Warehouse Strategy for Acme Fragrances: Overcoming Short-Term Challenges and Planning for the Future

QUESTION

Background

Acme Fragrances is a United Kingdom (UK) based producer of beauty products, cosmetics, scented candles and high-end gift sets. The company was formed in 1976 by the parents of the current managing director. From starting operations in the family kitchen the company has grown organically into a GBP 10 million business. New contracts with overseas clients in Europe, Malaysia, South Korea, Japan, China and the Middle East, together with a worldwide contract with Amazon, have required a significant change in strategy and the need to employ more staff with supply chain, logistics and import/export experience. However this is proving Sage © Gwynne Richards 2023 Sage Business Cases Page 3 of 11 Warehouse Strategy: How Can Acme Fragrances Manage Its Current and Future Storage and Logistics Needs?

difficult at present. Most of the products sold (60%) are produced in their own manufacturing facility which is adjacent to their finished goods warehouse. Raw materials for production are stored on a mezzanine floor in the manufacturing facility with reserve stock held in a third-party warehouse, 5 miles (8 kms) away. There is a suggestion that current warehouse space is turned over to manufacturing; however, this is not the preferred option. The preferred option is to increase production in Eastern Europe. The third-party warehouse, owned by a local haulage company, is not ideal, as it is used mainly for the storage of machinery and automotive products. Cleanliness is an issue. A daily delivery to the finished goods warehouse is undertaken by the local haulage company that owns the warehouse. This has been a long-standing arrangement which is unlikely to change in the near future due to the relationship between both parties. As with Acme, the haulage company does not operate with a warehouse management system and all transfers to and from the overflow warehouse are recorded manually. This causes a number of problems for the stock administrators. The remaining 40% of finished product is imported from Eastern Europe (25%) and the Far East (15%). Over 60% of the raw materials are imported from Eastern Europe, 10% from the United Kingdom and approximately 30% from China, including significant volumes of glass receptacles for the fragrances and the candles. According to the sales and marketing director, the warehouse is full to capacity and additional stock is having to be stored at the local haulage contractor, alongside the raw materials.

There are also issues with exports into the European Union (EU) countries at the moment, with export paperwork causing significant delays at the border. Imports of both finished goods and raw materials from Eastern Europe are also seeing delays at the ports of exit and entry. The problems caused by the Ever Given container ship getting stuck in the Suez Canal has also delayed deliveries from China due to a shortage of containers worldwide and the time taken to detour around the Suez Canal. This has necessitated more raw materials being purchased from suppliers in Eastern Europe. The lease on the combined manufacturing facility and warehouse has another five years to run; however, there is a break clause in two years’ time. There is a significant penalty if the lease on the buildings is terminated any time between the break clause date and the end of the lease. There are no plans to move manuSage © Gwynne Richards 2023 Sage Business Cases Page 4 of 11 Warehouse Strategy: How Can Acme Fragrances Manage Its Current and Future Storage and Logistics Needs? facturing as the transfer of equipment would prove very expensive. The sales and marketing director who is in charge of the project is not in favour of fully outsourcing the logistics operation at this point in time as he believes that operating their own logistics gives Acme an advantage over their competitors. The company’s head office is over 150 miles (240 kms) away and some of the senior team there want to relocate the manufacturing facility closer to the head office. However, suitable buildings are at least 25% more expensive the closer they are to the head office and, as mentioned previously, the cost of equipment transfer and potential loss of experienced production staff makes this unviable in the short to medium term. The sales and marketing director spends at least three days a week at the manufacturing site, as logistics has become his responsibility. The company has recently spent over GBP 1 million on new filling machines and an automatic packing line in the manufacturing space. There are two highly skilled chemists on site and the company employs 35 staff between the warehouse and the manufacturing facility. The manufacturing area is overseen by the general manager. Two production supervisors, two stock control administrators (finished goods and raw materials) and the chemists report directly to the general manager. An inexperienced warehouse and transport manager reports directly to the sales and marketing director. New construction is currently taking place on the Horizon Business Park where Acme are currently situated and these warehouses may be suitable for Acme. There is an opportunity, given the relationship the managing director has with the owners of the Horizon Business Park, that a design and build facility could be an option. It will take at least 18 months to complete and this is a sought-after area for logistics operations given its proximity to a large percentage of the population and to courier parcel hubs. Sales History Initially, the company sold all of its products direct to retailers and wholesalers in the European and UK markets. More recently, four new wholesale clients have been acquired in China, South Korea and Japan. New retail clients in Qatar and Kuala Lumpur have also begun ordering product. As a result of the Covid pandemic, when retailers were closed for long periods, online direct-to-consumer sales have increased significantly and are expected to continue at least at the same level. However, if Acme can solve the issues regarding export to the EU, the volume of online sales is expected to increase to 50% within the next five years.

facturing as the transfer of equipment would prove very expensive. The sales and marketing director who is in charge of the project is not in favour of fully outsourcing the logistics operation at this point in time as he believes that operating their own logistics gives Acme an advantage over their competitors. The company’s head office is over 150 miles (240 kms) away and some of the senior team there want to relocate the manufacturing facility closer to the head office. However, suitable buildings are at least 25% more expensive the closer they are to the head office and, as mentioned previously, the cost of equipment transfer and potential loss of experienced production staff makes this unviable in the short to medium term.

The sales and marketing director spends at least three days a week at the manufacturing site, as logistics has become his responsibility. The company has recently spent over GBP 1 million on new filling machines and an automatic packing line in the manufacturing space. There are two highly skilled chemists on site and the company employs 35 staff between the warehouse and the manufacturing facility. The manufacturing area is overseen by the general manager. Two production supervisors, two stock control administrators (finished goods and raw materials) and the chemists report directly to the general manager. An inexperienced warehouse and transport manager reports directly to the sales and marketing director. New construction is currently taking place on the Horizon Business Park where Acme are currently situated and these warehouses may be suitable for Acme. There is an opportunity, given the relationship the managing director has with the owners of the Horizon Business Park, that a design and build facility could be an option. It will take at least 18 months to complete and this is a sought-after area for logistics operations given its proximity to a large percentage of the population and to courier parcel hubs. Sales History Initially, the company sold all of its products direct to retailers and wholesalers in the European and UK markets. More recently, four new wholesale clients have been acquired in China, South Korea and Japan. New retail clients in Qatar and Kuala Lumpur have also begun ordering product. As a result of the Covid pandemic, when retailers were closed for long periods, online direct-to-consumer sales have increased significantly and are expected to continue at least at the same level. However, if Acme can solve the issues regarding export to the EU, the volume of online sales is expected to increase to 50% within the next five years. The majority of online sales are currently to the UK market as costs are deemed too prohibitive for European customer purchases. The current sales split is 35% online, 50% wholesalers and 15% retailers. 75% of the retailer/ wholesaler business is exported. A growing part of the business is white label products sold to hotels, spas and household brands. Companies can choose the fragrances and have them manufactured to their requirements. The online market has a diverse customer base from environmentally aware teenagers through to an older generation who value affordable, eco-friendly, natural wax candles.

At any one time there are 2,500 active product lines. The marketing team are constantly asking the production team to produce new fragrances and it is very rare that earlier fragrances are discarded, even if sales are significantly lower. Constant changes to the marketing material, product names and label designs is a big challenge for the production team. The company prides itself on its bespoke packaging and the experience it gives to customers when opening the box. This experience is called “Packaged with Love”. However, this does take up a significant amount of space in the office area which is currently the only space available for this operation. The movement of product to this area and across to despatch once completed also takes a significant amount of time. The company is growing at a rate of 20% per annum and is continually adding to its product range. A number of these additions are replacements for unpopular items which failed to reach their sales potential. The company has recently changed its corporate image with a new logo and strap line. Some retail and wholesale customers are refusing to accept products packed in the old style, especially when it comes to a combination of both new and old packaging which has resulted in a number of products being returned and left sitting in the warehouse. There are currently 3,400 finished product lines shown on the stock system as having physical stock in the warehouse. The system also records 25 archive storage locations (old invoices, purchase orders etc which have to be kept for a period of six years) and 20 “unknown item” locations. The sales and production software system utilised is a basic enterprise resource planning system called Up

silon which has a stock control module as well as a production, purchasing and sales order processing module. Logistics Operation Space The company currently operates in a 40,000 square foot (3,716 m2 ) manufacturing facility which is 29.5 feet (9 m) high. The warehouse is attached to the manufacturing facility, however the transfer of finished product necessitates driving forklift trucks outside the manufacturing facility and back into warehouse, as the door which allowed the internal movement of goods between the two buildings has been blocked to make space for more production equipment.

The manufacturing facility has three automated filling lines and three automated packing lines. There is also a manual packing line which is used when demand increases during peak periods such as Valentine’s Day, Singles Day in China (11 November), Mothers’ Day and the lead up to Christmas. There is very little space to hold finished goods which necessitates moving the items into the warehouse soon after production. There are two floor-level doors to the outside however one is currently out of use as the roller shutter is inoperable and Acme currently stores return product in this area. The L-shaped mezzanine floor in the production facility is fully occupied with raw materials, packaging, labels and returned product awaiting re-work or disposal. The floor loading is not sufficient for significant amounts of product storage. There are 612 shelves, 2.8 m wide by 0.5 m deep, with a clear height of 0.8 m. The base of the mezzanine floor is 5 metres from the floor of the warehouse There are in excess of 6,000 raw material stock items shown on the system. The warehouse has 3,100 pallet locations as seen in the figures below. The aisle width is 3.7 m. Each bay is 2.8 m wide and has a clear height of 1.65 m. Only one exterior door is active as the other is now obstructed by offices currently. The pallets are 1.2 m wide by 1.0 m deep by 1.5m high. There are four 20 foot containers in the yard. These are used to hold finished stock prior to collection by various third-party logistics companies (known as 3PLs) for onward delivery. They are owned by Acme. They are able to hold a total of 10 pallets each. Acme Fragrances relies on a variety of 3PLs to undertake their deliveries. Choice of 3PL depends on the destination of the goods and the cost of transport.

Acme has a contract with the Royal Mail and DHL for the delivery of online orders. Pallet distribution in the United Kingdom is undertaken by Palletline, a pallet distribution company. Parcel distribution into Europe and the rest of the world is undertaken by DHL. Pallet and full load deliveries into Europe are undertaken on a back-load basis by European transport companies who have delivered goods to other companies on the Horizon Business Park where Acme is situated. Some of the European wholesalers collect their goods on an ex-works basis. The space outside the buildings is not large and most of the space is taken up by staff car parking, the storage of empty pallets and the four containers. There are times when completed orders are stored in the yard prior to collection when the containers are full and also finished goods are held in the yard until the warehouse has sufficient space and time to check and put away. This means they are open to the elements. Cars have to be moved when an articulated delivery/collection takes place. There are no dock levellers so loose-loaded containers from the Far East have to be unloaded outside using a counter-balance truck with a cage attachment. The warehouse manager is inexperienced, having managed the transport operation until the old warehouse manager left, and now has responsibility for both areas. The warehouse manager has received no formal training in warehouse management and is unaware of concepts such as Pareto (Bousquet et al 1964) and ABC analyses (Wild T 2017) and has no knowledge of the different types of storage mediums and materials handling equipment. The company operates a paper-based system, printing off orders from the sales system and passing the orders to the four warehouse staff who walk through the warehouse to pick the items for online orders. These are returned to the office area to be packed, labelled and placed in a roll cage ready for the courier company to collect. Products are located in alphabetical order with one pallet location per product line (sku). Some locations have multiple sku as there is insufficient space to hold products in their individual locations. Large

wholesale and retail orders are picked utilising a powered pallet truck. Items located on levels 3, 4 and 5 are picked by medium level order picker equipment where the operative is lifted into the air on a platform. Where multiple cartons from a location are required, the pallets are picked by an articulated forklift truck and the remaining cartons are returned to the location once the required number of cartons are removed. This can cause congestion within the aisles at times as there is a delay in returning the pallet to its location. All orders are picked individually. Service timelines to the customer are acceptable although they could be improved significantly. Before the United Kingdom left the EU, European consumers were constantly contacting the company regarding quicker delivery for online sales. The majority of these sales have now stopped due to the increased costs and delays. The European wholesalers and retailers are also looking for quicker deliveries at a lower cost. The company has approached a consultancy company to assist them with their future strategy in terms of whether to continue operating from their current leased warehouse, move to a new facility or outsource to a logistics services provider. They also need to find solutions for their European business, both from an import and export perspective. As logistics consultants, you are tasked with assisting Acme Fragrances to overcome the short-term issues and produce a longer-term strategy for the next 5 years. Current layout of the building in 2D is shown in Figure 1. Figure 2 presents a 3D visualization.

Note the shelving is on a mezzanine floor as can be seen in the 3D diagram in Figure 2. The offices for the general manager and his staff are on the left-hand side of the manufacturing facility. The offices for the warehouse manager and her staff together with the packing area are at the front of the warehouse. The exterior doors to the warehouse are shown as the ‘hatched’ areas. The doors are 3.5m high.

Questions

. How can you provide Acme with more space in their facility to accommodate growth in the shortterm?

2. From an operational aspect how can Acme overcome the issues of lost online sales to Europe caused by the delays at UK and European ports as a result of increased customs checks and additional paperwork?

3. What will you advise Acme’s sales and marketing director regarding their future strategy in terms of the location of the two facilities (manufacturing and warehouse) once the lease expires or the escape clause is triggered?

Should the escape clause be triggered? What approach will you take regarding the sales and marketing director’s stance on outsourcing of logistics services?

ANSWER