Taking the Ontario region as an example that represents all regions, one can analyze the two transportation costs: when transporting to a local customer, and when transporting to a customer in a rural region. (See exhibit D)
For local runs, the carriers were paid a high hourly salary ($34), and a relatively low per kilometre rate ($0.37). As a result, for Ladner to reduce its transportation costs for local runs, it should minimize the travelling time. In other words, each time the courier should make one trip to serve all customers who are located in the same area and make as many drops as possible. Moreover, it would be useful here to find out what’s the longest segment in the process of delivering to customers? Is it the trip to a certain area, or the drop-off time? If it was the drop-off time, then maybe the deliveries should be organized to minimize drop-offs. Maybe Ladner should use different types of trucks that have shorter drop-off time which will reduce total amount of delivery hours, and then reduce carrier costs.
As for rural runs, the carriers are paid a high amount per drop ($17) also a high amount per kilometre ($0.87). It is clear here that the deliveries should be organized to reduce the number of trips for each customer (kilometres traveled) and the number of drops per trip. If possible, force customers to make large purchases, or accumulate purchases until it is profitable to deliver them to the customers.
It should be mentioned that pick-up orders are highly favourable for Ladner. They increase customer satisfaction (products reaching customer faster) and they reduce the loss from the delivery process to zero. Ladner should encourage pick-up orders heavily by increasing the quality of that service, and by giving discounts to customers who pick up their orders. For example, if the estimated loss from delivery per customer is 2%, Ladner could give a discount of 1% to customers with pick-up orders. That way, they can instantly cut their losses hassle free.
Finally, it is mentioned in the case that sometimes trucks leave without a full load because of weight requirement limitations. It is very important to manage these heavy products in order to manage successfully the number of trips and drops made by each carrier. To do that, more information is required such as which products are the heaviest? Which customers order these products the most? The management team can then categorize the products in terms of weight. For example: light, medium and heavy. Then, they can try to ensure that every load is completely full by limiting the amount of products depending on category for each load. (e.g. the limit for heavy products is 30/load … )
Analysis of customer and product base:
Exhibit A shows Ladner’s customer base. One can see that the number of delivery locations is almost the same for Dealers (4,360) and industrial customers (4100 locations). However, sales for dealers were much higher than sales for industrial customers. They were higher by about: $356/$139 = 256%. In other words, Ladner is paying around the same loss in delivery for both customers but the Dealers are producing much higher sales. It follows logically that if Ladner increases its Dealers customer base, and reduces its industrial customer base, it can reduce the overall cost (or loss). It would be very useful here to find out what types of products each customer base is mainly purchasing. If the industrial customer base is buying more of the products that have a high profit margin then that might offset the relatively low amount of sales.
Exhibit B shows Ladner’s product base. There are two issues to consider here, the profit margin and the SKU’s. Usually, it is assumed that the less stock a company keeps the lower the storage and handling costs are. We can see here that commodities have the lowest profit margin, but on the other hand they require the least space (only 10% of SKU’s). Allied products have the greatest profit margin but require the most space. Which means that if Ladner wanted to increase the sales of the allied products they would require the most increase in storage space. So there is a trade off. (Since Ladner only has 5% of market share, we can safely assume that it can increase its market share in any product if enough effort and promotion is put into it).
It will be useful here to find out what are the actual numbers for this trade off? Then Ladner can form a strategy to increase overall profit margins by changing the customer base. For example, if the costs of storage and handling are relatively higher, then Ladner could try to increase sales of industrial products, which have a relatively high profit margin and medium SKU space requirements. On the other hand, it could reduce sales of allied products, which have high SKU space requirements.
This product base management can be done in an indirect way as well. It is mentioned in the case that Ladner’s sales staff are evaluated on the basis of product gross margins. This ignores the costs of handling, storage and transportation. Ladner’s management can introduce a new evaluation method that would include these costs. The end result would be that sales representatives would try to sell the most profitable product to the most profitable customer after taking into consideration all the costs. In other words, better customer and product base selection.
