Favored Blends Coffee Company
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Favored Blend’s operations are losing their effectiveness because of the uncertainty of demand. As a result, inventory management is becoming inefficient. This is resulting in warehouses some of which are under-stocked and some of which are overstocked. Therefore the management of the company should conduct some sort of risk pooling in order to reduce some of the uncertainty. Once the uncertainty has been reduced, the company will be in a better position to enhance the level of inventory turnover. Fortunately, the company maintains only two product categories which are similar. Therefore, in designing a new logistics system, Able should consider one of three strategies in risk pooling: location pooling, product pooling and virtual pooling.
The challenge in front of the management is to reduce the level of demand uncertainty. The high level of uncertainty is resulting from the fact that the customers are placing their orders in small lots. Therefore Able should consider implementing the Just-in-time management philosophy. This will enable Favored Blend to design a production scheduling system which will enhance the level of inventory and thus minimize carrying costs. However the important consideration for Able is to design a production scheduling system that would be compatible with a pull system. Therefore some sort of framework for demand forecasting would have to be implemented. This would facilitate the implementation of the JIT philosophy.
There is sufficient similarity among logistics system to enable Able Management Consultants to manage this project effectively. Particularly in this case, the problem is common enough in the form of the company’s inability to meet demand schedules. This is the reason that Favored Blends was dropped by Big Food Chain. In this respect it must be mentioned that Favored Blend maintained an elaborate logistics system. However since the company had no way of forecasting demand, the logistics system was proving to be ineffective. Therefore the source of the problem lay in demand forecasting. Addressing this problem entailed the application of methodologies which were common across different industries.
Once the problem of demand forecasting had been solved, Able Management Consultants would have to address the issue of production scheduling. The methodologies available to address this problem were also common across different industries. Concepts such as JIT and batch processing were very much applicable to Favored Blend’s industry. The company operated in a high-risk business because of the high level of uncertainty in demand. Therefore risk pooling strategies would have to be implemented in order to reduce this uncertainty. These risk pooling strategies could be made applicable unchanged to Favored Blend. All logistics systems had these components and therefore Able Management Consultants would be able to apply them to Favored Blend as well.
The problems in the logistics system at Favored Blend resulted from the company’s inability to forecast demand effectively. As a result the company was forced to implement a cross hauling strategy between warehouses. Because marketing and distribution departments were not making any efforts to forecast demand effectively, the manufacturing system was following a push strategy. However the push strategy was no longer effective because customers were placing increasingly smaller orders over shorter periods of time. These order quantities were not fixed. In spite of these problems, the entire system could be made more efficient with greater integration in supply chain management. Because of lack of coordination, logistics were not being conducted effectively.
Businesses have three strategies at their disposal: differentiation, cost minimization and focus. Favored Blend was implementing the cost minimization strategy. However the effectiveness in implementing this strategy was being hampered due to the lack of proper inventory management techniques. In order to maximize the efficiency of inventory management, the management at Favored Blends should negotiate with Big Food Chain in order to enhance the level of coordination in the value chain. This lack of coordination is one of the most widely occurring problems in the industry today. As a result of inadequate coordination, neither demand forecasting nor production scheduling can be conducted effectively. Therefore the company could not meet retailers’ expectations.
The policy of using boxcars is not an effective one because it hides the real problem which is that the company does not have demand forecasting and production scheduling systems in place. Therefore the total system effect is negative. This is hardly debatable as the company’s inability to maintain an effective schedule has resulted in loss of large accounts such as Big Food Chain. Use of boxcars reduces the cost of the internal logistics system. But it does not improve external coordination such as coordination with the retailers. That is the critical success factor and the use of boxcars hardly addresses that factor.
The company implements the strategy of cost minimization. However that strategy is hardly effective if it does not take into account retailers’ expectations. Therefore the use of boxcars is ineffective. It reduces costs in the short-term but this cost reduction is not geared towards demand patterns that currently exist in the market. Therefore in the long term, the effect is a negative one. This is in addition to the fact that both transportation and warehousing costs have increased. Therefore the use of boxcars would no longer be effective. It would worsen the situation in the long term by diverting attention away from the total process of supply chain management which the management of the company should focus on at present.