fi+e, Asset $urno%er

%"is metric is used to s"ow "ow we!! in0estments into t"e companies fi+ed assets trans!ate into

increases in net sa!es by comparing net P!ant, Property and


10/19

Strengt"s, 3eaknesses, Opportunity, %"reats S.3.O.%E

' S.3.O.% ana!ysis is a point form compi!ation of strengt"s, weaknesses, opportunities and

t"reats facing an organi4ation. ' S3O% ana!ysis is used to "e!p an organi4ation understand

itse!f.

' S.3.O.% ana!ysis "e!ps an organi4ation de0e!op a 0ision and strategy for future de0e!opment.

' S3O% ana!ysis !ooks at interna! and e+terna! factors and pro0ides information onorgani4ations strengt"s and weaknesses in re!ation to opportunity and t"reats.

Stren#t-s

Four (ears good growt" (internal)

Determination (internal)


11/19

$-reats

ew competition

et earnings dec!ine

In0entory demand c"ange

&oss of e+isting c!ients

Payments from c!ients


12/19

PES$ Analysis

Pest ana!ysis is concerned wit" t"e e+terna! inf!uences on business, t"e acronyms stands for t"e

Po!itica!,


13/19

5.3 /ualitati%e Analysis

3"at are t"e affects t"at eit"er option wi!! "a0e on t"e firm in t"e !ong run3"ic" option is seeming!y better for t"e firm

3"i!e &ew "as proposed "e t"inks stream!ining t"e system is a better option, Franks suggestionis to in0est in a new infrastructure.

'urrent 0rea*,on

n%entory

%"e system is not automated to take orders, and as t"e current time it on!y works t"roug"two c"anne!s: p"one and fa+. %"ey need to upgrade t"eir system so t"at t"ey are readi!ya0ai!ab!e w"en t"e time comes to dea! wit" a !arger sca!e of demand.Some points are as fo!!ows:

• 2ncertainty regarding future sa!es.

• Dependab!e de!i0ery@s"ort de!i0ery time

• ot enoug" space wit" !ow grade in0entory p!anning t"ey "a0e now, need better

in0entory system in t"eir ware"ouse.• Di0ersity in products

• *ig" in0entory as !ast minute modifications due to retai!er/s orders.

Current!y BDI is seeing an in0entory turno0er rate of 6.7 turns. 3it" t"e option toimp!ement a new infrastructure deri0es a !ow in0entory ratio of 6.; turns, it seems t"e ot"eroption is a better so!ution, yet an e0en !ower ratio is produced w"en t"e ca!cu!ations for t"eimp!ementation of a new in0entory system is comp!ete.

Dri%ers Facilities

3"en a customer creates an order, Brunswick t"en purc"ases t"e products from t"e

manufacturers, storing t"em in t"eir own ware"ouse. %"is system was working fine w"en BDI

was on!y dea!ing wit" !ow end products> "owe0er, t"ey/0e recent!y b!ossomed into dea!ing wit"on!y "ig" end products. Current!y "e is trying to decide w"et"er a !arger ware"ouse is more

beneficia!, in comparison to an updated in0entory system.

3it" an entire!y new faci!ity, t"is can create more space for e+pansion, and sti!! imp!ement t"enewer system, wit" a possibi!ity to use more t"an two c"anne!s of communication, suc" as aninternet=based ordering system.

Sourcin#

ot"ing is outsourced.

$rans&ortationFrom t"e ware"ouse to t"e retai!er, BDI as t"e distributor is responsib!e for t"at s"ipment.

So w"at "appens if neit"er t"e manufacturers, nor t"e retai!ers, want to be t"e one to "and!e

t"e s"ipments It is )ust anot"er situation t"at fa!!s in Brunswick/s !ap.

n"ormation

%"e information t"ey "a0e is !imited, t"ese information prob!ems tend to !ead to situationsand "a0e a negati0e effect on BDI. %"ese prob!ems can !ead to de!ays in de!i0ery as we!! 's0arious pena!ties, for if t"eir "istorica! data is t"is unre!iab!e as t"e market continues to s"ift

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14/19

so many ways since BDI opened, t"ey wi!! ne0er be ab!e to correct!y forecast w"at may ormay not "appen. 1e!ying on past data to predict future sa!es tends to !ose its credibi!ity because t"is market is ne0er t"e same.

0asic le%el Full im&lementation

4es Plan Fran*s Plan

L. mi!!ion for fu!!y integrated system L7 mi!!ion propertyOperating and training costs of L. mi!!ion

per year

L; mi!!ion for p!ant and euipment

Sa0ing t"em in s"ipping and in !abor,

appro+imate!y L7,88,;7

Sa0ings of L8,;, end resu!t wou!d end

up increase profits eac" year, yet cost BDI

appro+imate!y L;6,G;?,65

%"is option a!so increase !iabi!ities, and

adds more stress if t"ere/s sti!! a !ack of

space in ware"ouse.

%"is option is better for BDI in t"e !ongr

run and not"ing wou!d need to be done in

t"e future, because t"ey wou!d be prepared

for "ig" demand, increase in capacity

reuirements and suc".

Bot" basic and fu!! systems wou!d actua!!yend up decreasing net income

appro+imate!y 5=G mi!!ion do!!ars for BDI.

%"is c"oice wi!! decrease net income aswe!! by appro+imate!y L mi!!ion, due to

more cost of goods so!d, w"ic" is not e0en

a bad t"ing.

Eac- Alternati%es ssues

4e ac*son an, a 0etter n%entory System Fran* Pulas*i an, a e n"rastructure

• ew in0entory system is mandatory.

2nnecessary items must be managed, t"e

2n=organi4ationegati0ity

• ew faci!ity wi!! yie!d an increase to ?8.8

working capita!, compared to 6.9 and

6;.? in pre0ious situations.

• De!i0eries at t"e current time, are not being

"and!ed in an order!y fas"ion, yet wit" better

system, t"ey can potentia!!y decrease

de!i0ery time from 8 days, down to 7 days.

• 's for transporting t"e goods, truck a0ai!abi!ity

based upon !ocation of new faci!ity, gi0e

feedback to c!ient on t"eir own de!i0ery times,

wit" t"e option to 0iew t"e sc"edu!e,

minimi4ing risk of comp!aints.

• Materia!s and in0entory cost wou!d increase

by ?.

• Maintain an integrated faci!ity wit" more space

t"an w"at t"ey need rig"t now, but t"is wi!! be

better for t"e future.

3"at if sa!es increase, and demand increase 're t"ey going to attempt to maintain a sma!!

ware"ouse or )ust "a0e to re!ocate in t"e future 3it" t"e opportunity to centra!!y !ocate

t"emse!0es, as we!! as mo0e to a superior, as we!! as an impro0ed faci!ity, isn/t t"at t"e more

producti0e option, one inc!uding future p!anning as we!!

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16/19

A,%anta#es

%"e company wi!! remain a stab!e distributor in t"e distribution business.

%"e company wi!! maintain t"e respect t"ey "a0e of t"eir e+isting customers.

Operating costs s"ou!d decrease if tig"ter contro! is imp!emented wit" t"e

in0entory contro! department.

Disa,%anta#es

%"e company may not be ab!e to compete wit" !arger companies.

%"e company may not be ab!e to sur0i0e t"e recession wit" on!y a sma!!er number

of retai!ers to se!! to.

%"e initia! cost to imp!ement t"e system cou!d strain t"e company financia!!y.

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17/19

5.5 Recommen,ations an, Action Plan

Our recommendation is to c"oose '!ternati0e 6:

4eis ac*sons recommen,ation is to streamline t-e or,er "ul"illment system. 8e ants to

utili9e a cost e""icient ,istribution system. 8e ants to im&ro%e it- t-e in%entory control

,e&artment to *ee& only &ro,ucts t-at are nee,e, an, ,is&ose o" t-ose t-at are not nee,e,.

0y ,oin# so t-e e+istin# customers ill be better an, more e""iciently ser%e,.

&ewis #ackson wants to imp!ement a fu!!y integrated center wit" automated systems, impro0ed"and!ing euipment, information tec"no!ogy w"ic" is specifica!!y designed for t"e distribution business. %"e new system wou!d euip t"e company wit" an automatic storage and retrie0a!system. '!! t"ese impro0ements cou!d be done using t"e e+isting ware"ouse faci!ities w"ic"wou!d e!iminate t"e cost of a new ware"ouse.

%"e initia! cost of t"e fu!!y integrated system wou!d be mi!!ion do!!ars but t"e company wou!damorti4e t"is o0er a fi0e=year period. %"is wou!d e!iminate a !arge in0estment up front and not put a financia! strain on t"e company. %"e operating costs wou!d be L.. mi!!ion do!!ars year!yand t"is cost wou!d be considered fi+ed e+penses. %"is system wou!d "a0e a !arge cost sa0ingsfor t"e company.

' fu!!y integrated system wou!d sa0e t"e company ;? percent in direct s"ipping and !abore+penses. '!! sa0ings t"e company makes wou!d be di0ided eua!!y between s"ipping and !abore+penses. %"e company cou!d opt to finance t"is o0er a fi0e=year debt p!an at a rate of ; percent.

%"is option works because t"ere are !arge sa0ings to be made from more efficient "and!ing oforders and impro0ed ware"ouse communication. %"ere wou!d a!so be a sa0ings on s"ippingcosts. %"is option is a!so a safer c"oice because of initia! cost !ayout. During a recession t"is isan important factor.

'ction P!an ; 3eek ; Mont" 6 Mont" ? Mont" ; (ear 7 (ear 5

(ear

8

(e

1esearc" 'S@1S

options

N

'S@1S decision

and order

N

'rrange financing N

De!i0ery and

insta!!ation of

euipment

N

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18/19

%raining and

imp!ementation

N


19/19

5.: 'onclu,in# 'omments

Brunswick Distribution Inc. and its founder #ames Brunswick are facing an issue of dec!ining net

income despite rising sa!es coup!ed wit" c"anges in t"e market p!ace inc!uding competition

c!osing t"eir doors and consumers c"anging t"eir buying met"ods. 3it" competition c!osing

t"eir doors and c"anging buying met"ods #ames Brunswick must take care in making t"e fina!

decision on w"ic" a0enue to proceed, wou!d e+pansion !ead to potentia! fai!ure, wou!d t"e status

uo be t"e best measure or wou!d stream !ining !ead to better operations 3it" market

uncertainty it wou!d be ad0antageous to simp!y make t"e company run smoot"er and more

efficient. By e+panding t"e business Brunswick faces t"e possibi!ity of taking on too muc" debt

and u!timate!y "a0e t"e business fai! due to !ack of cas" f!ow, wit" t"e status uo a continuation

of s"rinking net income cou!d cause t"e business to fai!. ' stream!ined, a!t"oug" does reuire a

financia! commitment, offers an opportunity for Brunswick Distribution Inc. to reduce costs

w"i!e becoming a more efficient operation w"i!e sti!! !ea0ing t"e option for e+pansion at a !ater

date. %"e former Prime Minister of India #aw"ar!a! e"ru once stated Ob0ious!y, t"e "ig"est

type of efficiency is t"at w"ic" can uti!i4e e+isting materia! to t"e best ad0antage. 2sing t"at!ogic it wou!d be in t"e best interests of Brunswick Distribution Inc. to use t"eir e+isting faci!ity

and impro0e on t"is a!ready successfu! business. 3it" an efficient system t"ere is to stop

Brunswick Distribution Inc. from being a greater success.

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Number 1 Bdi Case

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