Warehouse Management
Company Background
Volkswagen
Group Canada INC. (VGCA) was incorporated in 1952 and located in Ajax, ON, Canada.
VGCA is a subsidiary of Volkswagen AG, and it is comprised of three brands: VW
Canada, Audi Canada, and Lamborghini. Volkswagen AG designs, manufactures, and
distributes passenger and commercial vehicles, motorcycles, engines, and
turbomachinery and offers related services, including financing,
leasing, and fleet management. This company is part of the Motor Vehicle and
Motor Vehicle Parts and Supplies Merchant Wholesalers Industry. In 2020, It
ranked seventh in the 2020 Fortune Global 500 list of the world's largest
companies.
VGCA sold
and distributed vehicles in 153 countries. It sells passenger cars under the
Audi, Bentley, Lamborghini, Porsche, SEAT, Škoda and Volkswagen brands;
motorcycles under the Ducati name; light commercial vehicles under the Volkswagen
Commercial Vehicles brand; and heavy commercial vehicles via the marques of
listed subsidiary Traton. It has 62 production plants in 15 European
countries and 7 countries in America, Asia, and Africa. VGCA has 400,000 total
employees across all of its locations, and they produce around 30,000 vehicles
per day.
Case Background
The sales
of VGCA keep increasing, so VGCA want to expand its business to handle this
situation. The car models recorded the highest growth rates in various
car models. They have adopted the global strategy because their target customers
are across different countries. The strategy had originated at the corporate
level and was pushed down to each group at the country level, such as in Canada,
Asia, Europe, etc. The headquarter decide on an aggressive plan to grow the volume
of new car sales annually by 10 per cent per year over the next five years.
To activate
the plan, VGCA will make new vehicle launches and facelifts, which is to change
the design of the current outlook of vehicles. Its plan included four new vehicle
model launches and four new facelifts to existing models each year for the next
three years, so there will be 12 new vehicles and 12 facelifts in total at the
end of the third year. The distribution centre already housed more than 64,000
total active Stock Keeping Units (SKUs). Each new vehicle model would add 3,000
new SKUs, and each new facelift would add 1,000 new SKUs.
Their
current warehouse is in Toronto part distribution centre (PDC). There is a total of 160,000 square feet and has 40,000 cubic feet of unused space. Each SKU will be
put in the racking used for storing parts, which comprises two bin sizes, 10% of space was occupied by racking stacked to the ceiling, and 10% of space
was occupied by wide aisles enabled for staff to pick the product. The storage space included
small bin storage and large bin storage. The small bins had a capacity of 10
cubic feet, and the large bins had a capacity of 100 cubic feet. One bin was
sufficient to store as many parts for each SKU type. The
warehouse had 80,000 total bins available, of which 64,000 bins were utilized, 75 per cent for small bins and 25 per cent for large bins.
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Current Issues
Since the aggressive plan of VGCA will make new vehicle launches and facelifts, the current warehouse does not have enough space for the next five years' growth plan. Now, the total number of bins is 80,000 (60,000 for small bins, 20,000 for large bins), but only 80 per cent of bins are currently in use. We will have 3,000 new SKUs and 1,000 new SKUs for each facelift added for each new model. In the table, we can see that there will have 48,000 new bins required for new SKUs (36,000 small bins, 12,000 large bins).
When VGCA starts to make new vehicle launches and facelifts, the storage space will have a saturation state in the first year of the growth plan. In the second year, the storage will no longer store those bins. The distribution centre needs to expand its space to store at least 32,000 bins for the third, fourth, and fifth years. As each small bin owns 10 cubic feet and each large bin owns 100 cubic feet, the warehouse needs to expand from 1,208,000 cubic feet to 6,008,000 cubic feet to achieve the growth plan in the next five years.
There are three expansion options to address the space problem: expanding the existing warehouse, building or leading a new warehouse in a different location, and outsourcing all or part of the warehouse to a third party. They need to consider the timing, minimise disruption to the existing facility, and be cost-effective. Also, if they choose to build a new warehouse or outsource to a third party, the location needs to choose in Western Canada.
Pros and Cons of Each Option
Expanding the existing warehouse (Pros):
1. Time-saving
When compared with building a new warehouse, expanding the existing warehouse is cheaper. As the company is familiar with the design of the existing warehouse, they can find out the most efficient way to expand it and utilize all the space and resources of the existing warehouse.
2. Increasing the warehouse capacity permanently
Should the business scale grow even larger or decline in sales happens, management teams will have more of a buffer time to react. Also, they based on the changing needs to restructure or redesign anytime.
1. Demand uncertainty
They may need to expand again if the inventory exceeds the capacity once more. However, the adjacent land may be limited around the existing warehouse and will not be available to have a further expansion. Moreover, if the actual sales are higher than expected, it will increase the chance of new spaces sitting idle.
2. High upfront expenses
Expanding the existing warehouse involves many expenses such as building, renovation and maintenance fees. These costs may obstruct the business expansion of VGCA.
1. Significantly increase in size
Compared to expanding in the existing warehouse, building a new warehouse have a sharp increase in the capacity at once. If they have more space, they can faster and more effective finish their work.
2. Allow enhancement or bigger change of the warehouse layout
Building a new warehouse allows the redesign of the warehouse layout. Without the limit of the existing set of racking or equipment, it is a good chance for the company to redesign the layout to increase efficiency, especially when adopting the new technology and merging the past experience.
3. Spread the risk
It may be risky if they store all of the inventory in one place. For instance, if there is a big rainstorm or natural disaster, transportation may be interrupted. Different warehouse locations can maintain the business is still operating during the sudden situations.
4. Faster shipping time
A multi-location warehouse can reduce the inventory shipping time and reduce the transportation cost as the location of the new warehouse may locate closer to the customer.
Building or leasing a new warehouse in a different location (Cons):
1. Expensive upfront cost
It is costly to build or lease a new warehouse. They need to purchase or build a new warehouse that is larger than the old one and the new equipment and machine, which creates a high upfront cost. Also, the new space may not be fully utilized during the low order period, or the actual sales may be lower than expected.
2. Inflexible management cost
Should the inventory become less due to good sales or manufacturing issues, the company still has to pay for the maintenance or tax for the warehouse even though it is not currently in use.
Outsourcing all or part of the warehouse to a third party (Pros):
1. Low costThe company can save on the cost of building or purchasing a new warehouse. The saved cost can improve product quality or provide a better marketing strategy. As the 3PL firms specialise in their related industry area, they may help us save the cost through negotiating. Also, we can have more focus on our specialized competencies.
2. Depends on the need to choose a warehouse
The company can immediately find a warehouse to store their inventory as their distribution centre already housed a lot of active SKUs. They can transfer some of the SKU by outsourcing the warehouse to a third party. It can also help the company better plan how to manage the inventory of the new models they will launch in the future.
3. Flexibility
The company can be advantageous as they can arrange to outsource part of the warehouse more flexibly. That way, the company can save costs when it is in no need of extra space and can procure extra space when needed.
Outsourcing all or part of the warehouse to a third party (Cons):
1. High outsourcing costs in the future
The outsourcing cost is relatively high, as the company will launch different new models, and the number of SKUs is very high. It needs to use a lot of space to store its inventory, so the company need to pay more to outsource the warehouse to a third party.
2. Lack of control
The third-party has a large proportion of rights to control our product storing, packaging, and transporting. If we choose to outsource it, the company is willing to let the third party control those things. If the third party causes something wrong to our customers, it will damage our company’s reputation.
Which option makes the most sense operationally and financially?
After considering the following factors, Outsourcing all or part of the warehouse to a third party is the best option for VGCA.
1. Timing
It is easy to outsource all or part of the warehouse to a third party immediately, without waiting for the construction to complete.
2. Minimize disruptions to the existing facility
Outsourcing requires no disruption to the ongoing operation of the existing facility, while expanding the existing warehouse will certainly hinder a certain portion of the existing warehouse operation
3. Cost-effective
It will be more affordable in the short term when compared to expanding the existing or building a new warehouse. Moreover, the company still has to pay for rent or maintenance costs or taxes for the newly built, rented warehouse even if it is not in use while the inventory can be housed in the currently existing warehouse.
4. Less hassle
The company will have fewer hassles because some of the tasks are outsourced to a third-party such as packaging or transporting, even if the third party is an expert. The company can focus on its operation and product development.
5. Build long-term relationship
A long-term relationship with our third party can help our company and the third party create the highest value for our customers.
6. Reduce company management pressure
Since most warehouse outsourcing companies can help with warehouse management, they will provide the needed human force and equipment. The company can benefit from increased capacity without dealing with trivial management problems like human force planning.
Contingency Plan for Overstock
First of all, they may reserve a sizeable portion of the warehouse for unexpected inventory. It could be wise to reserve a certain portion of the warehouse that will not be used under normal circumstances and will only be used to house extra inventories when many unexpected goods are stored. Secondly, they can take apart the exceeding inventory, which is to disassemble the inventory apart to its pre-assembly stage so that it can be stacked more efficiently inside the warehouse. Thirdly, is to maintain an intimate relationship with third-party warehouse service providers. When they have a close relationship with those providers. If sales fall short, the company can contact them and ask for their emergent service to store their inventory.
Reflection
This case is learning how to manage the warehouse of a company. A warehouse is a critical component of a company since it stores what it is selling. Volkswagen Group Canada INC. (VGCA) wants to expand its warehouse due to the increasing demand and new products. Under this situation, three options can help with the expansion plan. We analyze the pros and cons of those options, which makes us understand the most suitable option in different cases. For this case, outsourcing can better solve the storage problem of VGCA.
As I know, warehouse management is more about information management. The warehouse is related to different progress during the operation, such as inventory, delivery, receiving goods, etc. Therefore, the warehouse system should connect to an inventory management system, CRM, or sales and marketing software. The warehouse management system can simplify the complicity of warehouse operation. It conducts analysis and sales forecasting and establishes an operation plan with high efficiency based on the data and automation. Not only that, but it also understands the warehouse operation efficiency to suggest what can be improved to optimize the space. A suitable warehouse management system can bring higher efficiency, speed, and the accuracy of orders to a warehouse. Consequently, the chance of overstock or understock will decrease, and we can fully utilize the warehouse space to decrease the following cost.
References
Volkswagen Canada.
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