Answer

Case Analysis Report on PR Corporation

Introduction

This report is about a PR Corporation case study on how it manages its supply chain, challenges encountered and the possible solutions. PR Corporation is a multinational corporation operating in 24 countries in Europe with main operations domiciled in Spain. Due to increased business operations the company faces various supply chain challenges.  This report highlights the main supply chain issues that the corporation faces and proposes several solutions which include use of ABC analysis in inventory management and Economic Order Quantity methodologies. The report also briefly focuses on social and environmental sustainability as they emerging issue in supply chain management that the company must embrace. The key terms in this report include ABC inventory analysis , Economic Order Quantity model and social and environmental sustainability in supply chain management.

2. Case analysis
3. Use of the quadrant technique to categorize items that PR Corporation purchases

(a) Categorization of the items that PR Corporation purchase.

The quadrant technique is a 2 by 2 matrix as shown below.

     High

Risk

    Low   

                                        Low                High

Value/potential for profit

(b) The rationale for each item identified in each category

Critical items are inventory items which are unique, high value customized items which are not obtained easily. These items have a high impact on value or have a high profit potential for the organization. These items are significant to the final product that the company manufacturers.   The critical item for PR Corporation is synthetic leather used in making its various products.  Synthetic leather is categorized as such because it is a main raw material which has a high profit potential for the corporation.  This is because the corporation had been using this leather for many of its products implying that it generates a lot of profits for the company. This raw material is also unique because it is cheaper, more breathable, easier to clean and functions better than ordinary leather. The risk of stock out is high because it is only obtained from Taiwan through single sourcing. It is also said that the supplier has limited capacities to supply which implies that there is a likelihood of stock outs if demand suddenly spikes.  The procurement manager, Ms. Jennifer Dillon, is said to be looking for new suppliers of synthetic leather to mitigate the risk of possible stock outs in future. This raw material therefore qualifies to be categorized as critical item.

                 Commodities are inventory items which have high potential for profit and have low stock out risk i.e. there is low risk for the items to be out of stock.  These items have low stock out risk because they have many suppliers such as basic packaging and logistic services and hence are basic items required for production. For PR Corporation the items that are in this category include; Cotton, Fuel for motor vehicles, Polyester, Rubber, EVA (Ethylene Vinyl Acetate) foam and Leather. The items are essential to the corporation because they are major items for producing apparel products and many of the other items that the company produces and therefore have a high profit potential. However, these products have a low risk of being out of stock because there are many suppliers who supply them. If one supplier fails to supply on time, in the right quantity and quality, the company can easily select a new supplier from the global market. For example, cotton is sourced from Uzbekistan and China while leather is sourced from tanners and suppliers in Italy and Vietnam. This implies that there are many suppliers in these source areas for these items.  Fuel for motor vehicles, Polyester, Rubber, and EVA (Ethylene Vinyl Acetate) foam are also items that the company can source from multiple suppliers and hence the risk of stock out is low.

                Generics are inventory items are low value items which are standard and are readily available such as office supplies and they also have low profit potential.  For PR Corporation, the items that fall in this category include paper for employee newsletter, buttons, zippers and interlining. These items have many suppliers and hence the risk of stock out is low. They also have low profit potential as compared to other main raw materials.  For example, each product made requires a small number of buttons, zippers and/or interlining as compared to the main material making their impact on profit very little.

                Distinctive items are inventory items are low value items which have high risk of stock outs. These are engineered items which are not expensive and are not easily available for the company. For PR Corporation the items that fall in this category are embellishments used in making its products such as high quality print and embroidery.  The company has limited suppliers of embellishments. These items are important for improving the design and visual appeal of the products that the company produces hence have low profit potential. It is said that the company is looking for new suppliers since the existing suppliers are not price competitive meaning that the company finds the prices charged restrictive. The risk of stock outs is high if the suppliers increase prices further than the company can accept.  These items have low profit potential because they only increase the appeal but are not the main profit drivers for the corporation.

2. Based on the information provided,

(a) A critical analysis of how the distinctive distribution features of PR Corporation

Provide;

1. a competitive advantage

The distinctive distribution features of PR Corporation provide a competitive advantage to the company. The company operates a centralized warehousing and distribution system which enables the company to have lower inventory storage which saves on handling costs and also lower related labor costs. This also leads to lower carrying costs which enables the company to gain competitive advantage.  The centralized warehousing and distribution systems enables the company to consolidate inbound logistics which saves on inventory costs and increases efficiency.  The company also undertakes value adding services such as sorting, labelling and repackaging which enhances customer satisfaction and increases customer loyalty.   The fact that the company ships directly to big retailers enhances customer loyalty and reduces transportation costs. This arrangement enables the company to consolidate shipments to many small retailers to reduce costs and utilize capacity. This enables the company to reduce stock outs for its retailers when goods are on demand and increases efficiency.  The fact that the company runs small satellite distribution centers in its major markets of France and Germany to ensure the company supplies its retailers in these markets on time also enables the company to obtain competitive advantage.  The company also manages its own distribution operations in Spain which has enabled the company to supply its retailers efficiently over the years which is a transportation system that is efficient and enables the company to maintain competitive advantage.

1. Competitive disadvantage to the company

The distinctive distribution feature provides a competitive disadvantage in the following ways. Firstly, the centralized nature of products’ distribution makes it cumbersome to collect demand data for each product. This makes it relatively difficult to forecast demand for each product which is useful for production planning for each product to avoid stock outs. This usually leads to a mismatch between the projected demand for each product per season and the quantity planned for production which leads to stock outs and lost profits.   Secondly, due to recent increases in retail stores in Spain, the own transportation arrangement that has served the company for years is likely to become inadequate. The company will have to incur additional capital expenditure costs to improve it which will reduce funds available for investment in core business activities. This will lead to loss of competitive advantage.  The central distribution arrangement is also inefficient as the company has to ship all finished goods to its central store in Spain before they are distributed to retailers in Spain and other parts of Europe. If this function was decentralized the company would be more efficient as the time taken to transport finished goods to the central store would instead be spend taking the goods to retailers.

(b)  Recommended distribution strategies for PR Corporation products

Considering the increasing demand for the PR Corporation products and

increasing service expectations of retailers, the corporation should use assorted strategies to distribute its products.   The strategies should be tailored to each product, the requirements of each retailer, resources that the company holds and existing capabilities.  The company could use direct delivery, a distribution center or cross-docking strategies depending on the product being handled, the requirements for each retailer, the available resources and in-house capacity.  For large retailers who request for homogeneous products the company could use cross-docking strategy. Cross – docking will enable the company to distribute products more efficiently than direct shipping as it can move products faster.  Cross-docking strategy will enable the company to sort and mix products efficiently and is faster than using a centralized distribution center.   The company will enable the company to change the type of conveyance to sort products intended for different retailers or combine products from different manufacturing centers into distribution vehicles for transportation to certain areas. The corporation will also need to use direct shipping especially for bulk products for satellite distribution centers in large markets.  This will enable the company to hold inventory in anticipation for a spike in demand from retailers. This will also enable the company to hold safety stock to protect itself from stock outs.  It will also help the company to hold small quantities received awaiting fulfilment to transport to retailers.  The company should also use a centralized distribution center for its assorted items especially in its main market of Spain. This enables the company to hold safety stocks to protect against contingencies. It enables the company to sort, label and repackage the products for different retailers in the country. The distribution center will enable the company to do consolidation for retailers in the same region. This will enable the company to enhance efficiency in its distribution and minimize stock outs.  The company could use a decentralized distribution strategy especially for products whose demand is very high. This will reduce order cycle time and also reduce the cost of delivery of the products.

(a) A critical assessment of the current transportation operations of PR Corporation in Spain

The current transportation operations of PR Corporation in Spain are managed by the company using its own resources. The company also delivers products to ports in Spain to be shipped to overseas markets in Europe.  This has enabled the corporation to achieve supply chain competitiveness as its transport system is efficient. The company has also been able to achieve supply chain flexibility overtime.  However, due to increasing demand for the PR Corporation products and increasing service expectations of retailers, the company has been experiencing transporting rate variations and transport capacity constraints.  The current logistics network may be unable to maintain consistent delivery to all retailers due to the huge expansion in the company and the growth of retailers in Spain.  The company has in recent studies recorded a huge variation in service reliability and transit time which implies that customer satisfaction levels are likely to plummet unless something is done to fix the growing transport challenges. The company has to choose either to use a third-party logistics provider or invest in its own transport capacity to address the emerging transport challenges.  This will require the company to carry out a major expansion on its logistics network which will require a huge capital investment. Transport challenges are also exacerbated by the fact that as a part of its operational strategy the company will be providing more frequent deliveries to its big retail stores which will increase the number of transportation trips.  The current transport arrangement is likely to be costly, unreliable and inaccessible due to the current expansion in the company’s business operations.  The company needs to put in measures to ensure the variation between service reliability and transit time is reduced.

(b) A discussion of how PR Corporation can improve its transportation services

                Based on the business needs of PR Corporation in Spain, it is best that the company maintains its own transport arrangement rather than bring on board a third-party logistics (3PL) provider. The benefits of using its own transport arrangement include the following. Firstly, the company has developed some capabilities towards the transportation network which will be lost if it brings on board a 3PL. Secondly, the company will have to dispose of a large number of vehicles which may lead to capital losses and also lay off a large number of employees engaged in current transport operations which will dent its reputation in the market. Thirdly, operating an own fleet offers the company greater scheduling flexibility and control over transit time which will not be possible with a 3PL. The promotional impact of having an own fleet will also be lost. The company will have to increase its promotional budget to compensate for this loss.  Fourthly, bringing on board a 3PL will require investment in developing capabilities to properly integrate with the 3PL firm which will be time involving and a costly undertaking.  The corporation will lose control of its logistics function and will hence not be able to make any modifications or improvements to it to gain competitive advantage going forward.  All the company needs to do when using own transportation arrangement is to determine the capital investment required and based on in-house experience come up with appropriate transport scheduling and vehicle routing network which will enable it expand its logistic network to meet the expanding business needs.   If the company chooses a 3PL it will lose control of its logistics function which is one of the areas which generates competitive advantage.

(a) Two separate ABC analysis using

(i) yearly revenue

(ii) yearly profit.

Comparison of the results

About 78. 09% of the revenues are generated by product line code PC 101, PC104, PC 203 and PC 502.  Whereas 79.33% of the company profits were generated by PC 203, PC 104, PC304 and PC 503.  Some of the product line codes i.e. PC 101 and PC 502, that were among the top 78.09% of the top revenue earners were not among the top product line codes that generated 79.33% of the company’s profits.  On the other hand, some of the top profit earners were not among the top revenue earners and they include PC 503 and PC 304.  This implies that products that generate most revenues are not necessarily among the ones that generate most profits for the organization

(b) The classification that PR corporation should use and the Justification

PR Corporation should use the ABC analysis using the yearly profit instead of yearly revenues.

For the corporation to maximize shareholder wealth it should general more capital gains or profits each year. This means that if it does not pay more attention to products that generate most of the profits it will be unable to maximize shareholder wealth and meet stakeholder expectations.

The company should use ABC analysis base on yearly profits as this classification shows the product line codes that generate most of the company’s profits. The company should ensure items classified as A items are ordered more frequently, are checked and monitored to avoid stock outs. Inputs used to make these products should be ordered more frequently and monitored to eliminate stock outs. The company should ensure reliable suppliers for Class A products inputs are identified.  Products classified as class B are also critical for the profitability of the corporation. A reasonable amount of their inputs should be held to ensure product stock outs are kept to a minimum. Inputs for class C products should be ordered when inputs class A and Class B products have been provided. 

 (c) Discussion of how PR Corporation could be benefited from classifying the inventory

items as A, B, and C

PR Corporation could have benefited in various ways by classifying inventory items as A, B and C. The first benefit is that the corporation would have been able to identify the vital few inventory items and the trivial many inventory items. This would enabled the company to identify the items that account for the bulk of the annual expenditure which account for 70 to 80% of the annual expenditures. This would have enabled the company to focus on getting the best prices and largest discounts for these products.  This would have also enabled the corporation to identify the fastest moving items and hence make appropriate purchase decisions. The items classified as B as usually intermediate items of inventory while the C items are slow moving or obsolete items. The company would have been able to classify each of its inventory items appropriately.   The company would have ensured that class A items are controlled and procured often to avoid stock outs. The information would have enabled the corporation to decide on which items to order more often and even plan its warehousing space appropriately. This classification would have enabled the corporation to manage lead times for the different items and maintain a proper amount of inventory. This would have enabled the company to know the transportation time by determining the delivery time. This would have also enabled the company to minimize obsolescence and low turnover items.

• The number of orders of synthetic rubber that should be placed each year

Economic Order Quantity (EOQ)=√2AR/S ;

 Whereby;                   A is the cost of placing an order,

                                                R is Demand per year

                                                S is Inventory carrying cost

Total number of units required in a year 1,800,000 units of synthetic rubber i.e 3000 pallets * 50 units *12 months . Hence R-1,800,000. A=$600 , Inventory carrying cost S-> capital cost-6%($25)+ storage space-8%(25)+ inventory insurance 4%($25)+ Other 2%($25)=$4.5

EOQ=√(2*$600*1,800,000)/$4.5=21,909 Units.

The number of orders of synthetic rubber that should be made each year are 21,909 units.

• Determination of the order quantity per order and the total cost of EOQ.

The total quantity per order is 21909/50units=438 pallets each containing 50 units of synthetic rubber.

The total cost of the EOQ=21909*$25*$4.5+($600*438.18) =$2,727,670.50

(a) Social and environmental sustainability’ will be the dominant selection

criteria for suppliers in the future fashion supply chain

There is overwhelming evidence that suggests that social and environmental sustainability will be a dominant selection criterion for suppliers in the future fashion supply chain. A survey done by McKinsey in 2019 indicated that social and environmental sustainability has become an issue of concern to apparel companies, consumers and governments throughout the world. These being powerful stakeholders in this industry will push players in the industry to prioritize this issue.  Players in the industry are expected to improve their ecological footprint, increase use of sustainable materials, strengthen their relationships with suppliers and increase their transparency levels among others.  Top level executives were interviewed in this survey which indicates that going forward this will become a reality.  Sustainable sourcing has been accelerated by rising purchasing power of generation Z consumers, growing concern on sustainable sourcing and activism for environmentally friendly practices among apparel makers.  Regulations have become stricter and framework that apparel companies operate has been changed by political action.  Implementation of sustainable goals is a core framework among the UN Sustainable Development goals adopted in 2015.  The G7 leaders agreed in their declaration in 2015 to promulgate industry –wide due diligence in textile and readymade garment sector which will put pressure for industry players to adopt social and environmental sustainability in their sourcing.  Major pacts have also been agreed by leading apparel manufacturers to adopt social and environmental sustainability’ as a dominant selection criterion for suppliers in the future fashion supply chain. Multilateral action on sustainable apparel has also been matched by similar actions by national governments all over the world.  For instance, China, Turkey and France are some of the nations that have either put in place measures or given strong indications that they will be supporting social and environmental sustainability in fashion supply chain.

(b) Key areas that Ms. Goury Roy should consider and act on for future social and environmental sustainability of PR Corporation operations

                The key areas that Ms. Goury Roy should consider and act on include shaping a robust sustainability agenda that addresses social and environmental concerns in the supply chain.  The key areas of focus include embracing sustainability materials from suppliers.  Mr Roy must ensure the corporation increases the share of products that contain sustainable materials than is current today.  The next key area is that Mr Roy must ensure the corporation’s sourcing practices drive transparency and traceability of materials.  Supply chains will have to be traceable and transparent in that consumers will need to have information on where and how raw materials were sourced.  The next key area is that Mr. Roy should ensure the company turns the relationships with suppliers into strategic partnerships as this ensures social and environmental sustainability is of utmost importance.  The last key area is that the company must reinvent its purchasing practices to incorporate sustainable and responsible sourcing.  Purchasing practices from planning to negotiation to order placement are impacted greatly by the prevailing purchasing practices.

Recommendation

                To manage its supply chain in a way that enables the company obtain competitive advantage, the company should use quadrant inventory analysis technique. This technic identified synthetic leather as a critical item that must be monitored closely to ensure its out of stock. The company should use ABC analysis to classify the most critical products that it must ensure they are not out stock to maximize shareholder wealth. The company should put in place measures to embrace social and environmental sustainability to remain competitive in future.

Conclusion

                Supply chain management is very critical in obtaining competitive advantage. For a company to obtain sustainable competitive advantage it must ensure its uses modern inventory analysis and management techniques such as quadrant technique and ABC analysis.  An efficient distribution and logistics network is also a very important component of an efficient supply chain management. Lastly, in future apparel companies must embrace social and environmental practices to remain competitive.