Case 9-1 - Penner Medica Products Attached a study case for you review for help

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Case 9-1 - Penner Medica Products

Attached a study case for you review for help

QUESTIONS BASED ON THE CASE

• Why do you think Penner handles its own inbound transportation?

• Assuming a 50% cost of goods sold, is Stinson a major supplier to Penner? Show calculations.

• Would you consider outsourcing transportation? Why or why not?

• How complicated is it to fill out customs forms? Why don’t they get a customs broker involved?

• What recommendations should Neil make to Ken McCallum?

Thanks

Case 9-1 Penner Medical Products also occasionally asked to drive the company's two-ton truck, the biggest delivery vehicle available. Warehouse workers were paid an average of $15 per hour. Neil Bennett started with Penner as a stock picker and was able to progress though the organization as a result of his effort and dedication. He was promoted to warehouse manager eight months earlier. Neil Bennett, warehouse manager at Penner Medical Pro- ducts (Penner), in Rockford, Illinois, was concerned about rising costs and delays associated with shipments arriving from an important Canadian supplier, Ken McCallum, the general manager, had asked Neil to look into the situation and get back to him with recommendations. It was Mon- day, April 14, and Neil knew that Ken expected to see his plan by the end of the week. PENNER Penner was a medical supplies distributor and retailer, supplying small and medium-sized medical practices for more than 50 years. Company sales were $30 million and Penner employed approximately 120 people. Management expected a 10 percent increase in sales over the follow- ing five years. Penner sold a wide range of products, such as blood pressure gauges, tongue depressors, scalpels, and specialized furniture. Customers could purchase products either through Penner's five retail locations, all of them within a 200-mile radius of Rockford, or order directly from its central warehouse. The company took orders from customers either over the phone or through its website. Although Penner was a family-owned business, retire- ment of key family members resulted in the hiring of several professional managers to run the company. Ken McCallum had been with the company for less than one year and was anxious to exploit opportunities to improve profitability. Penner's main warehouse was a 30,000-square-foot building, normally filled with merchandise in excess of $2 million. The warehouse was staffed by a manager, two receivers, two drivers for local deliveries to customers, two shippers, and two stock pickers, one of whom was STINSON DISTRIBUTION COMPANY Rising costs and missed delivery dates from Stinson Dis- tribution Company (Stinson), an important supplier in Ontario, Canada, had been a concern for some time. A medium-sized company, Stinson had a long-term relation- ship with Penner, supplying a wide variety of specialized equipment for medical offices. Stinson produced high- quality products and was Penner's only supplier of this equipment. Missed delivery dates and incomplete orders from Stinson were resulting in customer complaints and lost sales. Furthermore, transportation costs were well over budget and senior management viewed inventory levels as excessive. The controller indicated to Neil that inven- tory holding costs were 15 percent. Two days per week, Penner's two-ton truck was sent to Stinson, traveling across the border at Detroit. Under ideal conditions, the one-way trip took 9 to 10 hours, and the truck, although empty in the first leg of the trip, was typi- cally fully loaded with approximately $15,000 in goods on its way back to Rockford. The controller indicated that the cost of operating the two-ton truck was $55 per hour. including fuel, insurance, and administrative overhead. Neil observed that fuel costs had increased dramatically

Explanation / Answer

The reason Penner handles its own inbound transportation is likely because

Penner’s annual sale is $30 million. If we assume that the cost of goods sold is 50% then the entire cost of goods sold for the business is $15 million. Penner sends their truck to Stinson twice a week and receives goods worth $15,000 per shipment. This means on a weekly basis Penner purchases $30,000 worth of supplies from Stinson. Annually that makes it = 52 x 30,000 = 1,560,000 or $1.56 million worth of supplies.

Stinson supplies nearly 10% of entire goods for Penner Medical Products.

I would consider outsourcing transportation. This way, Penner can focus on their core business of selling medical supplies. In addition, transportation organizations continuously work to smoothen the process of shipment. Their expertise will be helpful in Penner’s business. However, the understanding is that the cost may rise if transportation is outsourced. In spite of increasing cost, if Penner can implement just in-time inventory management system then Neil and Ken can cut the cost of warehousing and inventory holding.

Filling out a customs form is pretty straight forward process. However, it is completely the discretion of the customs official to check the cargo. In such instances when officials want to check the cargo, the process takes longer.

Given the data on the case and recent occurrence of 9/11 incident, the customs officials are more vigilant at the border. Hiring customs broker will not relieve the situation at the present.

Neil should make the following recommendation

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