Many businesses have a challenge, especially concerning logistic procedures. For instance, there is always a problem of comparing the costs against the benefits of a process. For any business, there is always the need that they choose only those projects that have maximum benefits and minimum costs. This fact, therefore, means that a business only considers viable that project that will benefit it at the lowest operational costs.
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In this work, there is an analysis of the decisions concerning a firm called Gorman Marketing Company, which is a Polish firm that offers transportation services to customers on goods purchased. In this particular case study, the firm is faced with the problem of choosing between buying new delivery vans or sticking to the old system. The work will, therefore make a decision for the company, recommend that best practices, and highlight additional efforts that would make the process viable.
Summary of the Case Study
The company owns eight warehouses and has plans of adding two new ones in cities across Poland. The original warehouses are each 600 square meters, and the new ones will be about 1000 square meters. There were 2-7 people employed at each of the warehouses to facilitate the process of ordering, which they did manually through soliciting. There was also a sales manager placed in charge of each group of salespeople. The manager was in charge of supervising the people placed under him.
He also collected small payments from the customers who paid on credit and whose credit period had extended beyond the 14 days in the agreement. The manager was particularly important because of the consideration that about 60% of the transactions occurred on credit.
The ordering process of the firm initially involved the salespeople employed looking for orders from customers on pre-printed forms that ensured they only sold items that were at the store. A typical ordering system could deliver between 15 and 20 items at a total cost of 300 PLN. One delivery carried 18 separate boxes. Orders placed on a given day were delivered the next day because of the difficulties in the packing and finalization of the process.
The process of loading the vans took about 90 minutes while as much time as possible was spent on the process of sorting out the orders according to their destinations. Each of the warehouses was equipped with one delivery van except for Warsaw, which had two vans and Gdynia, which had a total of three vans. The vans had a capacity of between 10 to 12 square meters and made 25 deliveries per week.
The proposed new delivery process would require that the company buys new vans that had a larger capacity than the older ones. For this case, the new vans would have a capacity of between 15 to 20 square meters but would cost the company about 82500 PLN each. The new vans would give the drivers a chance of organizing the orders at the time of packing. There was also a proposal that the firm adopts a bucket system, which had the capacity of 30 cubic meters and the vans would complete 36 orders per day.
All the buckets to be used in the process will cost the firm a total of 1500 PLN, fuel and other expenses will cost the company will cost 200 PLN. The corporation will also spend 650 PLN on the salaries of workers. Additionally, cars depreciate completely after three years and the current vehicles have one year before they completely depreciate.
Should The Company Purchase New Vans?
The question concerning whether or not the company should purchase new vans depends on the analysis of the benefits against the costs involved. Like mentioned in the introduction, the project will only be viable if it will deliver higher economic benefits for the company than it will cause the firm to spend. According to the case study, there are a number of overhead charges, which this analysis will consider as being uniform for both the new and the old delivery systems. From the case study, charges such as salaries and other costs will remain the same, which means that the cost-benefit analysis of the process will not consider them.
The Cost-Benefit Analysis of the Old Process
There were a total of nine vans that served the eight warehouses, and each of them costs 31500 PLN
Therefore, all vans cost 9*31500 = 283,500PLN
The employees’ salaries amount to 650 PLN, which means that each one of them receives;
=650/64 (there are a maximum of 8 drivers and 7 other workers for each facility)
10.16 PLN =81.25 PLN per month
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Therefore, it will cost the company about 252,650 PLN to run the old system.
However, there is a need to consider that the company has only one year left before all its vans depreciate fully, which means that it will have to spend 252,0000 on purchasing new vans.
The Benefits of the Old System
The vans fit in the space according to the old dimensions of the company warehouses, which means that there is no need for expanding the warehouses.
The vans have the capacity of delivering 20 items in a day, which contributes 300 PLN for the company from each van. Therefore, all the vans will contribute;
=2700 PLN per week, which means that the company will get 10800 PLN per month (2700*4).
The net earnings for the company for each month is given by;
=Gross earnings-expenses on salaries and associated costs (for this case, salaries and fuel are the main constituents)
=9950 PLN per month
Cost-Benefit Analysis of the New System
If the company was to buy new vans, the constituents of the total would be computed as follows;
Additionally, the company will be required to build two more warehouses or expand the existing ones because the new vans are larger than the old ones and will not fit in the spaces available. However, the case study did not give the costs of repairs, which means such costs will remain disadvantageous for the company. Additional expenses will be the salaries, and in this case, there will be two more drivers and because of the additional two vans. Using the ratio computed in the first case, there will be about 80 workers at the company. The additional numbers will be the original 64 from earlier computations and two more drivers and 14 other workers for the two new warehouses
Each worker earns 10.16 PLN, therefore, 80 workers will earn,
80*10.16 =812.8 PLN
The company will therefore spend 656000+812.8 PLN on the vans and the salaries. There is a need to consider that the cost of warehouses is not included in this case.
There will be more vans with a capacity of transporting more cargo for the same unit of time. For instance, there will be 10 vans, and each of them will make 36 deliveries per week. Therefore, the gross earnings of the process will be;
=2700 PLN per week=
=12000 PLN per month (3000*4 weeks).
The net earnings for the firm will be;
12000-812.8 (gross earnings-expenses in this context).
However, the number of items delivered is approximated because of the absence of information concerning how much cargo they can carry. Therefore, there is only reasoning that a large vehicle will most definitely carry larger cargo. There will be more space in the vans that will give workers an easier time in the loading and offloading the cargo.
The Bucket System
The bucket system will help the drivers to have an easy time offloading cargo from the vans to their respective customers because of the labelling involved. However, its advantages are more than the advantages. For instance, it will cost the company 1500 PLN for their purchase, which will add to the expenses of the firm regardless of the delivery system adopted. The method will also reduce space available for packing of cargo because it requires more space.
The cost-benefit analysis completed in the preceding section indicates that the second option will give the company an added advantage because it will fetch 10987.2 PLN for the company in revenues per month compared to the older one, which will only deliver 8750 PLN. however, there is a need to consider that the vans have only three years before their value will depreciate maximally. The old system has one year left before the vehicles expire. In the entire period, the vans will generate 105,700 PLN, which will not be enough to buy new vans at once after the existing ones become obsolete.
For the three years before they become obsolete again, the vans shall have contributed 317100 PLN. On the other hand, the new vans will generate 131846.4 PLN, which is also not sufficient for the purchase of new ones. The vans shall have to generate about 395539.2. However, if we were to consider the three years for which the vans will be operational, there will be a discovery the old system will offset the cost of buying new vans and leave a net income of 65100 PLN (317100-252000). In comparison, the new vans will generate a loss of 260460.8 PLN (395539.2-656000). Therefore, the old system will be more feasible in the next three years of the company.
Recommendation That Will Help the Company and Their Justification
There are a number of recommendations that will help the company maximize its benefits against the costs of operation. For instance, the company should consider expanding the warehouses to accommodate more vans. Should that be done, the case will help the company to purchase more vans of the smaller size, which generally help in increasing the amounts of deliveries. For example, if the floor area of the warehouses expanded from 600 square meters to the expected 1000 meters, there will be a chance of packing at least a few other vans, say one more. If that will be done;
There will be a total of 18 vans at the company, which will double the revenues of the company.
=19900 PLN for one month.
Additionally, the company will reap a total of 238800 PLN for the one year before the older vans become obsolete completely. At that time, the company will have at least 9 vans with two more years to wear out. In such a case, the vans will allow the company to recollect before replacing them.
Another recommendation will be to improve the logistics of ordering at the company so that there would be at least five orders per day, which would mean the following;
There will be five times the deliveries made (9*300*5)
=13500 PLN per week
=54000 PLN for one month
In such a case, the business will make;
=19440000 PLN for three years.
For this case, the company will have enough money to buy more vans and replace the old ones as soon the time comes.
Additional Information for the Company
There is a problem at the company considering the processes of collection of money and administration. First, there are computers in each of the warehouses, but they are not interconnected, which means that there are difficulties with monitoring collection of orders as well as for the management to participate fully in the regulation of the process. The computers will also help the company in the process of ordering.
For instance, the company can allow customers to place their order online. If that is done, there shall be a reduction in the time spent by the employee of the company in physically ordering using manual procedures. Conventionally, the company needs to improve on the process of collection of orders. Another way of doing so and not necessarily using the internet would be increasing the number of collection centres. The company can set up subsidiary centres that will ensure it collects the orders and transfers them to the nearest warehouses per day. If the company does so, there will be a chance of having daily deliveries because of the smoothness in the transition periods.
This analysis has revealed a number of issues concerning the logistics procedure of Gorman Company. For instance, the company uses obsolete technologies in the collection and delivery of orders, which calls for modernization of such processes. The institution also faces a problem of management because each of the offices is not connected by computer or telephone. In this respect, the work has recommended that the management adopts a better system of management that will ensure there is the coordination of activities that will increase transparency in the collection and usage of company resources. The biggest task of this work was to advise the company concerning whether or not to buy new and bigger delivery vans.
The recommendation was that the institution should not buy new and larger vehicles. The rationale for the recommendation was the fact that new vans, apart from requiring more funds to purchase, required more space, which was also an additional cost. The new van option was also not viable for the company because the period of obsoleteness would catch up with the company before the project generates enough money that would buy others.