Introduction
Champion X (CX) manufactures, sells, distributes, and services oilfield chemicals. The products are stored and delivered in portable tanks, collected after being emptied at the clients’ sites. Currently, over 2400 tote tanks are in circulation, with the company owning a small proportion while the majority is rented. A recent inventory revealed that over 650 tanks were unaccounted for, or 27% of all. Addressing the loss of tanks is critical, as their loss results in additional financial costs for the company.
Current Supply Chain Structure
Currently, CX relies on an integrated supply chain, with products delivered by the venture’s private fleet and a third-party carrier, Action Access, which provides cleaning services and pick-ups and deliveries (AA). Another company, Hoover Circular Solutions, a tote tank manufacturer, has offered CX a package deal of delivery, pick-up, and cleaning. Although the offer is attractive, it is recommended that CX consider giving up the integrated supply chain approach in favor of in-sourcing logistics. The proposed solution offers substantial financial benefits and can help address the issues of tote tank loss, preventing the company from suffering additional economic losses.
Financial Implications of Tank Ownership
Currently, CX owns a small proportion of tote tanks, most of which are rented. Approximately 10% (240 items) of all tanks are owned by Hoover CS, with a rent price of $1/day/tank. Thus, CX pays $240 daily rent to Hoover CS, with an annual rent of about $87,600. Hoover CS is a leading manufacturer of tote tanks for chemical storage and transportation (Hoover CS, 2023). The proposed all-inclusive price for delivery, pick-up, and cleaning of tanks offered by Hoover CS is $4.1 million annually. The price is based on the maximum total tank population of 2600 totes. Currently, AA charges CX a flat rate of $150 per tank cleaning and storage, translating into $360,000 per fleet of 2400 tanks per cleaning.
Concerns with Hoover CS Offer
The Hoover CS offer presents several disadvantages, with many questions arising. Therefore, CX should not consider the option further if the company fails to provide satisfying solutions. From the wording of the offer, it is still being determined whether the rental cost is included in the all-inclusive price. In addition, whether the venture proposes to supply all 2600 tank fleets is still being determined. With just 10% of CX tanks owned by Hoover CS, accepting the deal is no financial benefit.
In addition, the proposal does not specify which party bears the risk of loss. Currently, CX pays for the lost totes at an average fee of $1500 per tank. With over 650 tanks missing, the company’s financial loss can be estimated at nearly $1 million. Considering that 90% of tanks are owned by CX or rented from other businesses, the proposed offer will likely increase the company’s operational costs if the risk of loss is expected to be on CX. Moreover, total tank fleet expansion is not considered in the offer.
Limitations of Current Logistics Services
It should be noted that although the services provided by AA are inexpensive, the company needs more offloading capabilities in terms of equipment and expertise. Thus, AA delivery is slow, with current shares of deliveries of 20% in winter and 50% in the summer. It is believed that Hoover CS will subcontract AA to deliver, pick up, and clean tote tanks while providing maintenance and inspections. Overall, the Hoover CS offer is financially disadvantageous to CX and is unlikely to increase revenue or effectively address the loss of tanks.
Recommendation for In-House Logistics
As CX’s primary goal is to improve logistics management and decrease the loss of physical assets, the company is making a complete switch to in-house logistics with automated route planning. Furthermore, the desired state incorporates GPS tracking for company assets. These changes will present substantial financial benefits for the company. CX should view the delivery and maintenance of tanks as the core business function. Logistics insourcing allows centralized logistics operations management and decreases dependence on third parties (Silva et al., 2019).
Furthermore, it increases visibility and control over all operations. The company is well-prepared to transition to in-house logistics, with a small private fleet of delivery vehicles available. Considering the narrow client base and the time tanks stored at customer sites, the company can switch to an in-house logistics scheme without additional equipment investments. This supposition is supported by the fact that the company fleet, rather than AA, makes up to 80% of deliveries in the winter. However, it is recommended that CX hire a logistics manager to optimize delivery routes.
GPS Tracking for Asset Management
Furthermore, the company should consider switching from barcode to tank tracking to GPS tracking. Although GPS is a more expensive option, it will allow a notable decrease in lost tanks, resulting in a total fee reduction for lost totes. Thus, Radio Frequency Identification (RFID) technology or GPS is recommended to track company property and rented assets. According to Faler and Modi (2019), using GPS for asset tracking is associated with a positive return on investment (ROI) in the first year of implementation. Moreover, GPS and RFID data can be used to optimize delivery routes and contribute to improving delivery efficiency.
Financial Impact of Proposed Changes
Considering the proposed changes, the financial impact on the company will be substantial. The significant investment required is the purchase of tracking devices for tanks, with costs estimated at $0.25 to $300 per tag, depending on the selected option (RFID or GPS) (Rowe, 2023). Thus, the maximum investment is gauged at $720,000 per 2400-tote fleet. Considering the potential risk of a nearly $1 million loss cost for 650 tanks, the investment is highly beneficial for the company. It will positively impact the bottom line, preventing further financial losses.
Benefits of In-House Logistics
The choice of in-house logistics will translate into enhanced organizational efficiency and customer satisfaction. Establishing a dedicated logistics department and automating delivery route construction is expected to result in timely and accurate order fulfillment and enhanced individual and total cycle times. Thus, the proposed measures will address one of the leading customer criticisms faced by the company: lackluster delivery service.
The improvement in delivery quality is unlikely to be reached with the deal offered by Hoover CS, as the venture is expected to outsource the logistics operations to AA. Insourcing logistics is expected to help the company improve desired metrics such as order accuracy, timely delivery, productivity, and capacity utilization (Faler & Modi, 2019). Overall, it can be argued that the suggested change in operations aligns with the company’s vision and strategy. With increased satisfaction with services in the existing customer base, the company can expand its operations to reach the planned revenue growth of 5%.
Conclusion
In summary, CX faces the central problem of lost physical assets, rented and belonging to the company, which is associated with substantial financial losses. Furthermore, the customer base needs to find the delivery service satisfactory. Therefore, the company should opt for in-house logistics and RFID or GPS tracking of physical assets to centralize logistics management and gain complete control over the operations. This approach will allow optimized delivery, reduce financial losses from losing tote tanks, and enhance customer experience.
References
Faler, E., & Modi, S. (2019). Cost benefits analysis of container tracking for the automotive supply chain. Center for Automotive Research. Web.
Hoover CS. (2023). Standard 350 Gallon IBC. Web.
Rowe, A. (2023). RFID asset tracking guide 2023. Tech.co. Web.
Silva, L. E., Doratiotto, K., & Vieira, J. G. (2019). Outsourcing or insourcing logistics activities: A Brazilian case study. International Journal of Integrated Supply Management, 12(3), 167-192. Web.