Leola Milling Company Case study
Jennifer Roberts, distribution manager for Leola Milling, has become increasingly aware that the company has a major problem as it continues to try to reduce inventories while maintaining the levels of service its customers have come to expect.
Company and Product
Founded in 1887, Leola Milling has provided high-quality bakery flour to commercial bakeries as well as to the consumer market. While commercial customers tend to have consistent buying patterns as well as brand loyalty, Leola has found that consumers have minimal loyalty but also generally prefer known names over the store brands. Demand is highly seasonal, with the annual peak occurring just before Thanksgiving and slacking off dramatically during January and February. To offset this, both Leola and its major supermarket chain accounts run special deals and sales promotions.
Production planning, located at the Leola, Pennsylvania, headquarters has responsibility for controlling inventory levels at the plant warehouse at Buffalo as well as at the three distribution centers located at Washington, Pennsylvania; Columbus, Ohio; and Pittsfield, Massachusetts. Planning has routinely been based on past history. No forecasting is performed, at least not in a formal sense. Distribution Centers (DC's) are replenished by rail from Buffalo; and lead times are typically seven days, with forty-eight to fifty-four pallets per car depending upon the type used. Should emergencies occur, eighteen pallets can be shipped by truck with a one-day transit time.
Recently Leola has experienced two major stockouts for its consumer-size five pound sacks of bleached white flour. One of these was due to problems in milling operations; the other occurred when marketing initiated a "buy one, get one free" coupon promotion. Since these events, planning has become overly cautious and err on the side of having excess inventories at the DCs. Additionally, two other events have affected DC throughput: (1) implementation of direct factory shipments for replenishing the five largest supermarket chains, and (2) a price increase making Leola flour more expensive than its national brand competitors, such as Pillsbury or Gold Medal.
Current Situation
Of the 1,500 pallets in the Pittsfield DC, Leola shows only 396 pallets for open orders. This has led the company to use outside overflow storage, where there are another 480 pallets. Flour is easily damaged; hence, Leola prefers to minimize handling. Overstocking at the DC alone costs $1.85 per pallet for outside storage, to which must be added $4.25 per pallet for extra handling and $225 per truckload for transportation. Similar scenarios are being played out at the other DCs as well.
Possible Solutions
Jennifer Roberts has been contemplating various approaches to solving the inventory issue. Clearly, product needs to be in place at the time a consumer is making a buying decision, but Leola cannot tolerate the overstocking situation and the stress that it is putting on facilities and cash flow.
Jennifer's first thought is that a better information system is needed, one that not only provides timely and accurate information but also extensively shares that information throughout the organization. Several questions immediately come to her mind; however, she needs additional information prior to coming to any solution.
Case Questions
1. Evaluate the alternative solutions being considered by Jennifer Roberts.
2. What additional solutions do you propose? Why?