1.a Case Summary
Tricon Logistics company was a division of Tricon Consulting Company Limited which was a subsidiary of Dallas based Tricon restaurants international. TRI was the branch of international operations of Louisville, Kentucky based Tricon Global Restaurants Inc. which owned global Pizza Hut, Kentucky Fried Chicken, and in Taco Bell Brands and over 30000 restaurants in more than 100 countries.
In China, Tricon was owning most of the KFC and Pizza Hut restaurants. Trcon Consulting was also known as Restaurant Support Center which was making all the marketing and business decisions for the coordinated the operational activities of KFC and Pizza Hut restaurants and had 13 departments overall to manage these operations.
The logistics department was called Tricon Logistics which was responsible for the warehousing, distribution and transportation of supplies to KFC and Pizza Hut restaurants. The main issue is that has caused the trouble is that the distribution cost of one of the center was higher than the budgeted, 4.25%.
When TLC was established in 1995, the company was made responsible for most of the decision making for the distribution centers and the regional companies. The regional distribution centers had less say in decision making and were mainly responsible for executing the operational and accounting plans.
No company in China was able to independently support the logistics for Tricon's rapidly growing KFC and Pizza Hut restaurants, and a a result, it was forced to build up its own supply chain and logistics system from the ground up. Tricon 's major competitor, McDonald 's, had relied on its long-time logistics partner, Ravi, to prepare and support its operations in China which had build huge warehouses but suffered major losses due to not having flexibility in its operating system.
Building up an independent supply chain and managing a complex logistics system was an extraordinary challenge for the company because it was difficult to decide about the size and management of the warehouses. The group decided to have only a single branch company invested in a distribution center and distributed supplies to other branch companies on the basis of a cost allocation system that was designed by TLC who was controlling all the distribution centers as a result.
Each distribution was designated cost center. The costs of each distribution center was grouped under warehousing, transporting, administration and material processing. Although the new system resulted in efficiencies but there were still problem and frictions among those branch companies who owned a distribution center and those who did not. This is because some of the companies were feeling that they bear a disproportionate share of the distribution center’s cost and are held responsible for uncontrollable costs. The analysis of the costs of the distribution center that was exceeding the budget also showed that the costs increased due to the reasons that were almost entirely beyond the control of the distribution center manager.
1.b Main characteristics and Advantages and Disadvantages of current logistics system
The main characteristic of the current distribution system is that it is highly flexible and is centralized.
This ensures lower cost along with managing the increasingly complex supply chain needs of the company. The group decided to have only a single branch company invested in a distribution center and distributed supplies to other branch companies on the basis of a cost allocation system that was designed by TLC who was controlling all the distribution centers as a result. Each distribution was treated as a cost center. The costs of each distribution center was grouped under warehousing, transporting, administration and material processing. The orders are made on rolling based budgets that are updated on quarterly basis and accordingly orders to the suppliers are modified. The current structure was developed haphazardly and is no longer appropriate for the current level of operations.
There are some disadvantages of the system as well. The complex corporate structure of the RSC was one of the major reasons of the problems. When the number of restaurants increased dramatically in mid-90s, the functions of the supply chain were disseminated into three separate departments: TLC, which was responsible for warehousing and distribution; The Department of Supply Chain Management (SCM), which took care of purchasing and inventory management, and The Department of Quality Assurance (QA). However, the ordering process was not centralized to The RSC (or more specifically, the SCM department). Each distribution center adopted an economic ordering quantity (EOQ) system and sent purchase orders directly to the suppliers. Based on the forecasts of sales provided by the departments of operations and marketing, SCM sent a rolling pro forma ordering plan to each supplier two or three months in advance. Sometimes there were big variances of quantity and frequency between the pro forma ordering plan and the actual orders that a distribution center delivered to a supplier. Thus, it was not unusual to hear complaints from the suppliers or disputes among internal departments.
The performance of many managers is evaluated on the basis of the factors and costs which are not under their control. For example, as mentioned in the case, costs due to truck accidents and because Government has taken their space for building project.
Moreover, due to the current system, sometimes there were big variances of quantity and frequency between the pro forma ordering plan and the actual orders that a DC (distribution center) delivered to a supplier. Secondly, the TLC, not the individual distribution centers, mad e the final decision, which was often assertive and may or may not be fair to the distribution centers. Thirdly, there should be some improvement to the AOP mechanism and to the current approach of cost allocation adopted by the company as it seems unfair.
c. The current logistics system is very good but still has some serious drawbacks which needs to be considered. There should be more integration between the three supply chain functions. Moreover, the arrangement with the suppliers should also need to be better and the Performa plans may need to be changed on three months’ basis. This would allow more flexibility into the system and would reduce storing and financing costs. This would solve another big issue, the suppliers’ complaints that the actual orders are different from the Performa orders.
The structure of the organization has become very complex and the chain of command is also quite confusing. The company should need to develop a functional structure instead of current hybrid structure and one person should have only one boss to answer to. Moreover, the decision making should also needs be improved and there should be more input of the distribution center managers particularly in the decisions related to their own business area.
This would improve the political situation within the company and there would be less complains among the division members about lack of control. There would also be more social cohesion among the company management and the culture may develop into a highly performing one as a result. This would improve economic situation of the company through better control of the costs.
d. TLC strictly controlled capital expenditures for and operating expenses of the distribution centers, through an annual operation plan (AOP) for each distribution center. Because the volumes of goods might vary from what had been planned, the AOP was essentially a flexible budget that was constantly adjusted through quarterly forecasts. By comparing the AOP with the actual costs, TLC could determine the trend and variations of the costs and would make necessary changes. The data of AOP and actual costs were stored in the centralized financial database of the RSC and provided valuable feedback for the departments of marketing, operations and supply chain management.
The major problem with the current cost system is that it assesses manager on the basis of non-controllable costs as well. The cost allocation system should be changed in a way that it assesses managers on the basis of the controllable costs. Moreover, the company should also give the division manager more control of the costs of each division is assessed against.
Distribution centers should no longer be invested by only one branch company, a few branch companies can co-invest m regional distribution centers and share the ownership. In decision-making, though centralized management can achieve greater efficiency and cost benefits, the heads of distribution centers, instead of TLC, make the final decision. TLC drew up AOP which should be a flexible budget not only adjusted through quarterly forecast but also some expected causes which have happened. The internal negotiation would be easier when the supported companies have invested in the distribution center and on one would feel they were required to bear a disproportionate share of cost which was out of control.
In order to design a new logistics network, the logistics department is needed to perform a detailed analysis of the company’s operations. This would help them determining the company’s needs on the basis of which new sytem can be developed. Particulrly, the analysis would focus the size and location of the facility and the flow of the warehousing facility. The analysis would also focus on determination of the costs of moving to a single warehouse from the present five. They would also need to provide the data that would help in the seclection of the facility to be used and the expenses that would be incurred for this purpose.
The decision that a single warehouse will be built has been made up-front. Therefore, we only need to focus on the location and capacity of the warehouse, and determine how much space should be allocated to each product in the warehouse. The main steps of the analysis are outlined below.
i. Location of retail stores, existing warehouses (5 warehouses located in Chongqing, Hefei, Zhengzhu, Wuhan and Shijiazhuang), manufacturing facilities (a single manufacturing facility in San Jose), and suppliers.
ii. The possible locations for the new warehouse.
iii. Information about products, i.e., their apes, size, and volume.
iv. Annual demand on the basis of past actuals and future estimates and the service level requirements of the retail stores.
v. Transportation rates.
vi. Transportation distances from candidate warehouse locations to retail stores.
vii. Handling, storage and fixed costs associated with warehousing. Fixed costs should be expressed as a function of warehouse capacity.
viii. Fixed ordering costs, order frequencies and sizes by product or product family.
There would be several advantages of the centralized warehouse. Most importantly it would help in speeding up the decision making and would improve efficiency and decrease costs.
With the centralized warehouse, service level will increase (less stock-out) and inventory holding costs will decrease due to risk pooling. Also, fixed costs associated with warehousing will typically decrease, and inbound transportation costs from the manufacturing facility to the warehouse should be less than the sum of the previous inbound transportation costs. However, we will incur increased outbound transportation costs from the central warehouse to the retailers. In summary, the essential design trade-off is between transportation costs on one hand, and inventory holding costs and service level requirements on the other.
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