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Rank Hovis McDougall Plc’s Distribution Consolidation Case Study

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Updated: Apr 26th, 2021

Introduction

Distribution is an activity within the logistics and supply chain management system. In layman’s language, logistics can be defined as a process of moving raw materials from the source to the manufacturing firm, undertaking the transformation process, and delivering the products to the end-users. Similarly, the council of logistics management defines it as a process of planning, “implementing, controlling the efficient and effective flow of goods from point of origin to the point of transformation process and finally the flow to the point of consumption by the end-users” (Wieland &Handfield 2013).

With so doing, conformity for the consumer’s orders is enhanced. Logistics is separated into two primary processes: these are inbound logistics and outbound logistics. Logistics, therefore, incorporates all activities related to; transportation, storage, material handling, production, planning, packaging, management of orders, purchasing, warehousing, and customer service. It is crucial and imperative for the logistics manager to plan and coordinate all these activities in order to enhance an efficient and effective logistics, and supply chain process (Wieland & Handfield 2013). A total cost approach system is adopted in order to ensure that cost efficiency is enhanced and that least resources including labor and materials are employed in the transformation process in order to enhance conformance to a customer’s specifications. The aim of this paper, therefore, is to analyze the case study for RankHovis McDougall PLC (RHM) while comparing the costs given in the contract proposals and making consultancy recommendations to RHM operations based on these proposals.

An overview of the Case Study

Rank Hovis McDougall PLC (RHM) is a leading food manufacturer in the United Kingdom with five operating divisions, the food services division is one of them. The case study, therefore, presents RHM Food Services division operations in the year 1991-1992. During this trading period, RHM had made divisional sales amounting to £ 250 million and the profit before interest and tax (PBIT) was amounting to £ 25 million. This constituted 25 percent of the entire group’s activities. The management of RHM was interested in reducing division costs by consolidating the distribution networks. A team of experts was, therefore, formed to evaluate this proposal by inviting distribution tenders from different companies. The company that wins the tender was to present a contract that would significantly reduce the distribution costs amounting to £ 7 million annually by 10 percent and also present an overall annual savings of not less than £ 500,000. The proposed consolidation of distribution networks was to be based on three businesses within RHM; these were Pasta food, RHM ingredients, and McDougall’s catering foods. The working team of experts initiated plans to foresee the proposed consolidation of the distribution system but later hires a consultant to analyze the contract proposals and make recommendations.

Spreadsheet for comparison (RHM operation versus the cost of contract)

The working team of experts gathered all the requisite data needed for evaluating the costs associated with the current distribution system of RHM operation. The spreadsheet, therefore, is based on this data. This compares costs associated with RHM operation and what the distribution companies have proposed as distribution costs in their contract proposals.

RHM OPERATION by region
North £(0000) South (£ 000) Total £ (000)
Transport 1,483 2,589 4,072
Warehouse 1,110 1,421 2,531
Total cost 2,593 4,010 6,603
PROPOSAL (COMPANY A)
OPTION 1
North South Total
Transport 1,284 2,089 3,373
Warehouse 918 1,650 2,568
Total costs 2,202 3,739 5,941
OPTION 2
Transport 1,284 2,020 3,304
Warehouse 918 1,812 2,730
Total costs 2,202 3,832 6,034
PROPOSAL (COMPANY B)
OPTION 1
North South Total
Transport 1,125,017 1,317,001 2,442,018
Warehouse 893,412 1,280,043 2,173,445
Total costs 2,018,429 2,597,044 4,615,473
OPTION 2
Transport 1,136,248 1,128,082 2,264,330
Warehouse 893,412 1,542,577 2,435,989
Total costs 2,029,660 2,670,659 4,700,319
OPTION 3
Transport 1,136,248 1,171,427 230,7675
Warehouse 893,412 1,803,357 2,696,769
Total costs 2,029,660 2,974,484 5,004,444

Consultants Recommendations to RHM

From a consultancy perspective, the evaluation of the proposed amalgamation of businesses within RHM Food Services division is imperative as it will enable RHM to award the tender to the company that provides the cheapest distribution alternative that, in the long run, will enable RHM to reduce divisional costs, especially those associated with distribution. Therefore, an option for merging three sub-divisions of businesses within the RHM Food Services division was considered as it would be a source of synergy power that will enable RHM to reduce costs and make an annual savings of £500,000. From the information above, the evaluation of the distribution system is to be conducted in both the Northern and Southern regions. Transport and warehousing costs associated with these two primary activities in the contract proposals are analyzed against those of RHM operation. In this analysis, it is factual that with all the proposals offered, there is a similarity in distribution strategies proposed in both the Northern and Southern regions. Therefore, the management of RHM Food Services would realize their objectives if they consider contracting Company B to offer distribution services as their alternative seems cheaper as compared to Company A’s proposal. Company B had presented three options in their contract proposal for distribution planning and strategy, while Company A had presented two options in their contract proposal.

From the analysis as illustrated in the spreadsheet above, Company A’s options and Company B’s options had annual savings, this is first without consideration of additional costs. It is calculated by deducting the respective total costs of both proposals from the total cost of the RHM operation as illustrated below.

Annual savings on cost= Total costs of RHM operation – Total costs of proposal options

The analysis creates a first impression that the Company B proposal is somehow cheaper as compared to the proposal by Company A. However, this is expected to change as there is additional information to be evaluated related to costs unspecified in the proposals submitted by both companies. After analyzing these costs unspecified in the contract proposals, it is clear that the costs of closure for current facilities after consolidation were amounting to £260,000 and £400,000 for Dunstable and Reading respectively. With these costs, Company A was to charge £73,000 per year for Dunstable while Company B was to charge £112,000 for Reading per year, with the charges based on a 5-year period. When submitting its contract proposal, Company B had included these costs in the first option but it was to charge an additional £ 65,000 per year for Dunstable in the second and third options respectively and an additional £ 100,000 for Reading in the third option, for a five-year period. The other costs unspecified in the contract proposals were start-up costs. Company A was to charge £ 56,000 for starting up the Northern depot and £87,000 for initiating a Southern depot at Northampton or either charge £101,000 for initiating a Southern depot at Luton. These start-up costs were to be on a reducing basis for a period of five years.

In its contract proposal, Company B did not specify the cost of sub-contracted transport which again was amounting to £1,092,000 per year. Moreover, it was also found that the cost of distributed operations of operating warehouses had been omitted in the contract proposals. These costs were estimated to be £ 899,000 every year if Company A was contracted and £ 748,000 every year for a contract with Company B. Incorporating these additional costs in the analysis of the total cost will enable the consultant to make appropriate decisions. The total additional costs due to the unspecified costs for the two companies are shown below: Total additional cost for Company A over a 5-year period is given by;

Cost of closing current facilities =£73,000×5-260000=£105,000 for either option 1 or 2

Start-up costs=£ (56×5+87×5)x 1000= £ 715,000 for option 1 and £ (56×5+101×5)x1000=£ 785,000 for option 2.

Distributed operations of warehouses=£ 899,000×5=4,495,000

Total additional cost for Company B over a 5-year period is given by;

For option 2- Cost of closing current facilities=£ 65,000×5=£ 325,000

For option 3- £ 325,000 and an extra £500,000 (£100,000x 5)

Cost of sub-contracted transport £ 1,092,000 x 5=5,460,000

Cost of distributed operations=£ 748,000×5=3,740,000

Therefore, the annual total additional costs for company A will be:

Option 1= £ ( 715/5 + 4495/5) * 1000= £ 1,063,000

Option 2= £ ( 105/5 + 785/5 + 4495/5) * 1000= £ 1,077,000

On the other hand, the total additional costs for Company B will be given by:

Option 1=£ 0

Option 2= £ ( 325/5 + 5460/5 + 3740/5 ) * 1000= £ 1,905,000

Option 3= £ ( 325/5 + 5460/5 + 3740/5 + 500/5 ) * 1000= £ 2,005,000

3.1 Costs of proposed contracts after factoring in unspecified costs

The total costs for Company A will be given by:

Option 1= £

(1063+ 5941) x 1000= £7,004,000

Option 2=£ (1077+ 6034) x 1000= £ 7,111,000

The total costs for Company B will be given by:

Option one remains the same with £ 4,615,473.

Option 2 = £ 1,905,000 + 4,700,319 = £ 6,605,319

Option 3= £ 2,005,000 + 5,004,444 =£ 7,009,444

Decision and recommendations

From the above calculations, it is clear that both proposals had annual savings on cost when the unspecified additional costs were not factored in. These unspecified costs were noted by the consultant after identifying some information gaps in the contract proposal while evaluating the proposals submitted by the distribution companies. It was important that the consultant requested such information that enabled total evaluation of the proposals. Initially, the proposal submitted by Company B seemed more appealing than the proposal submitted by Company A since it presented more annual savings. After factoring in the additional costs as illustrated above, it is clear that some of the options in the contract proposals actually increases the total costs as compared to RHM operation. But within Company B option 1, the total costs are significantly reduced; therefore, there will be total annual savings on cost amounting to £1,987,527. Thus, contracting Company B to provide distribution services under option 1 will be prudent since the total savings are way above the £ 500,000 set minimum. The best option for RHM, therefore, is Company B’s option 1.

As such, Company B will be operating a Northern warehouse at Ossett which will pick and stock-hold all the RHM products, while the Southern warehouse will be located in Northampton and will stock-hold all McDougall’s and Pasta food products. This will lead to a modern warehouse management system; it will also be manned by two distribution managers, each at a separate warehouse. This will lead to flexibility and will enable RHM operations to adapt to future business prospects.

How a distribution network for RHM should be planned

The RHM existing distribution network indicates that the market for RHM food services has seven factories, two depots, three factories or depots, and one transshipment point. These either produce or stock the products of the three businesses earlier identified as potential for reducing divisional costs. These businesses include McDougall’s catering foods, Pasta foods, and RHM ingredients. These were serving the market independently and also controlled the market independently. The major financial objective is to reduce the total variable costs of these three highlighted businesses by ten percent. This was amounting to £ 7,000,000. It is, therefore, appropriate to formulate a feasible distribution and planning strategy that will enable RHM food services to achieve this objective.

Therefore, there is a need for the distribution plans for the three businesses within RHM to be consolidated in order to minimize the costs associated with the distribution of RHM products. Therefore, taking an approach synonymous with mergers by the three businesses would be a wise decision to consider. This will also enable RHM to minimize capacity constraints and expand as well. Through merging inappropriate chain of command within the distribution, the system will be abolished as a result of developing one major distribution center for the entire market. However, it is important for this distribution center to have sub-distribution centers in different localities within the market share since the market is quite large and cannot be served by a single distribution center. To this end, this would pose major logistical challenges to RHM and may not reduce variable costs as it has been envisaged. Creating sub-distribution centers within the market means that different warehouses would be operated in different localities within the UK market.

Also, there is a need to consider subcontracting distribution operators as opposed to RHM operating distribution itself, however, the distribution strategy needs to be formulated by the RHM distribution manager, from where the operators will be given specified goals and targets to meet so that the overall cost of distribution is significantly reduced and at the same time maintaining and increasing annual sales. An integrated distribution system enhances the movement of a stock through a constant flow value-added chain, with inventory and products reaching their destination as and when required in correct quality and quantity. This means that each party in the value addition chain would be acting towards value addition (Blanchard 2010). This in turn leads to a total cost system within the distribution activities of the three businesses that would ensure that all costs accrued in the distribution activity are considered jointly in the centralized distribution center other than considering them separately in the distribution divisions within the three businesses.

People to be involved in the project team for RHM in determining the distribution network

The first person to be involved in the project team will be the Logistics Manager. This manager will be in charge of overseeing the successful completion of the entire project. Second is the Transport/Distribution Manager, who will be establishing the need for having warehouses, transport routes and also manage the fleet operation in distribution. The third person is the Logistics Consultant/ Distribution Expert, who will be offering advice on the best way to develop the distribution network. Moreover, this expert will also assist in determining the resources and time required to complete the entire project using project evaluation and review techniques (PERT). The fourth person is the Finance Manager, who will be assisting in formulating financial policies that will foresee the success of the project. This person will also provide finances and other resources required for the project.

The fifth person is the Sales Manager, who will assist in establishing the sales volume of products to be distributed in different localities and the goals to be achieved by the distribution operators. Sixth is the Product Manager, who will step in to establish the need for establishing a distribution mechanism for the number of goods produced. The seventh person is the consumer representative and intermediaries who will identify the specific localities that distribution centers can be established. Finally, the society representatives will be incorporated in order to assist the entire team in understanding the culture of the targeted market. They will also assist the organization to act responsibly without infringing on the rights of society as they seek to develop the distribution network. Furthermore, they will also assist in identifying the need for CSR (Corporate social responsibility) programs.

The exact data that is needed to plan the distribution network for RHM

In order to plan for an effective distribution network, exact data that is based on the factors outlined here is important.

Exact data needed

These factors include sales volume for the RHM products, customer preference, market segmentation or the total segments served by RHM Food Services division, the financial costs or implications of the distribution network, the production capacity of the RHM factories within the UK (either south or north), the channels of distribution preferred by RHM logistics manager, and other resources required to develop the distribution network other than finances. Moreover, other factors include the time required to develop the project, the number of depots established by RHM in the UK market, the size of the targeted market, the consumer buying behavior, and other logistical activities including packaging and customer service among others.

Timetable

This data timetable for comparing this data should be on a five-year period; this will enable the management to have the ability to analyze a five-year trend of the distribution system of RHM products and will be in a position to identify the needs for distribution while referring to the gaps in the market.

Standard Units to be used

When packing RHM products, it is appropriate to package these products in pallets; the appropriate standard units to be used should be kilogram (Kg) so that the data on sales volumes will be based on kilograms rather than on pallets sold. Moreover, there is a need to set the minimum weight supported by each pallet, for instance, the minimum weight of 50 kilograms per pallet. This will enhance the consistency and accuracy of data collected on sales volume with reference to pallets sold.

Level of detail needed

The project team will have to compile a detailed data plan for the distribution network based on the factors stated in 6.1 above. The data should be corrected separately in the market segments; this means that data there should be data related to factors highlighted above from all the market segments, this data should commensurate with the channels of distribution. The data should then be compared across the market segments so that specific trends of the distribution will be evaluated within the distribution network as opposed to a general view of the trend in the entire market.

Products that should be amalgamated

The products that need to be amalgamated include those manufactured by McDougall Catering Foods and those of Pasta Foods. This is because these two businesses serve the same market segment in the Southern part of the Uk and perhaps they satisfy similar consumer needs and also because due to the similarity of the channels of distribution in the Southern market of RHM products.

Customers that should be amalgamated

Lastly, amalgamating customers will be difficult and perhaps impossible because customer’s preferences, needs, purchasing power, and level of satisfaction always differ even though the characteristics of the market segments are similar.

Conclusion

Amalgamation basically means joining or merging of two similar businesses or groups to form a bigger organization (Blanchard 2010). Therefore, as a result of integrating the divisional businesses will accrue major benefits such as reduced variable costs, increased control, and improved productivity due to increased production capacity. The main aim of this paper, therefore, was to analyze the case study of Rank Hovis McDougall PLC (RHM). The costs given in the contract proposals were compared, and consultancy recommendations were made to RHM operations based on the contract proposals. An organization, therefore, reaps more benefits as a result of proper, efficient, and effective logistics management.

References

Blanchard, D 2010, Supply Chain Management Best Practices, Thomson Learning, South Melbourne.

Wieland, A& Handfield, R 2013, The Socially Responsible Supply Chain: An Imperative for Global Corporations, Supply Chain Management Review, Vol. 17, No. 5, pp. 3-5.

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