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Evaluation of a warehousing system in western Canada Pratt, Brian 1973

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EVALUATION OF A WAREHOUSING SYSTEM IN WESTERN CANADA by BRIAN PRATT B.Comm., University of B r i t i s h Columbia, 1969 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION in the Faculty of Commerce and Business Administration We accept th i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September, 1973 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make i t freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of Co-~\^CL£^ t L The University of British Columbia Vancouver 8 , Canada i . ABSTRACT T h i s s t u d y e v a l u a t e s the e x i s t i n g system o f d i s t r i b u t i o n f a c i l i t i e s f o r one f i r m and a s s e s s e s the f e a s i b i l i t y o f e s t a b l i s h i n g a.unew warehouse. The frame-work employed f o r a n a l y s i s a t t e m p t s t o measure the e f f e c t s o f v a r i o u s changes i n the f i r m ' s d i s t r i b u t i o n , , network on c o s t r e d u c t i o n and s a l e s g e n e r a t i o n . F o r measurement o f the c o s t r a m i f i c a t i o n s o f v a r i o u s warehouse l o c a t i o n a l t e r n a t i v e s , the s t u d y e s t a b l i s h e s the i n p u t s o f market demand, warehouse c a p a c i t i e s , and c o s t s o f d i s t r i b u t i o n from warehouses t o markets t h a t a r e r e q u i r e d . These i n p u t s a r e then e v a l u a t e d t h rough use o f a l i n e a r programme r o u t i n e w h i c h has a s e n s i t i v i t y a n a l y s i s . To e v a l u a t e t h e s a l e s g e n e r a t i o n a s p e c t s o f v a r i o u s l o c a t i o n a l a l t e r -n a t i v e s , a s u b j e c t i v e e s t i m a t i n g p r o c e d u r e known as t h e D e l p h i i s used. The D e l p h i i s used s p e c i f i c a l l y o n l y t o measure the r e l a t i v e i m p o r t a n c e o f d e l i v e r y times and warehouse l o c a t i o n f o r the market a t w h i c h the proposed warehouse i s t o be l o c a t e d , however, i t s g e n e r a l f i n d i n g s a r e a l s o used f o r e s t a b l i s h i n g t h e r e l a t i v e i m p o r t a n c e o f customer s e r v i c e i n a l l m a r k e t s . i i . The general conclusions of the analys i s are that the sales generation impact of warehouses has been over-emphasized by the company studied and, as a r e s u l t , i t i s not feas ib le to e s t ab l i sh a new warehouse i n the loca t ion proposed. The analys i s also indicates that the f i rm 1 s e x i s t i n g d i s t r i b u t i o n network i s too decentra l -i zed and that subs tant ia l savings w i l l r e su l t i f several warehouses are abandoned. i i i . TABLE OF CONTENTS CHAPTER Page ONE 1 INTRODUCTION . 1 Background on the Firm S t u d i e d , . . . . 2 Purpose of the Study 4 Limitations of the Study 5 Organization of the Study . . . . . . 6 De f i n i t i o n of Terms 7 TWO 10 RELEVANT LITERATURE 10 Decentralized versus Centralized D i s t r i b u t i o n 10 Cost Tradeoffs of Warehouse Location 12 The Customer Service E f f e c t . . . . „ . 14 Measurement of the Customer Service Fleet 15 Models for Solving the Warehouse Problem 17 THREE 21 PRELIMINARY FINDINGS AND RESEARCH METHODOLOGY 21 Preliminary Findings 21 Methodology of the Study 2 8 The Transportation Model . . . . 30 Limitations of the Model . . . . 33 i v . Page FOUR 35 DERIVATION OF DEMAND INPUT 35 Estimating Demand—The Delphi 35 Results of the Delphi 42 Reconciling the Delphi Estimates . . . 50 Inferences about the Importance of Customer Service 51 Demand Input for the Di s t r i b u t i o n Network 54 FIVE 57 DETERMINING UNITS OF OUTPUT AND COST INPUT 57 Determining units of Output 57 Derivation of Cost Input 64 Cost of shipping goods to customers 64 Landed cost of goods at warehouses 7 8 SIX 84 A MORE OPTIMAL DISTRIBUTION SYSTEM . . . . 84 F e a s i b i l i t y of the Lethbridge Warehouse 84 Optimality of the Ex i s t i n g D i s t r i b t u i o n System 93 S e n s i t i v i t y of the Optimal Solution 98 Conclusions on the Optimal Solution . . 109 SEVEN 121 SUMMARY AND CONCLUSIONS 121 Summary 121 V. Conclusions 122 Areas for Further Study 124 Concluding Comments 127 BIBLIOGRAPHY 129 APPENDIX 132 v i . LIST OF TABLES TABLE Page I. Demand Points that would possibly berserved by a Lethbridge Warehouse 2 3 II. Estimated 1970 Interwarehouse Transfers i n Hundredweight . . . 26 II I . I n i t i a l Estimates of Lethbridge Market Potential 42 IV. F i n a l Estimates of Lethbridge Market Potential 43 V. Estimates of Annual Percentage Growth Rates i n Lethbridge Potential 46 VI. I n i t i a l Estimates of Market Shares under Lethbridge Strategies 46 (a) VII. F i n a l Estimates of Market Shares under Lethbridge Strategies 48 VIII. Assimilation of the Delphi Estimates 52 IX. Percentage of Ex-mill Sales to Total Sales by Warehouse Region 55 X. Warehouse Sales by T e r r i t o r y or City 56 XI. Average Sales Value of Invoice .. 62 XII. Estimates Warehouse Throughput in pounds as Calculated by Regression 63 XIII. Estimated Weight of Sales by Te r r i t o r y 65 v i i . XIV. L.T.L. Freight Rate Regressions, Shipments within Manitoba and Saskatchewan ,68 XV. L.T.L. Freight Rate Regressions, Shipments between the P r a i r i e Provinces 69 XVI. L.T.L. Freight Rate Regressions, Shipments within Alberta and Alberta-B.C 70 XVII. L.T.L. Freight Rate Regressions, Shipments within B.C. and B.C.-Alberta 71 XVIII. Paper Products T a r i f f , Vancouver to Vancouver Island C i t i e s . . . . 75 XIX. D i s t r i b u t i o n of Customer Shipments by Weight Group 7 7 XX. I n t r a c i t y Shipment Costs 78 XXI. Landed Cost of Goods per Hundredweight 82 XXII. P r o f i t a b i l i t y of Increased Sales Coverage 87 XXIII. Annual Operating Costs of Proposed Lethbridge Warehouse 88 XXIV. P r o f i t a b i l i t y of Lethbridge Warehouse 89 XXV. P r o f i t a b i l i t y of Maintaining the Status Quo 92 XXVI. S e n s i t i v i t y of the Optimal Solution to Warehouse Capacity 9 9 XXVII. S e n s i t i v i t y of the Optimal Solution to Cost C o e f f i c i e n t s 100 v i i i . XXVIII. Decreased Variable D i s t r i b u t i o n Costs which would have resulted with the Optimal Solution during 1970 113 XXIX. Average Warehouse Inventory 114 XXX. Maximum Sales Loss Permissable before Optimal Solution Cost Savings Dissappear 119 i x . LIST OF FIGURES FIGURE PAGE 1. Cost Tradeoffs of Warehouse Location 12 2. Graphic Description of the Transportation Problem 31 3. Matrix Representation of the Transportation Problem 32 4. Markets served by Warehouse i n Exi s t i n g D i s t r i b u t i o n Network 110 5. Markets served by Warehouse i n Proposed Optimal D i s t r i b u t i o n Network I l l X . ACKNOWLEDGEMENTS The writer wishes to express his sincerest appreciation to the management of the A.B.C. Widget Co. Without t h e i r co-operation and assistance, both i n supplying relevent data and suggesting ingenious methods of obtaining hidden information, i t i s doubtful the study could have been undertaken. In addition, gratitude i s owed to Dr. K. MacKrimmon of the University of B r i t i s h Columbia whose suggestions and assistance i n developing the Delphi questionnaire were most useful. The writer i s also indebted to Dr. Peter Lawrence, formerly of the University of B r i t i s h Columbia, who acted as advisor during the formative stages of the study's development. Dr. Lawrence's suggestions and guidance for the use of a n a l y t i c a l approaches were p a r t i c u l a r l y h e l p f u l . The writer further wishes to express appreciation to Dr. T. Heaver, Chairman of the Transportation D i v i s i o n at the University of B r i t i s h Columbia, under whose guid-ance the study was completed. Dr. Heaver's constructive c r i t i c i s m of the study's organizational and a n a l y t i c a l weaknesses were invaluable. CHAPTER ONE INTRODUCTION Wit h p r o d u c t i o n t e c h n o l o g y h a v i n g l o n g r e a c h e d the p o i n t o f d i m i n i s h i n g r e t u r n s and the a r t o r t e c h -n o l o g y o f m a r k e t i n g near o r p a s t t h i s p o i n t , t h e a n a l y s i s o f p h y s i c a l d i s t r i b u t i o n problems g a i n i n c r e a s e d i m p o r t -ance. I n many i n d u s t r i e s the c o s t s o f d i s t r i b u t i o n r e p r e s e n t t h e l a r g e s t c o r p o r a t e o u t l a y and i t i s e s t i m a t e d t h a t f o r American i n d u s t r y as a whole l o g i s t i c s c r e a t e s o n e - t h i r d o f t o t a l c o r p o r a t e e x p e n d i t u r e s ; y e t , p h y s i c a l d i s t r i b u t i o n has remained one o f the most n e g l e c t e d a r e a s o f c o r p o r a t e management."'" T h i s n e g l e c t has not been i n t e n t i o n a l , b u t me r e l y t h e r e s u l t o f f i r m s e v o l v i n g a l o n g f u n c t i o n a l l i n e s . G e n e r a l l y , d i s t r i b u t i o n problems o v e r l a p i n t o many a r e a s o f management; they a f f e c t b o t h p r o d u c t i o n and m a r k e t i n g and u s u a l l y r e s u l t i n s o l u t i o n s w h i c h e v e n t u a l l y n e c e s s i t a t e the commitment o f o f funds t o e s t a b l i s h warehouses and/or p l a n t s . Such f a c i l i t i e s , b e i n g l o n g l a s t i n g , r e q u i r e c a r e f u l a n a l y s i s b e f o r e they a re l o c a t e d s i n c e t h e y can o f t e n g i v e the f i r m an i n h e r e n t advantage o r d i s a d v a n t a g e i n i t s c o m p e t i t i v e K.M. Ruppenthal, H.A. McKinnel,, (eds) " L o g i s t i c s : a Forward Look"by Ruppenthal, Business L o g i s t i c s i n  American Industry, Stanford University, C a l i f . , 1968, p.5. 2. environment. This study evaluates the e f f i c i e n c y of the e x i s t i n g warehouse system for one firm. 2 Background on the Firm Studied The company analyzed i n t h i s study i s the A.B.C. Widget Company which i s a wholly owned subsidiary of one of i t s major suppliers. A.B.C. i s primarily a d i s t r i b -utor of paper and related products i n Western Canada. Like many national d i s t r i b u t o r s i t may have suffered from p r o l i f e r a t e d product l i n e s — i t d i s t r i b u t e s approxi-mately 11,000 d i f f e r e n t items ranging from l i g h t stationery, e l a s t i c bands, and paper c l i p s to kr a f t paper and Timex wristwatches. The company d i s t r i b u t e s three main product l i n e s : resale items, i n d u s t r i a l paper, and p r i n t i n g paper. At the time t h i s study was undertaken A.B.C. had a system of eleven d i s t r i b u t i o n centres i n Canada. These centres were located at Vancouver, V i c t o r i a , Prince George, Prince Rupert, Edmonton, Calgary, Regina, Saska-toon, Winnipeg, Thunder Bay, and Toronto. The f a c i l i t y at Toronto was i n the i n i t i a l stages of operation and for a l l purposes i t could be said that A.B.C. only contested those markets west of the Lakehead, Accordingly, due to the infancy of the Toronto f a c i l i t y , i t was excluded for the purposes of the study. Of the other ten 2 . Author's note: Since much of the data i n t h i s study i s c o n f i d e n t i a l , the-.name of the firm has been changed. 3. warehouses i n operation, the Vancouver warehouse was the central warehouse, while Calgary, Edmonton, Winnipeg, and to a lesser extent Saskatoon and Regina could be described as regional warehouses. Thunder Bay, V i c t o r i a , Prince Rupert, and Prince George were l o c a l warehouses large l y dependent upon the other warehouses as a source of goods. The primary impetus for the study came from a proposal to investigate the f e a s i b i l i t y of establishing a new warehouse at Lethbridge, Alberta. There were three reasons which prompted such an inves t i g a t i o n : 1. D.E.F. Widget, A.B.C.'s major competitor i n the Lethbridge area, had operated a warehouse at Lethbridge for several years and apparently was capturing a major share of the market. 2. Up u n t i l a year and a h a l f before t h i s study was i n i t i a t e d , A.B.C. had employed a rather i n e f f e c t i v e sales representative at Lethbridge. At that time a rather young and inexperienced, but aggressive salesman began serving the Lethbridge area and sales increased dramatically. 3. Lethbridge was undergoing a phenomenal rate of economic growth, and i f t h i s continued, there was a p o s s i b i l i t y that Lethbridge might become an important market. 4. Thera was also probably a fourth reason for studying the Lethbridge proposal. The Calgary ware-house, which was currently serving the Lethbridge area, was operating at f u l l capacity. During the period i n which t h i s study was taking place, the capacity of the Calgary warehouse was increased through i n s t a l l a t i o n of high rack, narrow a i s l e shelving. Purpose of the Study I n i t i a l l y , the study's purpose was to investiage the f e a s i b i l i t y of establishing a Lethbridge warehouse. After preliminary analysis, i t appeared unlikel y that a Lethbridge warehouse would prove feas i b l e and the study took on a further purpose. Acceptance of a ware-house at Lethbridge would support the acceptance of a decentralized system of d i s t r i b u t i o n , while r e j e c t i o n of a warehouse would mean there was a good p o s s i b i l i t y a more centralized d i s t r i b u t i o n system would be more economic. Accordingly, i n addition to studying the Lethbridge problem, the entire d i s t r i b u t i o n system was evaluated. To summarize, the study had two underlying hypotheses: 1. Establishment of a warehouse at Lethbridge would not prove f e a s i b l e , and 2. 5. The e x i s t i n g d i s t r i b u t i o n system had too many warehouses. Limitations of the Study Like most studies of d i s t r i b u t i o n problems, t h i s one was hampered by a lack of data i n the form desired. Sales data were available only on an aggregated basis and i t was impractical to pinpoint sales by c i t y i n :r most instances. The information systems of the firm were also not yet f u l l y developed and i t was d i f f i c u l t to obtain detailed data on actual d i s t r i b u t i o n costs and movement of goods i n the e x i s t i n g d i s t r i b u t i o n system. As a r e s u l t , extensive sampling was required and i t was not within the f i n a n c i a l resources of the study to have a l l results s t a t i s t i c a l l y s i g n i f i c a n t . The study was also l i m i t e d i n i t s scope since i t did not consider the p o s s i b i l i t y of new warehouse locations (except at Lethbridge) and merely optimized the e x i s t -ing network of warehouses. This l i m i t a t i o n , however, was primarily t h e o r e t i c a l since i n practice warehouses must be located at or near areas of economic concen-t r a t i o n and there were very few centres of economic concentration i n Western Canada where A.B.C. did not already operate warehouses. Organization of the Study 6. Chapter Two discusses the l i t e r a t u r e that was useful i n developing a methodology for analysis. This chapter b r i e f l y reviews the cost tradeoffs which must be made i n evaluation of physical d i s t r i b u t i o n systems and outlines d i f f e r e n t approaches which have been suggested for solving the warehouse location problem i n a multi-warehouse system. Chapter Three presents the res u l t s of preliminary analysis and an overview of the d i s t r i b u t i o n system being modelled. This chapter explains how the transport-ation model can be formulated to solve the warehouse location problem and how i t i s incorporated into the general methodology of the study. Limitations of the study's methodology and j u s t i f i c a t i o n for i t s use are also noted i n t h i s chapter. Chapter Four derives the demand input necessary for solution of the model presented i n Chapter Three and explains a subjective estimating procedure known as the "Delphi" which i s applied to the problem of measuring the a f f e c t of various d i s t r i b u t i o n plans on sales at Lethbridge. The Delphi should be of p a r t i c u l a r i n t e r e s t to those who must generate data when i t i s non-existant. 7. Chapter Five explains the method by which cost data were developed for the model and tests the assumpt-ion that a l l warehouses d i s t r i b u t e the same homogeneous mix of goods. Chapter Five also converts a l l demand and cost data to a common denominator (units of output) and makes extensive use of regression analysis to determine how f r e i g h t rates vary with distance. Chapter Six presents a p r o f i t a b i l i t y analysis on the f e a s i b i l i t y of various d i s t r i b u t i o n strategies which could be implemented at Lethbridge. This chapter also tabulates the results of the transportation model and derives a more e f f i c i e n t d i s t r i b u t i o n network. Chapter Seven summarizes the r e s u l t s of the study, draws conclusions, and suggests areas for further research. Definitions of Terms Customer Service: A s p a t i a l and temporal term used to describe the importance attributed to warehouse location and delivery times by customers. F Values: A s t a t i s t i c a l term, often used i n regression analysis, which tests the significance of the c o e f f i c i e n t s of the independent variables for a given l e v e l of confidence and estimated degrees of freedom. The C r i t i c a l F Value i s that F Value at which the independ-ent variable becomes s i g n i f i c a n t . 8. O b j e c t i v e F u n c t i o n : The o b j e c t i v e f u n c t i o n i s t h a t f u n c t i o n o f t h e independent v a r i a b l e s whose maximum o r minimum i s sought i n an o p t i m i z i n g problem. Optimum: A s e t o f v a l u e s o f v a r i a b l e s w h i c h y i e l d s t h e most f a v o r a b l e v a l u e (maximum o r minimum) t o the o b j e c t i v e f u n c t i o n . R e g r e s s i o n A n a l y s i s : A s t a t i s t i c a l p r o c e d u r e f o r determining, the r e l a t i o n between one dependent v a r i a b l e and one o r more independent v a r i a b l e s where the dependent v a r i a b l e responds t o the independent v a r i a b l e ( s ) . R e g r e s s i o n measures the c o r r e l a t i o n between the dependent and independent v a r i a b l e s . 2 2 R : The R ais- a measure o f how good a p r e d i c t o r t h e i ndependent v a r i a b l e i s o f t h e dependent v a r i a b l e i n terms o f c o r r e l a t i o n . I n s h o r t , i t measures t h e e x p l a i n -ed v a r i a n c e o v e r the t o t a l v a r i a n c e o f t h e r e g r e s s i o n e q u a t i o n . R e s i d u a l s : The r e s i d u a l s a r e the d i f f e r e n c e between t h e e s t i m a t e d and a c t u a l v a l u e s o f t h e dependent v a r i a b l e , i ; e . , t h e r e s i d u a l s a r e t h e u n e x p l a i n e d v a r i a n c e o f the r e g r e s s i o n e q u a t i o n . The r e s i d u a l s o f a r e g r e s s i o n e q u a t i o n s h o u l d be randomly d i s t r i b u t e d and when t h e y are n o t they are termed b i a s e d . B i a s e d R e s i d u a l s o f t e n i n d i c a t e t h a t t h e dependent v a r i a b l e i s b e i n g a f f e c t e d 9. by an independent variable which i s not recognized i n the regression equation. S e n s i t i v i t y Analysis: The responsiveness of a solution to changes i n the numerical values of the c o e f f i c i e n t s . Service E l a s t i c i t y of Demand: A measure r e f l e c t -ing the degree to which improvements or deterioration i n customer service w i l l a f f e c t sales. .Transshipment: :•• A term used to describe shipments of goods t r a v e l l i n g from one warehouse to another ware-house p r i o r to d i s t r i b u t i o n to customers. CHAPTER TWO RELEVANT LITERATURE The v i t a l problem of physical d i s t r i b u t i o n i s concerned with the movement of goods from t h e i r source of production to t h e i r point of consumption. Therefore, l o g i s t i c s i s primarily concerned with the creation of time and place u t i l i t y at the lowest possible t o t a l cost. The most important decision i n creating these u t i l i t i e s i s the location of inventories which results i n the establishment of d i s t r i b u t i o n f a c i l i t i e s . Decentralized versus Centralized D i s t r i b u t i o n In recent years there has been a trend towards c e n t r a l i z a t i o n of d i s t r i b u t i o n i n many industries. Primarily, there have been two reasons for t h i s : 1. It has been possible to achieve better delivery times through improved warehouse f a c i l i t i e s , f aster processing of orders, and improved trucking services, and 2. The advent of the computer has allowed faster 3 processing of sales and inventory information F.H. Mossman, and N. Mortman, L o g i s t i c s of  D i s t r i b u t i o n , A l l y n and Bacon, Boston, 1964, p. 308. There are, of course, constraints on d i f f e r e n t indust-r i e s which often necessitate a decentralized system. If goods have high s u b s t i t u t a b i l i t y , i . e . they are undifferentiated and hence have a f a i r l y e l a s t i c demand, firms may attempt to d i f f e r e n t i a t e through 4 location dispersion . Also, some products which are of an e s s e n t i a l nature i n other processes dictate maximum a v a i l a b i l i t y . S i m i l a r l y , some products necessitate decentralized d i s t r i b u t i o n from a s t r i c t cost viewpoint since demand dictates small shipment l o t s and/or the goods have low d o l l a r densities which are unable to support the high costs of transportation 5 from a central storage point . Sales v a r i a t i o n of in d i v i d u a l demand points also can a f f e c t the d i s t r i b -ution system chosen. Where the degree of cross c o r r e l a t i o n i n sales v a r i a t i o n i s low, so that v a r i -ations i n one market o f f s e t those i n other markets, there i s p o t e n t i a l l y substantial economy i n the con s o l i -dation of inventory . There i s , however, one f i n a l constraint on the d i s t r i b u t i o n system chosen—the degree of service customers demand and competition meets. D. Bowersox, E. Smykay, and B. Lalonde, Physical  D i s t r i b u t i o n Management, The MacMillan Co., New York, 1968,p. 245. 5 T. Heskett, R. Ivie, and N. Glaskowsky, Business  L o g i s t i c s , The Ronald Press, New York, 1965, p. 19 8. ^J.F. Magee, "The L o g i s t i c s of D i s t r i b u t i o n " , The  Harvard Business Review, v o l . 38 #4 (July-August), I960, p. 7. 12. Cost Tradeoffs of Warehouse. Location Warehouse location theory has developed as a s p a t i a l l y oriented d i s c i p l i n e through techniques such, as centre of gravity models (ton mile centres, etc.) and li n e a r programming models. At the basis of these models has been an optimum solution of minimum cost. The basic l o g i c of these techniques can be depicted graphically: FIGURE 1 COST TRADEOFFS OF WAREHOUSE LOCATION ^^r-' d i s t r i b u t i o n 1 . plant to y warehouse transport costs, inventory costs, & warehouse over-head & operating costs ^ ^ " N i w ^ warehouse to -.. customer transport costs Number, of warehouses Optimum number of warehouses Source: W.M. Stewart, "Physical D i s t r i b u t i o n : Key to Improved Volume and P r o f i t s " Journal of  Marketing, v o l . 29, January, 1968, p. 68. 13. By trading o f f the costs depicted i n Figure 1, i t i s often thought that an optimal warehouse system i s achieved. This approach, however, usually has serious l i m i t a t i o n s i n that unless demand i s assumed constant regardless of the d i s t r i b u t i o n system design, the solution may have l i t t l e to do with p r o f i t maxi-mization. The reason for t h i s , although obvious, i s often overlooked. In a str a t e g i c context, the primary requirement for inventory i s to meet the demands of time and place u t i l i t y - - i f t h i s i s not done, nothing w i l l be sold: i f i t i s not done e f f i c i e n t l y , p r o f i t s w i l l be placed i n jeopardy. Thus the t r a d i t i o n a l cost trade-o f f s of warehouse location dismiss to a great extent the revenue generation e f f e c t s of inventory loca t i o n . If inventories are reduced i t i s true there w i l l be cost savings, however, indescriminate reduction i n the location of inventory may seriously impair the r e l i a b i l -7 l t y of delivery to customers.. To some extent the s p a t i a l l y oriented approaches, p a r t i c u l a r l y l i n e a r programming, can accommodate the sales generation e f f e c t of d i f f e r e n t warehouse systems through the incorporation of service time constraints. Also, these techniques do not t o t a l l y neglect customer service i n that they are l i k e l y to r e s u l t i n solutions 7 Ibid., p. 9. which have warehouses at areas of great concentration of demand to which very high standards of service w i l l be given. It has also been argued that these techniques produce cost savings and these additional funds can be placed i n promotional a c t i v i t i e s or allow price reductions causing greater market penetration. The Customer Service E f f e c t The above discussion suggests that a measurement of the e f f e c t s of customer service i s required before a d i s t r i b u t i o n network can be t r u l y optimized. Customer service, as defined i n t h i s paper, i s a time-oriented concept. Improvement of service i n this context can t h e o r e t i c a l l y be measured as the diminuation of time from order placement to delivery of the goods to the customer's door (the re-order c y c l e ) . The a b i l i t y to provide quick delivery to customers reduces the custom-er's inventory requirements by allowing him to cut safety stocks to a minimum. Accordingly, quick delivery can be viewed i n economic terms as a reduction i n p r i c e . With faster delivery times the firm should be able to move downward along i t s demand curve and increase i t s quantity sold. Incorporation of t h i s basic economic concept adds a further dimension to the warehouse location problem since i t considers the revenue-producing c h a r a c t e r i s t i c s of d i f f e r e n t location strategies. It i s also possible 15. that there i s a further dimension to customer service beyond those purely attributable to customer inventory savings. A location i n a market might actually r e s u l t i n a s h i f t i n the demand curve which the firm faces. Thus, even i f a firm offers equal delivery times to those of i t s competitors, but the competitors are located i n a p a r t i c u l a r market and the firm i s not, i t may not be possible to obtain an equal market share. Heskett has g termed t h i s phenomina "the value of being known". Measurement of the Customer Service E f f e c t It i s highly u n l i k e l y the e f f e c t of customer service on demand can be adequately quantified. However, th i s i s true of many areas of business, for example, advertising. There i s probably no s a t i s f a c t o r y method by which to measure the e f f e c t of advertising on sales, yet firms continue to make massive advertising expendi-tures and use i n d i r e c t measures of effectiveness. S i m i l a r l y , there are i n d i r e c t measures of customer service. One method of measurement i s to simply review h i s t o r i c a l sales data and note changes that took place under various service l e v e l s . This can be achieved through regression analysis, or on a less sophisticated g Heskett, et a l . , op. c i t . , p. 196. 16. l e v e l by simply p l o t t i n g trends before and a f t e r changes 9 have been made. A second method i s to survey the opinions of salesmen. Although salesmen may be somewhat biased i n favor of too much service, they usually are the most sensitive to customer needs. Another method i s to interview customers and discover how many would give firm commitments under various service l e v e l s . Unfortunately, t h i s approach i s often more costly than the expected payoffs and must be implemented with extreme caution since i t could be disastrous i f customers gained the impression that better service was forthcoming. Perhaps the best method of measurement i s to a l t e r service le v e l s on various test markets, although th i s approach also could have disastrous consequences. Ultimately, however, the method chosen w i l l be dictated by resources available and the data generated by the firm's information systems. The important thing i s that customer service be recognized when the model used to optimize the d i s t r i b u t i o n system i s chosen. A.W. Napolian, "Determining Optimum D i s t r i b u t i o n Points for Economic Warehousing and Transportation", from Marks and Taylor (eds.), Marketing L o g i s t i c s : Perspect- ives and Viewpoints, John Wiley & Sons, New York, 1967, p. 176. 10 . . American Management Association, A new Approach to Physical D i s t r i b u t i o n , New York, 1967, p. 31. I L , . , Ibid. 17. Models for Solving Warehouse Problems Several models have been suggested for evaluation of the general warehouse problem, which i s : 1. how many warehouses should there be, 2. where should warehouses be located, and ,„ 3. what market areas should each warehouse serve. Although the l i s t of models i s endless, there are basic-a l l y two approaches to the problem—cost contour approaches, and l i n e a r or non-linear programming tech-niques . Cost Contour Approaches: The most simple method of analysis and one which i s oftenrused for small warehouse problems i s the establishment of equal cost contours. Under t h i s approach the cost of landing goods at each warehouse i s determined and f r e i g h t rates from each warehouse to various market areas are calculated. By use of t h i s technique i t i s then possible to construct equal cost contours to e s t a b l i s h the market area served by each warehouse. This approach has been extended by Bowman and Stewart. Napolian, op. c i t . , p. 176 18. The Bowman Stewart formulation argues that ware-house costs per d o l l a r of goods handled w i l l decrease with increasing warehouse volume. The argument i s based on the assumption that costs of supervision and other overhead are spread over more units of throughput and that labour may be more e f f i c i e n t l y used i n large scale operations. The Bowman Stewart formulation states that there are three categories of cost i n the general ware-house problem: 1. Certain costs associated with warehouse e f f i c i e n c y which decrease with increased warehouse volume. 2. Certain costs associated with d i s t r i b u t i o n of goods to customers from warehouses which tend to vary approximately with the square root of the area served by the warehouse, and 3. Certain costs which are associated with neither the volume of throughput i n a warehouse nor 13 the area served by the warehouse. Mathematically, the model may be stated as: c = a + -rt + & r K E.H. Bowman, and J.B. Stewart, "A Model for Scale of Operations," from Marketing L o g i s t i c s , p. 71. where, C = cost within the d i s t r i c t served per dol l a r s worth of goods d i s t r i b u t e d . KA = volume of goods handled by a warehouse where K equals sales density per square mile 'and A equals the area served, a = cost per dol l a r s worth of goods d i s t r i b u t e d independent of either the warehouse volume handled or area served, b = fixed costs per warehouse volume handled which divided by the warehouse volume w i l l y i e l d the appropriate cost per do l l a r s worth of goods di s t r i b u t e d , c = the cost of d i s t r i b u t i o n which varies with the square root of the area served. To solve the Bowman Stewart model i t i s necessary to esta b l i s h values for the parameters a, b, and c. Once the parameters are established the model i s restated and minimized with respect to area. Linear and Non-Linear Programming Techniques: The most common method for solving warehouse problems i s a special form of l i n e a r programming known as the Trans-portation Problem. B a s i c a l l y , the model states that the optimal solution i s one that minimizes the cost of d i s t r i b u t i n g goods from warehouses to markets. By defin-i t i o n l i n e a r programming assumes a l l costs are l i n e a r . 20. One problem with non-linear approaches i s the gathering of s u f f i c i e n t data so that the proper non-l i n e a r i t i e s are r e f l e c t e d . There i s also the p o s s i b i l i t y that the warehouse system modelled may f a l l into a s i t u a t i o n demonstrated by B a l i n s k i and M i l l s where the warehouses are close to a high l e v e l of a c t i v i t y and 14 n o n - l i n e a r i t i e s i n cost may not e x i s t . There are, however, given the proper data a v a i l a b i l i t y and the existance of economies, good reasons for using non-l i n e a r models. Marks and Taylor, Marketing L o g i s t i c s , p. 106. CHAPTER THREE PRELIMINARY FINDINGS AND RESEARCH METHODOLOGY Before embarking upon a study i t i s often useful to investigate the problem on a f a i r l y simple l e v e l to ensure that the problem has been i d e n t i f i e d c o r r e c t l y , and to f a m i l i a r i z e oneself with the data constraints that w i l l be placed upon analysis. Preliminary Findings As the i n i t i a l purpose of the study was to test the f e a s i b i l i t y of a Lethbridge warehouse t h i s problem was analyzed on a preliminary basis. I t was decided to determine the ex i s t i n g sales volume which could be served from Lethbridge i f a f a c i l i t y was established. To achieve t h i s , the area a Lethbridge warehouse might serve was somewhat a r b i t r a r i l t y determined by drawing an equie^ distant boundry between Calgary (which currently served Lethbridge) and Lethbridge. Such an approach has been suggested by Wolfe and assumes that outbound shipment costs are a l i n e a r function of distance; i t also assumes )• that the costs of supplying goods to each d i s t r i b u t i o n 15 centre are equal. Adoption of such an approach was u n r e a l i s t i c since i t was unlike l y goods could be supplied to a Lethbridge warehouse as cheaply as they could to Calgary. However, the approach was desirable since i t gave the Lethbridge proposal every advantage. Using t h i s framework i t was possible through t o t a l l i n g of sales invoices to determine the sales volume which a Lethbridge warehouse might serve. Table I shows the sales volume of every point a Lethbridge warehouse would serve on the basis of 1969 sales, the f i r s t ten months of 1969 sales, and the f i r s t ten months of 19 70 sales. I t was found that for the f i r s t ten months of 1970 three market areas—Lethbridge, Medicine Hat, and Cranbrook-Kimberly--were responsibile for 87% of the sales a Lethbridge warehouse might serve, while the c i t y of Lethbridge was responsible for 47% of the sales that could be served. Comparison of the period June 1 to October 30 for 1969 and 1970 indicated a 36% increase i n the sales of the area a Lethbridge ware-house might serve. This l e v e l of sales, however, was far below that which management thought j u s t i f i e d a warehouse."^ 15 H.B. Wolfe, "The Systems Approach to D i s t r i -bution," Business L o g i s t i c s i n American Industry, pp. 116-17. 16 Author's note: As a rule of thumb, A.B.C. f e l t that a minimum annual sales of $ 500,000 was required to sustain a warehouse. TABLE I 23. DEMAND BY POINTS THAT WOULD POSSIBLY BE SERVED BY A LETHBRIDGE WAREHOUSE (excludes ex-mill shipments) Point Jan-Dec. 31/69 Jan-Oct. 31/69 Jan-Oct. 31/70 BLAIRMORE $ 572 $ 206 $ 953 BOW ISLAND 355 225 3,930 CARDSTON 612 313 1,112 CLAIRSHOIM 2 ,821 2,151 4,974 COLEMAN 65 65 — CRANBROOK 11 ,500 9,014 24,566 FERNIE 9 ,136 7,689 6,891 FT. McLEOD 2 ,476 2,113 2,663 FOREMOST 144 144 — KIMBERLY 6 ,641 4,612 6,606 LETHBRIDGE 102 ,223 83,337 103,196 MEDICINE HAT 51 ,330 45,354 56,267 NORTiEFORD 155 75 — NATAL 40 — 1,584 NANTON 436 315 1,212 PICTURE BUTE 64 32 279 PINCER CREEK 336 538 1,261 RAYMOND 397 195 247 TABOR 2 ,708 2,185 2,214 VULCAN 1 ,645 1,519 372 VAUXHAUL 233 233 TOTAL $193,998 $160,419 $218,589 Source: A.B.C. Widget Invoices 24. Presentation of t h i s f inding to management revealed a general f e e l i n g that the e x i s t i n g sales volume was not a f a i r basis upon which to judge the f e a s i b i l i t y of a warehouse. The Lethbridge proposal did not stem from cost considerations alone; i t was thought establishment of a warehouse would stimulate sales considerably. Accordingly, the preliminary f i n d -ings indicated that a d e t a i l e d study would require estimates of the sales stimulation which might be attributable to establishment of a warehouse, i t was at t h i s point i n study that i t was decided to evaluate the r e s t of the d i s t r i b u t i o n system since acceptance of a Lethbridge warehouse would mean continuation of a decentralized warehouse system, while r e j e c t i o n would tend to indicate there was a p o s s i b i l i t y ' t h a t too many d i s t r i b u t i o n centres were already i n existence. Having decided to evaluate the entire d i s t r i b u t -ion system's e f f i c i e n c y / i t became necessary to discover the i n t e r r e l a t i o n s h i p s which existed between warehouses. Of primary importance was the determination of the extent of transshipments between warehouses. To t h i s end, waybills were sampled and transshipments were noted. Since t h i s information was also required for determining f r e i g h t rates and shipment sizes i t required l i t t l e incremental e f f o r t . The sampling procedure chose every 25. tenth waybill, and i n order to obtain an estimate of the volume of transshipments between each warehouse, the sample observations were mu l t i p l i e d by a factor of ten. The results are tabulated i n Table II. A cursory analysis of Table II revealed that two warehouses, Winnipeg and i n p a r t i c u l a r Vancouver, transshipped considerably more goods than they received, while Thunder Bay, Prince George, Prince Rupert, and V i c t o r i a received considerably more transshipments than they sent. However, i n r e l a t i o n to the t o t a l through-put of each warehouse, shown i n brackets on Table I I , i t was found that the volume of transshipments was s i g n i f i c a n t for only the warehouses of V i c t o r i a , Prince Rupert and Prince George. It was discovered that transshipments were primarily the r e s u l t of two factors: 1. Transshipment due to poor forecasting. Many of the transshipments, p a r t i c u l a r l y to larger warehouses, were caused by stockouts. Thus, i n order to secure certain items quickly, i t was necessary to secure them from other warehouses rather than the manufacturer. 2. Transshipment due to buying economies. The bulk of transshipments to smaller warehouses TABLE II ESTIMATED 1970 INTERWAREHOUSE TRANSFERS IN HUNDREDWEIGHT Total From: T.B. Wpg. Reg. Sask. Cal. Edm. Vane. Vic. P.Geo. P.Rup. Rec' d To: T.B. — 1204 -- 45 56 -- 6 — -- — 1311 (1263)* Wpg. -- ~ 105 19 196 194 56 — — — 570 (63811) Reg. ~ 896 — .413 124 48- — — — — 1482 (37839) Sask. ~ 804 450 — 47 172 558 — -- ~ 2031 (46616) Cal. -- 799 — — ~ 918 1240 — — ~ 2956 (52475) Edm. — 908 — 168 1881 — 656 — — — 3613 (85968) Vane. — 30 — — 341 107 — — — — 478 (122442) Vic. — — — — — 6604 — — — 6604 (23497) P.Geo. -- — — — — 6164 — — — 6164 (10934) P.Rup. — — — — ~ 3372 — 207 ~ 3579 Total — — ^ 9 7 ) . Sent • - e - 4640 555 645 2645 1439 18657 -9— 207 -0— 28788 *NOTE: Numbers i n brackets show estimated warehouse throughput. Source: A.B.C. Widget Company Freight B i l l s . 27. were the r e s u l t of buying economies whereby i t was more economical to secure large orders at the bigger d i s t r i b u t i o n centres and ship some of the orders to smaller warehouses. It was primarily t h i s reason which resulted i n the Prince George, Prince Rupert and V i c t o r i a warehouses receiving a substantial protion of t h e i r goods through transshipment. Given these reasons for transshipment i t was decided not to b u i l d a model which wou'M r e f l e c t these movements i n the d i s t r i b u t i o n system. This decision was based upon the following factors: 1. The location of the smaller d i s t r i b u t i o n centres dictated that i t was highly u n l i k e l y they would ever increase the market areas they served to a point where i t would be possible to gain s i g n i f i c a n t l y further buying econom-ie s . 2. I t was l i k e l y many of the larger d i s t r i b u t i o n centres were already achieving close to the maximum amount of buying economies possible. 3. It would have been impossible to c o l l e c t cost information for even major suppliers to compare the alternatives of shipping d i r e c t 28. from manufacturer to a warehouse versus the e x i s t i n g practice of transshipment. Methodology of the Study Since the i n t e r r e l a t i o n s h i p between various d i s t r i b u t i o n costs are seldom clear cut there i s no simple method by which to determine an optimal solution. At best, one must develop a framework which f a c i l i t a t e s analysis i n a systematic fashion and attempts to measure cost reduction on the one hand and sales generation on the other.. The most useful and p r a c t i c a l tools for analyzing warehouse: problems are the programming approaches noted i n Chapter Two. This study uses a special type of l i n e a r programming known as the transportation model which i s discussed below along with the general methodology used. A methodology for the consideration of the sales generation e f f e c t s of l o c a t i o n a l strategies i s discussed i n Chapter Four. The study measures the cost ramifications of various location alternatives by establishing the inputs of market demand, warehouse capacities, and costs of d i s t r i b u t i o n from warehouses to markets which are required. These inputs are then evaluated through use of a l i n e a r programme routine which has a s e n s i t i v i t y analysis. To evaluate the sales generation aspects of warehouse location a subjective estimating procedure, known as the Delphi, i s used. The Delphi i s used as an indicator of the requirements of customers and how important delivery times and warehouse location are to sales. Although t h i s measure i s only incorporated s p e c i f i c a l l y for the Lethbridge market, the general findings for Lethbridge are also used as an indicator for the r e l a t i v e importance of customer service to a l l markets. B a s i c a l l y , the study i s divided into two parts--the Lethbridge problem and determining optimality of the e x i s t i n g d i s t r i b u t i o n system. For solution of both problems the basic input of demand at each market, supply available at each warehouse, and the cost of d i s t r i b u t i n g goods from each warehouse.to each market i s derived. A p r o f i t a b i l i t y analysis i s then conduct-ed on the f e a s i b i l i t y of various strategies at Leth-bridge and l i k e l y demand those strategies w i l l create i s determined. After consideration of the Lethbridge problem the res t of the d i s t r i b u t i o n system i s evalu-ated by use of the transportation model and the solution produced i s reviewed against the requirements of customer service. The Transportation Model: Since the trans-portation model i s used to solve the warehouse problem i t i s worth explaining the model by use of an example si m i l a r to the one being studied. Suppose that a company has warehouses l a b e l l e d 1, 2,....m which have available a supply of goods S^, S^z-.-.S^. These goods are to be di s t r i b u t e d to demand centres 1, 2,....n which demand respectively an amount of goods D,, D_,....D . If the unit cost of d i s t r i b u t i n g these 1 2 n 3 goods i s denoted as "C" then the cost of d i s t r i b u t i n g these goods from warehouse " i " to demand cent-re " j " i s C^j. Thus, given the demand at each market, the supply available at each warehouse, and the cost of d i s t r i b u t i n g from each warehouse to each market, i t i s possible to determine the volume of goods "x" which should be shipped from each warehouse to each demand point so that the t o t a l cost of d i s t r i b u t i o n i s minimized. The problem i s presented graphically i n Fi g u r e d and i n matrix form i n Figure 3. Since the transportation problem can be expressed i n a matrix i t can also be expressed mathem-a t i c a l l y where the objective function i s : n m min = < < C. .X. . 1=1 ;j=l J J FIGURE 2 GRAPHIC DESCRIPTION OF THE TRANSPORTATION PROBLEM 31. FIGURE 3 MATRIX PRESENTATION OF TRANSPORTATION PROBLEM 1 Markets 2 .... n Supply available w A 1 C11 X11 C12 X12 .... In In S l R E 2 C21 X21 C22 X22 . . . • <"2nX2n S 2 H 0 U S E S m C ,X , ml ml <~m2Xm2 C X .... mn mn S m Goods demanded D l D2 D n 33. subject to the constraints that: 1. The amount of goods shipped from any warehouse cannot exceed the amount of goods available from that warehouse, and 2. The amount of goods demanded by any demand centre must be supplied to that demand centre. Limitations of the Model It was noted i n Chapter Two that the most serious c r i t i c i s m of a l i n e a r model i s i t s tendency to have too many warehouses i n i t s optimum due to the p o s s i b i l i t y of economies i n larger warehouses and the fact a warehouse could remain i n the optimal solution and ship a low volume of goods. This l a t t e r argument i s not severely l i m i t i n g i n that i t i s a r e l a t i v e l y easy task to decide i f a warehouse's volume j u s t i f i e s the expense of operating that warehouse. The argument for economies of scale, however, has some merit since i t has been noted larger warehouses have buying economies. The existence of economies i n the problem anal-yzed, however, did not appear to be conclusive. In fact, the data developed i n Chapter Five indicates that the most e f f i c i e n t warehouse i n terms of handling costs, o f f i c e costs, and administrative costs i s a r e l a t i v e l y small warehouse. This suggests that for the problem being studied the economies argument does not hold for a l l areas of operat ion. The model also i s s t a t i c rather than dynamic. In most p r a c t i c a l s i t u a t i o n s , however, t h i s i s not a serious l i m i t a t i o n since a s t a t i c model i s usual ly s u f f i c i e n t to give good bas ic answers about a d i s t r i b -ut ion system's conf igurat ion providing the optimal so lu t ion i s not over ly sens i t ive to i t s bas ic parameters. CHAPTER FOUR DERIVATION OF DEMAND INPUT In Chapter Two i t was seen that e x i s t i n g sales volume i s l i k e l y to be an i n v a l i d indicator of demand when changes are made i n the d i s t r i b u t i o n system. Of the several methods which were mentioned for evaluating changes i n customer service, those methods employing some form of s t a t i s t i c a l inference are the most desirable. Unfortunately, .these techniques could not be applied to A.B.C. since: 1. Sales data were only available i n an aggregated form and were rarely i d e n t i f i a b l e by c i t y , and 2. There had b a s i c a l l y been no changes i n the d i s t r i b u t i o n system by which past and present performance could be compared. Estimating Demand—The Delphi When adequate data are lacking there often are subjective techniques which can be used for analysis. These approaches, although lacking the precision and o b j e c t i v i t y of purely quantitative approaches can y i e l d good answers. Of the several forms of subjective evalu-ation which e x i s t , a technique known as the Delphi appears to be the most sophisticated and i s substantiated by a considerable amount of research. The Delphi makes use of what has been c a l l e d "opinion technology". It i s an i t e r a t i v e estimating process which i s based on three prineiples--anonymity, controlled feedback and s t a t i s t i c a l response. The Delphi uses several chosen experts' to make estimates and i s often able to bring out the reasoning behind estimates as well as the estimates themselves. As a r e s u l t , the technique can often uncover i m p l i c i t models that l i e between many 17 soft areas and expressed opinions. T y p i c a l l y , the Delphi commences with a primary question on which experts are requested to make estimates, ask for data, and express the factors which they consider relevant i n making estimates. At the end of each round i n the process the responses of a l l experts are summarized and returned to the experts on the next round. Information i s only given between rounds i f requested by one of the experts so as to avoid experimentor bias. After several rounds, the estimates of a l l experts show a tendency to converge and the mean or median of the estimates of a l l the experts i s used. It has also been suggested by Winkler that a weighted average of estimates could be used--the weighting of 18 experts being made by the f i n a l decision maker. N.C. Dalkey, "Delphi" The Rand Corporation, Paper # 3704, Santa Monica, C a l i f . , October, 1967, p. 9. 18 R. Winkler, "The Consensus of Subjective Pr o b a b i l i t y D i s t r i b u t i o n s , " Management Science, v o l . 12, 1968, p.512. Theory behind the Delphi: The general theory of the Delphi, l i k e a l l group decision techniques, i s that "n" heads are better than one. However, since the Delphi i s usually conducted by mail and the i d e n t i t y of experts i s kept secret, i t i s often able to mitigate some of the problems which are inherent during face to face confront-ation of experts: 1. Dominant i n d i v i d u a l s , either because of corporate position or personality, exerting too much influence, 2. Noise, i . e . , the generation of i r r e l e v a n t or redundant information which can obscure relevant information, and 19 3. Group pressure to conform. Studies have shown, however, that group pressure s t i l l e xists i n the Delphi. It seems that those experts who are most distant from the group median i n the early 20 rounds are the most l i k e l y to change t h e i r estimates. Thus, there are two centres of a t t r a c t i o n for change—the group median and the true answer. It i s d i f f i c u l t to determine how much of the Delphi's convergence of answers i s caused by: 1 9Dalkey, "Delphi," p. 5. 20 N.C* Dalkey and 0. Hemler, "An Experimental Application of the Delphi to the Use of Experts," Management  Science, v o l . 9, 1963, p. 459. 38. 1. Social pressure, since individuals are aware of the answers of others, 2. Rethinking of the problem, since the experts are asked to j u s t i f y t h e i r estimates and are able to see what factors others consider relevant, or, 3. Transmission of data through feedback. 21 Application of the Delphi: The Delphi was used primarily to discover what the demand for A.B.C. products at Lethbridge might be under various strategies so that the f e a s i b i l i t y of establishing a Lethbridge warehouse could be considered. As a secondary purpose, i t was hoped that the estimates and general comments received for Lethbridge might be useful i n determining the general importance of delivery times and warehouse location to sales generation. These secondary goals were i n i t i a l l y planned to be explored i n d e t a i l , but d i f f i c u l t i e s encountered i n securing a high response rate over a long time period precluded t h i s . As i t was, the exercise commenced i n early February, 1971 and was not completed u n t i l mid-August, 19 71. During t h i s time f i v e rounds of the Delphi were conducted. 21 Dalkey, "Delphi," p. 3. 39. Choosing Experts: To date, other studies using the Delphi have employed two methods i n choosing experts: 1. Let experts rate t h e i r own competence, and 2. General i n t e l l i g e n c e tests. Both of these methods have been tested i n exercises where the correct answers are known, but there has been l i t t l e or no c o r r e l a t i o n between perceived i n t e l l i g e n c e or 22 measured i n t e l l i g e n c e and the accuracy of answers. Accordingly, experts were selected by l e t t i n g the General Manager and Sales Manager of A.B.C. independently generate names of individuals whom they thought would have the necessary expertise to make good estimates. These names were then reduced to a panel of twelve experts by j o i n t s e l e c t i o n . To ensure co-operation from the experts, the General Manager sent a covering l e t t e r p r i o r to the f i r s t round. By the t h i r d round of the exercise there were only eight experts p a r t i c i p a t i n g . Two dropped out because they lacked i n t e r e s t and deemed the exercise to be a waste of time, and one was eliminated as he always responded l a t e and always misinterpreted questions. One expert dropped out of the exercise because he perceived he lacked the competence to make estimates. The experts used were a l l i n middle management and had a sales background. 22 N.C. Dalkey, "Predicting the Future," The Rand  Corporation, Paper # 3948, Santa Monica, C a l i f . 1968, p. 16. 40. 23 Procedure Used : Since the experts chosen were located throughout Canada, the Delphi was conducted by mail. The procedure was modified s l i g h t l y from that suggested by Dalkey. During the f i r s t two rounds the experts were only asked to generate factors they considered relevant to assess the problem. This modifi-cation was made because of a tendency i n the Dalkey format 24 for experts to s t i c k with t h e i r o r i g i n a l estimates. The s p e c i f i c problems analyzed i n the exercise were r e s t r i c t e d to the c i t y of Lethbridge only. There were two reasons for t h i s : 1. Lethbridge was where competition's greatest advantage was since they had a d i s t r i b u t i o n f a c i l i t y there, and 2. Analysis of e x i s t i n g demand (see p.22 , Chapter Three) had indicated the only markets of conser quence i n the area a Lethbridge warehouse would probably serve were Medicine Hat, Cranbrook-Kimberly, and Lethbridge i t s e l f . Although a Lethbridge warehouse would be s l i g h t l y closer to these markets than Calgary, i t was thought that customers i n the markets of Medicine Hat 23 Authors note: The questionnaires used for the Delphi are i n the Appendix. 24 This v a r i a t i o n was adopted at the suggestion of Dr. K. MacKrimmon of the University of B r i t i s h Columbia who has done research (unpublished) on the Delphi. 41. and Cranbrook-Kimberly would perceive l i t t l e or no advantage i n being served from Lethbridge. At the commencement of the exercise the p a r t i c i -pants were given two general primary questions: 1. "Assuming there were no competitors for the complete l i n e of products d i s t r i b u t e d by A.B.C., what factors would you consider relevant i n order to aid you i n deciding upon the t o t a l sales potent-i a l of Lethbridge over the next f i v e years?" 2. "Assuming you wished to stimulate sales at Lethbridge, what sort of background information would you l i k e to know about A.B.C.'s present service to Lethbridge and competition at Lethbridge?" In response to these questions several factors were generated and strategies for stimulating sales were also generated. On the second round of the exercise the experts were supplied with a summary of the f i r s t round and asked i f they thought any of the factors were ir r e l e v a n t and i f any additional factors should be considered. On the second round, the participants were also asked to suggest strategies for stimulating sales. On the t h i r d , fourth, and f i f t h rounds, estimates of of market potential were requested, while estimates of market share under d i f f e r e n t strategies were only requested on the fourth and f i f t h rounds. During the fourth and f i f t h rounds estimates of the annual growth rates i n poten t i a l were also requested. A l l estimates were three point estimates of which the experts were 90%, 50% and 10% certain were not too high. Results of the Delphi Estimates of Market Potential; Although the experts were given two opportunities to revise t h e i r o r i g i n a l estimates of market p o t e n t i a l , only a few chose to do so. On the f i r s t opportunity for re v i s i o n only four of the experts made changes, while on the second opportunity not one expert chose to make any revisions. The i n i t i a l and f i n a l estimates obtained for Lethbridge market po t e n t i a l are tabulated i n Tables III and IV. TABLE III INITIAL ESTIMATES OF LETHBRIDGE MARKET POTENTIAL ( A l l estimates i n thousands of dollars) Expert i i £2 £3 #4 #5 *6 #7 &8  Estimate Certainty 90% $475 500 300 668 700 1,190 300 1,103 50% 525 600 400 896 900 1,485 325 1,800 10% 600 750 500 1,260 1,200 1,930 345 2,200 TABLE .'IV 4 3. FINAL ESTIMATES OF LETHBRIDGE MARKET POTENTIAL ( A l l estimates i n thousands of dollars) Expert #1 #2 #3 #4 #5 #6 #7 #8 Estimate Certainty 90% $ 650 500 500 668 700 50% 825 600 600 896 900 10% 1,000 750 800 1,260 1,200 Tables III and IV reveal that the only changes made were by those experts who were towards the t a i l s of the d i s t r i b u t i o n of o r i g i n a l estimates. Also of in t e r e s t i n these tables i s the resistance to re v i s i n g estimates by expert number six, whose estimates were considerably higher than any of the other experts. Expert number s i x was one of the most conscientious of a l l the experts and was keenly interested i n the exercise, but he made an error i n one of his cal c u l a t i o n s . When t h i s was drawn to his attention he became very adamant about the v a l i d i t y of his estimates and threatened to withdraw from the exercise. Given the rather wide range of estimates, an attempt was made on the f i f t h round to f i l l i n the probab-i l i t y d i s t r i b u t i o n of each expert's estimates. The experts were asked to make estimates at which they would give two 1,190 1,485 1,930 1,000 1,250 1,500 750 860 1,034 44. to one odds the potential was below and two to one odds the pot e n t i a l was above, i . e . , estimates of 33j% and 2 66-j% certainty. Unfortunately, t h i s question was poorly answered. Only f i v e of the experts r e p l i e d and not one of these experts was- l o g i c a l i n his estimates, i . e . , these estimates did not l i e between t h e i r 50% and 90% or 50% and 10% estimates. It would have been i n t e r e s t -ing to follow up thi s apparent inconsistency to determine i f the experts misunderstood the question or i f the experts were t r u l y inconsistent. This was not p r a c t i c a l , however, since i t would have been impossible to have secured a reasonable response rate had another round been attempted. Estimates of Growth i n Market Potent i a l : The experts were given two opportunities to estimate the percentage annual growth rates of Lethbridge pot e n t i a l over a f i v e year period. These estimates were obtained for two reasons: 1. It was desirable to gain some idea of the future importance of Lethbridge as a market, and 2. It was necessary to have temporal estimates i n order to evaluate strategies since i t was unlikely that any strategy would show immediate benefits. 45. The estimates of growth rates are shown i n Table V, and there i s a wide dispersion of estimates between experts. When the experts were asked to revise t h e i r estimates, however, not one expert wished to change his o r i g i n a l estimates. Estimates of Lethbridge Market Shares: Three strategies for increasing sales performance at Lethbridge were evaluated: 1. Increase sales coverage at Lethbridge. 2. Improve delivery times to Lethbridge, and 3. Establishment of a warehouse at Lethbridge. The experts were given two chances to estimate the percentage market share each strategy would achieve i n the years 1972-1976. The i n i t i a l estimates made are shown i n Table- VI-., while the f i n a l estimates obtained are i n Table VII. Review of Table VI-' indicates that the i n i t i a l estimates displayed a wide dispersion. Of p a r t i c u l a r i n t e r e s t are the estimates by experts number two and seven which are considerably below the rest of the group for a l l strategies. In l i g h t of the ex i s t i n g sales at Lethbridge i n r e l a t i o n to the potential market these experts estimated, the estimates of these experts appeared unduly low. Accordingly, the f i f t h round of the exercise TABLE V ESTIMATES OF ANNUAL PERCENTAGE GROWTH RATE IN LETHBRIDGE POTENTIAL (1972-1976) Year Estimate C e r t a i n t y 90% 50% 10%. 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10! Expert #1 12 16 22 10 17 20 10 18 18 10 15 20 10 125s 20 #2 5 6 7 6 7 8 7 8 9 ' 8 9 10 9 10 11 #3 5 10 10 7 10 10 * * * * * * 10 12 15 #4 5 8 11 6 8 9 4 6 8 4 6 8 4 6 7 #5 1 3 10 2 4 10 3 5 10 2 4 10 i 3 5 10 #6 7 9 12 7 9 12 7 9 12 7 9 12 7 9 12 #7 4 7 12 6 9 12 6 9 14 6 9 14 i 6 9 14 #8 14 16 18 14 16 18 14 16 18 14 16 18 ! 14 16 18 ! *NOTE: Expert #3 d i d not give estimates f o r these years. TABLE VI INITIAL ESTIMATES OF PERCENTAGE MARKET SHARES UNDER LETHBRIDGE STRATEGIES (1972-1976) Estimates of market share (in per cent) i f delivery within one day i s given. Year 1972 1973 1974 1975 1976 Estimate Certainty 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% '50% 10% 90% 50% 10% Expert #1 29 32 40 31 34 40 31 34 40 32 35 40 32 35 40 #2 8 10 12 9 11 14 10 12 15 12 13 16 ' 13 14 18 #3 25 30 35 28 34 38 30 35 39 37 38 40 40 42 44 #4 21% 22 23 22 24 243* 23 25 26 24 26 28 25 28 29 #5 20 22 25 21 23 26 22 24 27 22 24 27 • 22 24 27 #7 8 12 20 3.0 15 22 12 18 • 24 14 21 25 i 14 21 25 Estimates of market share (in per cent) i f one f u l l time salesman serves Lethbridge Year 1972 1973 1974 1975 1976 Estimate Certainty 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% Expert #1 32 38 45 33 39 45 34 40 47 36 42 48 37 45 52 #2 12 15 18 13 17 20 15 19 22 17 21 23 18 23 24 #3 30 35 40 33 38 44 35 45 48 40 45 47 45 46 49 #4 21 22 23 22 23 25 24 243s 26 25 26 28 26 28 293s #5 25 30 35 30 32 37 32 33 39 33 34 40 34 35 43 #7 9 14 21 11 15 22 12 18 24 14 22 26 16 24 30 #8 25 30 40 28 .32 42 30 34 44 32 36 46 34 38 50 *N0TE: Some experts did not make estimates of market share for some strategies. /— TABLE VI (Continued) Estimates of market share (in per cent) of Lethbridge warehouse i s established. Year 1972 - . 1973 1974 1975 1976 Estimate Certainty 90% 50% 10% 90% '50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% Expert #1 40 44 50 42 46 55 45 50 55 48 55 60 51 60 60 #2 18 20 25 20 25 30 23 30 35 25 35 40 30 40 45 #3 32 36 42 35 40 45 38 46 49 41 46 49 46 47 50 #4 21% 22 23 23 24 25 24 25k 27 26 27 29 • 27 29 31 #5 30 40 50 30 45 55 40 50 60 50 55 60 50 60 65 #7 12 16 22 14 18 26 17 20 29 22 24 23 24 27 35 TABLE VII FINAL ESTIMATES OF PERCENTAGE MARKET SHARES UNDER LETHBRIDGE STRATEGIES (1972-1976) Estimates of market share (in per cent) i f delivery within one day i s given. .Year 1972 1973 1974 1975 1976 Estimate Certainty 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% Expert #1 27 32 38 29 33 40 31* 36 40 30 35 40 30 35 40 #2 8 10 12 9 11 14 10 12 15 12 13 16 13 14 18 #3 25 30 35 • 28 34 38 30 35 39 37 38 40 40 42 44 #4 21% 22 23 22 24 24% 23 25 26 24 26 28 25 28 29 #5 20 22 25 21 23 26 22 24 27 22 24 27 22 24 27 #7 8 12 20 10 15 22 12 18 24 14 15 25 14 21 25 Estimates of market share (in per cent) i f one f u l l time salesman serves Lethbridge Year 1972 1973 1974 1975 1976 Estimate Certainty 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% Expert #1 29 35 40 31 39 45 33 40 45 33 42 48 33 42 48 #2 12 15 18 13 17 20 15 19 22 17 21 23 18 23 24 #3 30 35 40 33 38 44 35 45 4 8 40 45 47 45 46 49 #4 21 22 23 22 23 25 24 243s 26 25 26 28 26 28 29H #5 20 25 30 22 25 33 25 27 35 28 30 35 . 30 30 35 #7 9 14 21 11 15 22 12 18 24 14 22 26 16 24 30 #8 25 30 40 28 32 42 30 34 44 32 36 41 34 38 50 NOTE: Some experts did not make estimates of market share for some strategies. J>. CO I TABLE VII (Continued) 1 Estimates of market share (in per cent) i f Lethbridge warehouse i s established. Year Estimate 1972 1973 1974 1975 1976 Certainty 90% 50% 10% 90% 50% 10% 90% 50% 10% 90% 50% 10% ' 90% 50% 10? Expert-#1 33 40 50 35 45 55 38 48 55 41 50 55 / 44 50 58 #2 18 20 25 20 25 30 23 30 35 25 35 40 30 40 45 #3 32 36 42 35 40 45 38 46 • 49 41 46 49 , 46 47 50 #4 21*5 22 23 23 24 25 24 25*3 27 33 40 43 32 36 42 #5 25 27 30 27 30 33 30 32 35 35 37 40 37 40 50 #7 12 16 22 14 18 26 17 20 29 22 24 33 24 27 35 #8 38 42 44 45 44 46 42 46 48 44 48 50 45 49 51 OS-VO 50. was subjected to some experimentor bias i n the hope that experts two and seven would revise t h e i r o r i g i n a l e s t i -mates. The experts were t o l d that as a general consensus i t seemed that the e x i s t i n g market share was about twenty per cent. When given the chance, several experts made revisions of t h e i r estimates, but experts two and seven were not among them. Reconciling the Delphi Estimates In order to render the estimates obtained use-f u l , a method of rec o n c i l i n g the v a r i a t i o n between experts was required. Three alternative methods were considered; Winkler's weighting, means and medians. Winkler's weighting procedure was tempting since at least one expert (number seven) appeared s i g n i f i c a n t l y less r e l i a b l e than the others, but i t was not used since there was no objective c r i t e r i a for weighting. S i m i l a r l y , i t was decided not to use a median estimate since t h i s method discounts the v a l i d i t y of high and low estimates. Accordingly, i n order to ensure equal weighting the simple mean of a l l estimates was used. The mean was calculated on the basis of a certainty equivalent for each expert. Since each expert had made estimates of which he was ninety percent and ten percent cert a i n , i t was possible to derive a value of which each expert was certain, i . e . each expert's ninety percent and ten per-cent estimates were multiplied by 0.9 and 0.1 respectively and summed. The results of these calculations are tabulated i n Table VIII. Inferences from the Delphi about the General Importance  of Customer Service One of the most i n t e r e s t i n g results of the Delphi was that a l l experts considered improvement of delivery times from three day service to next day service as of l i t t l e importance. Several experts noted i n t h e i r responses that they could not r e c a l l many instances where customers demanded next day delivery. It was also noted by one expert that delivery times to non-metropolitan areas were often lengthy and i t was not uncommon for a salesman to l e t a week pass before he placed r u r a l orders. Discussion with company personnel not used i n the Delphi and an examination of the delivery frequencies to various areas of the c i t y of Vancouver tended to support the conclusion that delivery times were seldom c r i t i c a l i f they were within three or four days. Another i n t e r e s t i n g finding was that two experts noted a substantial portion of sales i n the industry was to national buyers and chain stores. It was noted that regardless of the service l e v e l given a p a r t i c u l a r market, TABLE VIII ASSIMILATION OF THE DELPHI ESTIMATES YEAR j 1971 : 1972 \ 1973 1974 ' 1975 ' 1976 Market Potential j « . i (mean of estimates)* | 788,700 Market Potential j . . ; Growth Rate j 7.125% 7.76 7.83 7.86 ! 8.41 Preceeding Years ; ^ i Market* Potential ; 9788,700 ! 849,903 : 915,855 987,566 11,065,189 Increase In e : • Market Potential ? 61,203 • 65,952 71,711 77,623 89,582 New Market . ! * ' Potential ?849,903 915,855 987,566 1,065,189 1,154,771 PLAN I: Improved j Delivery Per Cent Market Share Dollar PLAN II: Increased Sales Coverage Dollar PLAN III: Establish Warehouse Dollar 19.13% 20.59 22.05 23.78 24.65 Market Share : $162,586 188,575 217,758 253,373 284,651 Per Cent Market Share 21.67% 23.87 25.86 27.91 29.76 $ Market Share v184,174 218,615 255,385 297,294 343,660 Per Cent Market Share 26.44% 28.66 31.23 35.41 37.9 $ Market Share . *227,714 262,484 308,417 377,183 437,658 * NOTE: A l l estimates are means of the experts' certainty equivalents. 53. a c e r t a i n volume of sales would always remain with those national accounts held by A.B.C. or competition. This comment suggested that while.' a high l e v e l of customer service to the markets served as a whole was important, high l e v e l s of service to each i n d i v i d u a l market might not be c r i t i c a l . I t was also mentioned, however, that a high l e v e l of service was c r i t i c a l i n some markets which were parochial, and many of the experts considered Lethbridge to be a parochial market. This finding was extremely s i g n i f i c a n t i n that although the experts thought Lethbridge to be parochial, t h e i r estimates of possible market share did not attribute great importance to the sales operation whicn might be caused at Leth-bridge . Review of the Delphi estimates also revealed that, at l e a s t for the Lethbridge area, increased sales s t a f f was an e f f e c t i v e method for stimulating sales. Given the sales background of the experts there was no doubt some bias i n t h i s respect, however, the r e s u l t s at l e a s t implied sales loss through a s l i g h t deterioration i n delivery times and a reduction i n the number of warehouses could be o f f s e t through increased sales coverage. In conclusion, a summary of the comments and estimates made by the experts indicated that A.B.C.'s 54. products had a r e l a t i v e l y low service e l a s t i c i t y of demand. Demand Input for the rest of the D i s t r i b u t i o n Network In order to evaluate the entire d i s t r i b u t i o n system, i t was necessary to have a measure of demand at each market served. Since the results of the Delphi tended to indicate that demand would not be c r i t i c a l l y affected by a s l i g h t deterioration i n customer service, these inputs were derived by using actual 19 70 sales figures. Due to data inadequacies actual sales could only be pinpointed for the larger metropolitan areas and i t was necessary to use sales t e r r i t o r i e s as the demand unit for the smaller areas of sales concentration. Many of the sales t e r r i t o r i e s were extremely large, and since i t was not possible to allocate sales within the t e r r i t o r y , the sales of each t e r r i t o r y were allocated to the largest c i t y i n that t e r r i t o r y . The sales data also required modification since they included ex-mill sales. It was necessary to ex-clude ex-mill sales since these were shipped d i r e c t from the manufacturer to customer and were not warehoused. Thus, these sales were t o t a l l y unrelated to the warehouse system and were factored out of the data. Factoring out of the ex-mill sales was achieved somewhat a r b i t r a r i l y since ex-mill sales were only known on a regional basis Therefore, i t was necessary to assume that the percent-age of ex-mill sales i n any market was the same as for the region of which a market was a part. Table IX shows the ex-mill factors used, while Table X shows the warehouse sales which were derived for each market. TABLE IX PERCENTAGE OF EX-MILL SALES TO TOTAL SALES BY WAREHOUSE REGION, 19 70. EX-MILL SALES REGION TOTAL SALES Thunder Bay 11.1% Winnipeg 18.7% Regina 17.0% Saskatoon 16.5% Calgary 17.0% Edmonton 24.4% Vancouver 16.8% V i c t o r i a 17.0% Prince George 1.35% Prince Rupert 0.88% Source: A.B.C. Widget Co., Monthly Regional  Sales Analysis, 1970. TABLE X WAREHOUSE SALES BY TERRITORY OR CITY, 1970. Calgary $2,010,037 Red Deer Terr. 304 ,924 Lethbridge ^ $ 122,287 Medicine Hat ^ 63,581 Cran-Kimberly ( 1 ) 39 ,276 Leth. Terr. 34,211 Edmonton 3,069,938 Gr. Prairie Terr. 228 ,880 Saskatoon 1,670,658 N. Nattleford Terr. 269,508 Pr. Albert Terr. 249 ,501 Regina 829,302 Moose Jaw Terr. 223,661' Yorkton Terr. 203 ,413 Weyburn Terr. 184,725 Swift Current Terr. 210,897 Winnipeg 1, 881 ,183 Winn. Terr.#230 191,115 Winnipeg Terr. #207 229,316 Winnipeg Terr. #25.5 196 ,326 Kenora Terr. 71,846 Dauphin Terr. 204,723 Brandon Terr. 191 ,326 Vancouver 3,113,380 Penticton/Kelowna 253,230 Powell Riv/Chilliwack 491 ,416 Nanaimo/Alberni 419,419 Campbell Riv. Terr. 229,498 Nelson/Trail Terr. 246 ,784 Kamloops Terr. 242,571 Victoria 868,936 Duncan/Sydney Terr. 211 ,532 ' Pr. George '. 548,664 Pr. George Terr. 235,143 (2) Prince Rupert 172 ,181 (2\ Kitimat^ ' 129,135 (2) Terrace 1 ' 129,135 (2) Thunder Bay* ' 406 ,000 Thunder Bay Terr. 176,000 NOTES: (1) Sales for of Table I these markets were derived by , Page 13. • factoring upward the data (2) Estimates by ABC's B.C. Sales Manager and Distribution Manager. SOURCE: A.B.C. Widget Co. Branch Sales Analysis, 1970. u i CHAPTER FIVE DETERMINING UNITS OF OUTPUT AND COST INPUT Before costs of d i s t r i b u t i o n are meaningful they must be related to a measure of output. S i m i l a r l y , sales or demand data i s useful i n the transportation model only i f i t i s related to some unit of output. For the purposes of th i s study the most l o g i c a l unit of output was weight, since i t was ph y s i c a l l y meaningful for the transportation model and the only basis on which l i n e haul transport costs were read i l y available. DETERMINING UNITS OF OUTPUT Since sales volumes and t h e i r associated d i s t r i -bution costs were known for each warehouse, data could be expressed i n terms of output i f the relat i o n s h i p of t o t a l warehouse sales to weight could be established. To make t h i s necessary conversion from sales to weight, sales invoices were sampled and regression analysis was used to esta b l i s h a predictive sales to weight re l a t i o n s h i p . The population of sales invoices was grouped 58. by warehouse, but only certain invoices, generally those for country rather than c i t y sales, had weights. Given the low frequency of country to c i t y sales, a random sample would have been i n e f f i c i e n t and a c l u s t e r sample was taken. The cl u s t e r sample was based upon the month of October, 1970, a month which management thought would be a good representative of the sales mix for the year. This month was sampled on a one hundred per cent basis for four warehouses; Winnipeg, Saskatoon, Calgary, and Edmonton. These warehouses were not chosen randomly, but on the basis of a c c e s s i b i l i t y for ease of sampling and the fact that some warehouses did not record weights 4-^ • • 25 on t h e i r invoices. The regression used to analyze the sample was designed i n such a manner that i t could not only estab-l i s h a sales to weight r e l a t i o n s h i p , but also so i t could detect i f the sales to weight rela t i o n s h i p varied between warehouses. This method was adopted so that one of the major assumptions behind the transportation model, that of homogeneity of output between warehouses, could be tested. Several d i f f e r e n t regressions were attempted, Author's note: The smaller warehouses of Thunder Bay, Prince George, and Prince Rupert did not record weights on t h e i r invoices. but a l l gave f a i r l y low R values and residuals which were s l i g h t l y biased. The model which proved most successful was: WEIGHT = + Sales + B 3 Dummy 1 + B 4 Dummy 2 + B r Dummy 3 + B,- Dummy.• where the dummy variables were used to indicate which warehouse the sample observations were taken from. Thus, i f the dummy variables were s i g n i f i c a n t , the assumption of homogeneity of output between warehouses would be 2 6 erroneous. The regression equation which resulted was: WEIGHT = 69.331 + 1.39458 Sales + 36.66945 Dummy 3 This regression had an R of .4269 ( i t explained 42.69% of the variance i n the data) and F values for the Sales and Dummy 3 variables respectively of 1603.7 and 8.8714. The regression also had s l i g h t l y downward biased residuals (the variance i n the data not explained). Since the c r i t i c a l F value was 3.83 both the Sales and Dummy 3 v a r i -ables were s i g n i f i c a n t . Thus, the best regression that Author's note: Dummy variables are used when i t i s desirable to test whether a non-quantifiable factor i s s i g n i f i c a n t . For example, i n the above analysis i t was desirable to know i f each warehouse had a s i g n i f i c a n t l y d i f f e r e n t sales to weight rel a t i o n s h i p . To tes t t h i s , a dummy variable was generated for each warehouse, and i f a sample observation was for a p a r t i c u l a r warehouse, that warehouse's dummy variable was given a value of one (1), while the dummy variables for the other warehouses were given values of zero (0). could be established yielded only a f a i r predictor of weight. This regression also proved that the Dummy 3 warehouse (which was Edmonton) had a sales to weight relat i o n s h i p which was s i g n i f i c a n t l y d i f f e r e n t from that of the other three warehouses. This l a t t e r finding was not anticipated since management had previously stated that a l l warehouses e s s e n t i a l l y d i s t r i b u t e d the same mix of goods, but further discussion with management indicated that the Edmonton warehouse did have a considerably higher portion of I n d u s t r i a l sales than any other warehouse. Management also stated, however, that i t was highly unlike l y that any of the other warehouses had a sales to weight rela t i o n s h i p which was d i f f e r e n t than that of the Winnipeg, Calgary, and Saskatoon warehouses. In l i g h t of t h i s statement i t was decided to u t i l i z e the results of the regression and e s t a b l i s h 27 a throughput i n weight for each warehouse. Since actual relationships between sales and weight were known for only four of the warehouses i t was necessary to make assumptions—it was assumed that each warehouse Author's note: Although the regression estab-l i s h e d was not t o t a l l y s a t i s f a c t o r y i t had to be used since i t was the best f i t possible. 61. not used i n the c a l c u l a t i o n of the regression could be approximated by one of the warehouses used i n the : regression. I t was thought that the weight relationships at Thunder Bay and Winnipeg, and at Regina and Saskatoon would be s i m i l a r due to geographical proximity, while the warehouses i n B r i t i s h Columbia (Prince George, V i c t o r i a , Prince Rupert, and Vancouver) might have a relationship s i m i l a r to the average of the Saskatoon, Winnipeg, and Calgary warehouses, since i t had been proved these warehouses had an homogeneous output which was l i k e l y i n d i c a t i v e of most warehouses. Since the regression developed was useful i n predicting weight only on a single sales invoice i t was necessary to determine the sales value of the average invoice so that the weight of the average sale could be calculated. The average sales value was then divided into the t o t a l sales of each warehouse and i t was possible to determine the number of sales invoices at each ware-house. By multiplying the estimated number of sales invoices times the average sale invoice weight i t was thus possible to determine the throughput i n weight at each warehouse. These calculations are shown i n Tables XI and XII. The same procedure established to calculate ware-house throughput was also used to e s t a b l i s h the weight TABLE XI AVERAGE SALES VALUE OF INVOICE OCTOBER, 19 70 Sample Warehouse Sample warehouse used to predict warehouses of: Number of sample i n -voices i n regression Total sales value of sample invoices Average sales value of sample invoices Edmonton Winnipeg Calgary Saskatoon Winnipeg Calgary Saskatoon combined Edmonton Winnipeg Thunder Bay Calgary Saskatoon Regina Vancouver V i c t o r i a Prince George Prince Rupert 561 493 561 558 53,669 44,145 48,506 59,408 95.67 89.54 86.46 90.34 1,612 143,509 89.03 SOURCE: A.B.C. Widget Co.' sampled sales invoices for month of October, ^ 1970. N» TABLE XII ESTIMATED WAREHOUSE THROUGHPUT IN POUNDS AS CALCULATED BY THE REGRESSION Warehouse WEIGHT of sales invoice Estimated value of average sale = 69,331 + 1.39458 avg. value of sales invoice +36.66945 Total 1970 ware-house sales Estimated number of sales Dummy 3 ware-house Weight of average . ' sale as calculated by regression Warehouse throughput in pounds Vancouver Victoria Prince Geo.* Prince Rup.* Calgary Edmonton Saskatoon 'Regina Winnipeg Thunder Bay '89.03 89.03 89.03 89.03 84.46 95.67 90. 34 90.34 89.54 89.54 p5,633,884 1,081,192 503,109 340,345 2,389,063 3,376,351 2,156,131 1,750,133 2,942,110 582,000 63,281 12,144 .5,651 3,823 27,631 35,291 23,867 19,373 32,858 6,500 193. 193. 193. 193. 189. 239. 195. 195. 194. 194. 49 49 49 49 906 42 317 317 202 202 12,244,266 2.349.975 1,093,414 739,714 5,247,301 8,449,336 4,661,638 3,783,882 6,381,076 1,262,312 *NOTE: The warehouse sales of Prince George and Prince Rupert were deflated by five per cent since A.B.C.'s B.C. Sales Manager indicated these branches charged prices higher than any other warehouse. of sales demanded by each sales t e r r i t o r y . (It was assumed that a sales t e r r i t o r y would have the same weight to sales relationship as the warehouse from which i t was served.) The average weight of sales by t e r r i t o r y i s tabulated i n Table XIII. DERIVATION OF COST INPUT The cost input required for the transportation model was composed of two parts: 1. The cost of supplying goods to each warehouse, and processing goods through each warehouse, and 2. The costs of shipping goods from each warehouse to customers. Costs of Shipping Goods to Customers For the purposes of analysis i t was necessary to divide transport costs to customers into two c l a s s i -f i c a t i o n s — i n t e r c i t y shipments and i n t r a c i t y shipments--because two d i f f e r e n t methods of transport were used. In t e r c i t y Shipments: For i n t e r c i t y shipments A.B.C. uses common c a r r i e r truckers since the bulk of i t s shipments are L.T.L. Although common c a r r i e r s publish t a r i f f s for these types of shipments, t a r i f f s were not p a r t i c u l a r l y useful since: TABLE XIII ESTIMATED WEIGHT OF SALES BY TERRITORY (Rounded off to nearest ton) Calgary 2,208 Red Deer 335 Lethbridge 134 Medicine Hat 70 Cran-Kimberly 43 Lethbridge T e r r . ^ 3 8 Edmonton 3,372 Grand Prairie 251 Saskatoon 1,816 N. Battleford 291 . Regina 887 Moose Jaw 246 Prince Albert 270 Yorkton 220 Weyburn 200 Swift Current 228 Winnipeg 2,040 Winnipeg #2 30 207 Winnipeg #207 249 Winnipeg #255 213 Kenora Terr. 78 Dauphin Terr. 222 Brandon Terr. 207 Vancouver 3,384 Penticton/Kel. 275 Powell R./Chill. 534 Nanaimo/Alberni • 456 Campbell R. Terr. 249 Nelson/Trail 268 Kamloops Terr. 264 Victoria 944 Duncan/Sydney 230 Prince George 596 Pr. George Terr. 256 (2) Prince Rupert 187 (2) 1 Kitimat* ' 140 (2) Terrace 140 17) Thunder Bay 440 (2) Thunder Bay Terr. 191 NOTES: (1) Sales for these markets of Table r i l . -, Page 23 were^derived by factoring upward the data (2) Based upon estimates of sales in these areas by A.B.C.'s B.C. Sales Manager and Distribution Manager. 66. 1. Goods often do not t r a v e l under t h e i r published t a r i f f rates, and 2. A.B.C. ships numerous goods which f a l l into several d i f f e r e n t t a r i f f c l a s s i f i c a t i o n s . Therefore, to overcome these inadequacies, wherever possible, transport rates between c i t i e s were determined by sampling f r e i g h t b i l l s and c a l c u l a t i n g a regression equation which could predict the cost of shipping over various distances. One advantage of t h i s approach i s that once established the regression can be used to predict f r e i g h t rates between points where applicable t a r i f f s are not published. The f r e i g h t b i l l s were sampled randomly with every tenth b i l l being chosen and the sample observ-ations were grouped into six weight categories which tended to best r e f l e c t the rate breaks given by most trucking companies. The rate groups used were: 0-100 pounds, 101-200 pounds, 201-300 pounds, 301-400 2 8 pounds, 401-500 pounds, and over 500 pounds. After the sample data was grouped by weight i t was handplotted by various geographical regions since d i f f e r e n t areas Author's note: Most trucking companies charge the same rate for shipments of 500 pounds to 2000 pounds and A.B.C. seldom has shipments i n excess of 2000 pounds. of the country tend to have d i s s i m i l a r rate structures. I t became apparent there were four d i s t i n c t rate structures i n the sample data: rates between the p r a i r i e provinces of Saskatchewan and Manitoba; rates between the p r a i r i e provinces of Alberta, Manitoba, and Saskatchewan; rates within Alberta and between Alberta and Southeastern B r i t i s h Columbia; and rates within the province of B r i t i s h Columbia and between Alberta and B r i t i s h Columbia. It was found that rates within the province of Manitoba and Saskatchewan and between the p r a i r i e provinces were best f i t t e d as a l i n e a r function of distance, while those rates i n B r i t i s h Columbia and Alberta were best f i t t e d as a log of distance. A summary of regression equations derived for each of the rate t e r r i t o r i e s i s given i n Tables XIV, XV, XVI, and XVII. As can be seen from Tables XVI and XVII, the regressions calculated for B r i t i s h Columbia and Alberta showed a p o s i t i v e relationship between transport rates and distance which was s t a t i s t i c a l l y s i g n i f i c a n t and explained a high percentage of the v a r i a t i o n . An examin-ation of the residuals for these equations showed they were randomly d i s t r i b u t e d . TABLE XIV L.T.L. FREIGHT RATE REGRESSIONS SHIPMENTS WITHIN MANITOBA AND SASKATCHEWAN rate = K + B(distance i n miles) c r i t i c a l 95% F. Value = 3.83 9 Sample Weight Group K B F. Value _R Size 0-101 lbs. 2.02742 -0.00027 0.1148 .001 118 101-200 lbs. 2.07888 0.00157 1.416 .0198 72 201-300 lbs. 1.91917 0.00496 14.8283 .2064 59 301-400 lbs. 2.12607 0.01028 12.8445 .2385 43 401-500 lbs. 2.22883 0.01652 140.9233 .7203 56 500 plus lbs.* .44683 0.00418 118.5313 .6677 61 *NOTE: The 500 plus pounds weight group had i t s observations i n rate per cwt., while a l l other observations were rates per shipment of each weight group. oo TABLE XV L.T.L. FREIGHT RATE REGRESSIONS SHIPMENTS BETWEEN THE PRAIRIE PROVINCES rate = K + B(distance i n miles) c r i t i c a l 95% F. Value = 3.83 Weight Group K B F. Value R Sample Size 0 - 100 lbs. 3.49570 0.00212 71.0025 .4734 81 101 - 200 lbs. 3.88388 0.00286 17.3032 .2497 54 201 - 300 lbs. 4.74957 0.00471 29.9912 .4545 38 301 - 400 lbs. 5.39537 0.00711 164.6995 .8459 32 401 - 500 lbs. 500 plus lbs.* 1.22669 0.00167 365,0083 .8838 50 NOTE: The 500 plus pounds weight group had i t s observations in rate per cwt., while a l l other observations were rates per shipment of each weight group. eTi TABLE XVI L.T.L. FREIGHT RATE REGRESSIONS SHIPMENTS WITHIN ALBERTA AND ALBERTA-B.C. rate = K + B(log of distance in miles) c r i t i c a l 95% F. Value = 3.83 Weight Group K B F. Value R Sample Size 0 - 100 lbs. -0.60085 0.92998 1606.3586 .9063 168 101 - 200 lbs. -1.36953 1.29007 511.1484 .8377 101 201 - 300 lbs. -3.21005 1.99128 365.6267 .9193 69 301 - 400 lbs. -5.29362 2.76221 288.6477 .8974 35 401 - 500 lbs. -8.50141 3.70529 94.9476 .8636 40 500 plus lbs.* -0.89765 0.53346 424.9602 .8691 139 *NOTE: The 500 plus pounds weight group had i t s observations i n rate per cwt., while a l l other observations were rates per shipment of each weight group. o TABLE XVII L.T.L. FREIGHT RATE REGRESSIONS SHIPMENTS WITHIN B.C. AND ALBERTA-B.C. rate = K + B(log of distance in miles) c r i t i c a l 95% F. Value = 3.83 Weight Group K B F. Value R 2 Sample 0 - 100 lbs. - 4.5914 1. 5615 395.5999 . 8664 63 101 - 200 lbs. -10.70951 2. 85667 195.5035 .7534 66 201 - 300 lbs. -19.17128 4. 6801 . 191.4784 .8063 48 301 - 400 lbs. -21.45624 5. 35338 207.3656 . 8810 30 401 - 500 lbs. -25.35445 6. 39651 253.4491 .9235 23 500 plus lbs. * - 3.9935 1. 06006 527.1912 .8828 72 *NOTE: The 500 plus pounds weight group had i t s observations i n rate per cwt., while a l l other observations were rates per shipment of each weight group. h-• Examination of Table XIV, however, shows that the results of the Manitoba and Saskatchewan regressions were not as anticipated for a l l weight groups. For the 0-100 weight class there was a negative relationship between f r e i g h t rates and distance, i . e . , as distance i s increased the predicted f r e i g h t rates decrease. This negative r e l a t i o n s h i p , however, was not s t a t i s t i c a l l y s i g n i f i c a n t since the F value was less than the c r i t i c a l F value at the ninety-five per cent l e v e l of confidence. In the 101-200 pound weight class there was a p o s i t i v e relationship between rates and distance, but t h i s also was not s t a t i s t i c a l l y s i g n i f i c a n t . For a l l other weight classes there was a s t a t i s t i c a l l y s i g n i f i c a n t r elationship between rates and distance, although the 201-300 weight class l i k e the 0-100 and 101-200 weight 2 class had low R values. In general, then, the f r e i g h t rates i n Saskatchewan and Manitoba could not be explain-ed well as a function of distance, p a r t i c u l a r l y i n the 29 lower weight classes. However, since there were no other apparent variables with which to estimate rates, and since a p l o t of f r e i g h t rates indicated they did 29 Author's note: The r e l a t i v e unimportance of distance i n p r a i r i e f r e i g h t rates i s not surprising. With f l a t roads on which truckers can maintain high speeds and good f u e l economy, the importance of pickup and delivery costs i s probably increased so that they become a dominant factor i n p r i c i n g . Also, the presence of "farmer truckers" may prevent common c a r r i e r s from exercising a normal p r i c i n g structure. not increase with distance i n the lower weight classes, the regressions calculated were used for a l l weight classes, except the 0-100 pound class where an average rate was taken. The regressions i n Table XV for shipments between the p r a i r i e provinces of Alberta, Saskatchewan, and Manitoba, were a l l s t a t i s t i c a l l y s i g n i f i c a n t , although 2 there were low R values for the 101-200 pound weight class. It should be noted that almost a l l of the observations used for these regressons were from ship-ments between A.B.C.'s warehouses. On average, however, i t i s l i k e l y that these interwarehouse shipments were i d e n t i c a l to the types of shipments which customers receive. I t should also be noted that there are no rates for the 401-500 pound weight class i n Table XV. This was not possible because observations were not available. There were two reasons for t h i s : 1. A rate break i n truck charges existed where the 500 plus pound rate was lower than the 401-500 pound rate, and 2. A price break i n buying volumes i n excess of 500 pound existed. Therefore, for the c a l c u l a t i o n of transport rates i n the 401-500 pound weight c l a s s , an average of 500 plus and 301-400 pound rates were used. Although the regression equations could estab-l i s h i n t e r c i t y rates for most of the shipments of the transportation model, they were not useful for shipments into two geographical areas: shipments between Vancouver and Vancouver Island, and; shipments between Winnipeg and Eastern Ontario, and shipments within Eastern 30 Ontario. This l a t t e r problem was solved by review-ing the Manitoba Truckers Association paper t a r i f f s and i t was found that the rates were not unlike those of B r i t i s h Columbia and could be s a t i s f a c t o r i l y approxi-mated by using the B r i t i s h Columbia regression equations. For Vancouver to Vancouver Island rates the t a r i f f i n Table XVIII was used. In t e r c i t y Shipment Sizes: In order to u t i l i z e the transport rates established i t was necessary to deter-mine what percentage of the t o t a l goods shipped by each warehouse were i n each weight group, and what the average weights of shipments were i n each weight group, so that a weighted average cost of shipping could be calculated. 30 Author's note: It was not possible to sample fr e i g h t b i l l s and e s t a b l i s h regressions for shipments within Eastern Ontario and between Winnipeg and Eastern Ontario because A.B.C. shipped c o l l e c t into these areas. 31 . . Manitoba Truckers Association, O f f i c i a l Shipment by Trip Directory, Winnipeg, Manitoba, 1971, pp. 80-103. TABLE XVIII PAPER PRODUCTS TARIFF VANCOUVER TO VANCOUVER ISLAND CITIES 75. Weight From: Vancouver To: V i c t o r i a Duncan Nanaimo Port Alberni Campbell River 4. 75 4.40 4. 75 5.10 101-200 lbs. 2 01-300 lbs. 301-400 lbs. 401-500 lbs. 5. 85 5.15 6.25 6.79 7.23 6.18 8. 20 9.20 12.08 500 + lb s . * $4.40 $5.20 $6.48 $7.80 $9.10 $2.04/cwt. 8.73 10.15 2.28/cwt. 7.15 8.25 1.82/cwt. 8.85 1Q.98; 13.13 2.73/cwt, 2.81/cwt. *NOTE: The 500+ pounds rate i s per cwt., a l l others weight groups have rates per shipment. Source: H.H. Williamson Ltd., Vancouver, B.C. t a r i f f e f f e c t i v e January 25, 1971. Discussions with A.B.C.'s D i s t r i b u t i o n Manager indicated that i t was l i k e l y each market would have a si m i l a r volume of shipments i n each weight cl a s s . Therefore, i t was decided to use the sample of customer shipments which were used i n determining the f r e i g h t rate regress-ions as the basis for analysis. These were tabulated by the number of shipments observed, pounds shipped, average shipped, for each weight class. The r e s u l t s , shown i n Table XIX, were then applied to the f r e i g h t rate regressions for each weight group so that a weighted cost of shipping goods to each market could be derived. I n t r a c i t y Shipments: I n t r a c i t y shipments were defined as those shipments from a warehouse i n a c i t y to customers within the greater metropolitan area of that c i t y . These shipments were distinguished from i n t e r c i t y shipments by the fact that they were made with company-operated trucks (either leased or owned) on which A.B.C. kept costs per delivery. These costs were converted to a cost per hundredweight by assuming the average weight of an i n t r a c i t y shipment would be the same as that of an i n t e r c i t y shipment. (The D i s t r i b u t i o n Manager of A.B.C. f e l t there would be e s s e n t i a l l y no difference between the shipment size of i n t e r c i t y and i n t r a c i t y shipments.) TABLE XIX DISTRIBUTION OF CUSTOMER SHIPMENTS BY WEIGHT GROUP Weight Pounds Number of Average ship- % to t o t a l group shipped §hipments ment weight weight shipped 0-100 lbs. .34,080 525 64.9 lbs. 8.5% 101-200 lbs. 38,867 265 146.7 9.7 201-300 lbs. 24,882 101 246.4 6.2 301-400 lbs. 29,886 84 155.7 7.5 401-500 lbs. 24,727 85 449.6 6.2 500 plus lbs. 247,156 197 1254.6 61.9 399,598 1,227 325.9 l b s . 100.0% TABLE XX INTRACITY SHIPMENT COSTS ASSUMPTION: Average delivery i s 32 6 pounds 78. City Winnipeg 1.41 0.432 Saskatoon 1.12 .344 Regina .92 .282 Calgary 1.42 .436 Edmonton 1.37 .420 Lethbridge* 1.10 .337 Vancouver 2.56 .909 V i c t o r i a 1.14 .350 Prince George* 1.10 .337 Prince Rupert* 1.10 .337 Thunder Bay* 1.10 .337 *NOTE: These costs are estimates by A.B.C.'s Di s t r i b u t i o n Manager. Source: A.B.C. Widget, Monthly D i s t r i b u t i o n Report, May, 19 71. Landed Cost of Goods at each Warehouse Landed cost of goods was defined to include a l l costs related to procurement of goods and processing of goods through a warehouse. As such, the d e f i n i t i o n included not only variable costs, but also some costs which were semi-variable. These costs are usually unique at each warehouse due to varying factor costs, operating e f f i c i e n c i e s , and inbound f r e i g h t costs. 79. To make these costs meaningful they were expressed as a cost per hundredweight of warehouse throughput. The following cost categories were included i n establishing a landed cost of goods: Gross Cost of Sales and Inbound Freight: The majority of A.B.C.'s suppliers prepaid f r e i g h t , and i t was a r a r i t y when suppliers indicated actual f r e i g h t charges on t h e i r invoices. Therefore, the cost of i n -bound f r e i g h t could not be ascertained. To circumvent thi s problem the gross cost of sales was treated as a d i s t r i b u t i o n cost since i t was l i k e l y that suppliers who shipped prepaid recouped transportation costs through t h e i r p r i c i n g structure. Those suppliers shipping c o l l e c t posed no problem to t h i s approach since c o l l e c t f r e i g h t was automatically included i n the gross cost of sales. Purchase Discounts: Purchase discounts r e a l i z e d by each warehouse were deducted from the gross cost of sales. This was necessary since, as noted i n Chapter Three, one of the advantages of larger warehouses i s t h e i r a b i l i t y to order i n more economic buying l o t s . Since most suppliers prepaid freight i t was also possible that at least a portion of purchase discounts were a r e f l e c t i o n of savings due to higher minimum carload or truckload shipments. 80. Warehouse Handling Costs: Due to warehouse design, the volume of warehouse throughput, and labour cost d i f f e r e n t i a l s , some warehouses can place inbound supplies into storage and prepare orders for shipment to customers more e f f i c i e n t l y than others. Included i n these costs were warehouse s a l a r i e s , packing supplies, and maintenance and repair of materials handling equipment. Interwarehouse Service Costs: Since the trans-portation model did not r e f l e c t transshipments of goods between warehouses, i t was necessary to allocate costs against those warehouses who drew upon the resources of other warehouses. Fortunately, a good proxy measure of these costs was available from the accounting system which assessed service charges and a l l o t t e d service revenues when warehouses transshipped goods to one another. The accounting system also i d e n t i f i e d the frei g h t costs associated with transshipments. Warehouse Support Costs: Included as warehouse support costs were the costs of o f f i c e operation and administration at each warehouse. These costs are probably semi-variable but were included since they represented costs of order entry and order processing which are costs associated with operating a warehouse. 81. The per unit costs derived from the above cost categories are tabulated i n Table XXI, and when analyzed they generally appeared to be i n t u i t i v e l y correct. Purchase discounts were higher the larger the warehouse, and interwarehouse service charges were lower the larger the warehouse. A l l other cost categories appeared to have l i t t l e or no relationship to warehouse throughput. There were, however, two instances where the data used to calculate costs seemed to be incorrect: 1. V i c t o r i a ' s gross cost of sales was calculated to be less than Vancouver's which, given V i c t o r i a ' s i s o l a t e d geographical location, was improbable. To r e c t i f y t h i s , i t was assumed that at best V i c t o r i a ' s gross cost of sales could only equal Vancouver's. Accordingly, V i c t o r i a ' s costs were r e c a l c u l -ated with the only change being that the gross cost of sales figure used was Vancouver's. 2. In Table XXI two gross costs of sales are shown for Edmonton. The lower figure i s based upon the higher weight to sales r e l a t i o n s h i p which was l i k e l y due to heavy i n d u s t r i a l sales at t h i s warehouse. This figure i s not relevant since i t v i o l a t e s the assumption that a l l warehouses d i s t r i b u t e e s s e n t i a l l y the same TABLE XXI LANDED COST OF GOODS PER CWT. FOR 1970 Warehouse Gross cost of sales Less purchase discounts * Net cost of sales Inter-warehouse service charges Real cost of ware-house sales Handling costs Office costs Admin. costs Landed cost of goods al warehou; Vancouver $36,12.. $ -.58 $35.54 - . 2 4 $ 35.20 $ 1.29 $1.40 * .71 $ 38.60 Victoria 35.47 ( 1 ) -.36 35.76 1.15 ' 36.91 1.15 1.21 1.27 40.56 Pr. Rupert 38. 34 ' -.16 38.18 2.06 40.24 2.10 .64 .78 43.76 Pr. George 38. 35 -.06 38.29 1.80 40.49 1.61 .64 .78 43.02 Calgary 35.87 -.39 35.48 .19 35.67 1.18 .94 .92 38.71 Edmonton 31.57 ( 2 ) 35.87 -.43 35.44 .14 35.58 .92 .87 .71 38.08 Saskatoon 36. 76 -.46 36.30 .13 36.43 .92 .89 .98 39.22 Regina 37. 27 -.36 36.91 .21 37.12 1.02 1.15 1.06 40.35 Winnipeg 37.24 -.48 36.76 -.13 36.53 1.23 1.10 .94 39.80 Th. Bay 37.26 -.34 36.92 .73 37.65 .71 1.56 1.11 41.03 NOTE: (1) Due to Victoria's isolated gross cost of sales equal location, i t was to Vancouver; assumed at best Victoria could only have a (2) Edmonton's gross cost of sales is extremely low due to industrial sales. " Therefore, the second figure i s a gross cost of sales based on Calgary. j Source: A.B. Widget Co. Branch Expenses Summary, 1970. oo 83. mix of goods. As an attempt to circumvent th i s problem an approach si m i l a r to that used i n the case of V i c t o r i a was made and a gross cost of sales figure the same as that calculated for Calgary was used. This figure i s the second figure whown i n Table XXI. Unfortunately, t h i s approach i s not t h e o r e t i c a l l y sound since handling costs, administrative costs, etc. are based upon a warehouse throughput which s t i l l r e f l e c t s i n d u s t r i a l sales and creates an insurmountable j o i n t cost problem. In l i g h t of these problems i t was decided to use a landed cost figure for Edmonton which was i d e n t i -c a l to that of Calgary. The above modifications, l i k e many of the assumpt-ions "used during t h i s chapter, were not s c i e n t i f i c . Thus, l i k e most d i s t r i b u t i o n studies, i t was necessary to bu i l d up data. The precision of such data, however, i s not usually c r i t i c a l unless the model used for analysis produces solutions which are extremely s e n s i t i v e . As Magee has noted, i t i s more c i r t i c a l that the ri g h t costs be recognized and estimated roughly rather than i r r e l e v -32 ant costs be used for the mere sake of pre c i s i o n . 32 J.F. Magee, Physical D i s t r i b u t i o n Systems, Magraw H i l l , New York, 1967, p. 100. CHAPTER SIX A MORE OPTIMAL DISTRIBUTION SYSTEM At the outset i t was stated that the study had two purposes: 1. To test the f e a s i b i l i t y of establishing a Leth-bridge warehouse, and 2. To investigate the optimality of the ex i s t i n g d i s t r i b u t i o n network. Although both of these objectives would appear compatible, i t i s possible they are not. A Lethbridge warehouse could be a p r o f i t a b l e venture, yet not be part of an optimal d i s t r i b u t i o n network since the transportation model might f i n d i t more economical to service the Lethbridge area from another warehouse. FEASIBILITY OF A LETHBRIDGE WAREHOUSE Establishment of a Lethbridge warehouse, as noted e a r l i e r , was only one of several possible strategies for stimulating Lethbridge sales; hence, i t could only be evaluated when compared to the alternatives available. Therefore, the p r o f i t a b i l i t y of establishing a warehouse, increasing sales coverage, and maintaining e x i s t i n g sales and d i s t r i b u t i o n practices at Lethbridge were evaluated. The alternative of better delivery times 85. was not evaluated since the results of the Delphi had indicated t h i s strategy would have a negligable e f f e c t on stimulating Lethbridge sales. The comparison of p r o f i t a b i l i t y was over a ten year time horizon with benefits and costs being d i s -counted at f i f t e e n per cent which was A.B.C.'s cost of c a p i t a l before tax. The comparison considered only the markets of Lethbridge i t s e l f , the Lethbridge sales t e r r i t o r y , Medicine Hat, and Cranbrook-Kimberly, since i t was l i k e l y these were the only markets a Lethbridge warehouse could economically serve. The analysis was predicted upon the following assumptions: 1. The sales impact of the various strategies which could be u t i l i z e d at Lethbridge would be f u l l y r e a l i z e d within the f i v e year time period covered by the Delphi. After that time each strategy would have l i t t l e or no further a f f e c t on increasing the Lethbridge market share. 2. Market pote n t i a l at Lethbridge would not l i k e l y 33 have s i g n i f i c a n t growth a f t e r f i v e years. Author's note: One of the major reasons for Lethbridge's economic growth was that i t had been declared a depressed area and the federal government was giving firms c a p i t a l subsidies to locate there. These sub-s i d i e s were due to end i n 1975. 86. 3. Market p o t e n t i a l at Medicine Hat, Cranbrook-Kimberly, and the L e t h b r i d g e s a l e s t e r r i t o r y would not l i k e l y i n c r e a s e s u b s t a n t i a l l y over the time p e r i o d c o n s i d e r e d f o r a n a l y s i s , and 4. A l l s t r a t e g i e s would on l y have an impact on s a l e s a t the L e t h b r i d g e market. P r o f i t a b i l i t y o f Increased Sales Coverage The s t r a t e g y of i n c r e a s e d s a l e s coverage, l i k e a l l s t r a t e g i e s , was e v a l u a t e d by simply c a l c u l a t i n g the c o s t s o f d i s t r i b u t i o n , the i n c r e a s e d c o s t s r e s u l t -i n g from the s t r a t e g y , and the gross p r o f i t a t t r i b u t a b l e to i n c r e a s e d s a l e s . A.B.C.'s estimated gross t r a d i n g margin f o r the L e t h b r i d g e area was twenty per cent, while the c o s t per year of salesman w i t h expenses was estimated a t $13,000. A n a l y s i s o f t h i s s t r a t e g y (see Table XXII) i n d i c a t e d t h a t the d i s c o u n t e d net p r o f i t over a ten/;year p e r i o d would be $110,342. P r o f i t a b i l i t y o f a L e t h b r i d g e Warehouse In order to e v a l u a t e p r o f i t a b i l i t y o f the L e t h -b r i d g e warehouse i t was necessary to e s t a b l i s h the c o s t s o f o p e r a t i n g such a f a c i l i t y . A l s o , i t was necessary to c o n s i d e r any i n h e r e n t b e n e f i t s or c o s t s i n d i s t r i b u t i n g from the warehouse, such as the i n c r e a s e d c o s t o f l a n d i n g ' goods a t the f a c i l i t y and the decreased c o s t s o f d i s t r i b -u t i n g goods to customers. These c o s t estimates and TABLE XXII PROFITABILITY OF INCREASED SALES COVERAGE 1977 S TOTAL DISCOUNTED-PROFITS OVER TEN YEARS 1, 110,342 1972 1973 1974 1975 1976 SALES: Lethbridge 1 S 184,174' $ 218, ,615 $ 255 ,385 5 297,294 5 343,660 Med. Hat 63,581 63, ,581 63, ,581 63,581 63,581 Cran-Kimb. 39,276 '39, ,276 . 39 ,276 39,276 39,276 Leth. Terr. 34,211 34, ,211 34 ,211 34,211 34,211 321/242 555, ,683 392,453 434,363 480,728 GROSS PROFIT @ 20% 64,348 71, ,137 • 78, ,491 86,872 96,146 LESS: Cost of Cal. warehouse operation @ $3.04 per cwt-2 21,450 23, ,752 26, ,205 28,944 32,099 Cost of 1.6 sales-men: 20,800 20, 800 20 ,800 20,800 20,800 Profit prior to ship-ment to customers 22,098 26, 585 31, ,486 37,128 43,247 LESS: Transp't cost , warehouse to customer Lethbridge 5,602 6, 651 7, -768 9,044 10,454 Med. Hat 1,043 1, 043 1, ,043 1,043 1,043 Cran-Kimb. 3,038 3, 038 3, ,038 3,038 •3,038 Leth. Terr. 2,277 2, 277 2, ,277 ;2,277 2,277 NET PROFIT 10,138 13, 576 17, ,360 21,726 26,435 Discount rate 6 15% 1.0 .8 607 .7408 .6376 . t5488 DISCOUNTED NET PROFITS 10,138 11,685 l2',86fl 14\507 480,728 96,146 20,800 43,247 26,435 NOTES: jSee Table VIII, p. 52. Estimated cost of distribution from Calgary warehouses . includes handling, o f f i c e , and administration costs in Chapter V, Table XXI, p. S i -Transport costs to customers estimated by ragression lines of Chapter V. 1978 "8T77778" 96,146 20,800 43,247 26,4351 .4066'. 10', 74 a 1979 4807728 96,146 20,800 43,247 26,435 .3499 19,250 1980 480,728 96,146 20,800 43,247 26,435 .3012 •7,562 1981 480,728 96,146 20,800 43,247 26 ,435 • 3 0 1 2 ; ' 6,852 \ 88. the basis upon which they were calculated are given i n Tables XXIII and XXIV. Analysis of thi s strategy indicated that over a ten year period a Lethbridge warehouse would generate discounted net p r o f i t s of $70,598. TABLE XXIII ANNUAL OPERATING COSTS PROPOSED LETHBRIDGE WAREHOUSE SPACE COSTS: minimum space required 7000 sq. f t . cost of space with r a i l spur, heat and l i g h t included, $1.50 ^ per sq. f t . per annum 10,500 EQUIPMENT: one f o r k l i f t with rental and operating costs of $2,500 annually , .2,500 INVENTORY: warehouse would r e s u l t i n increment of $60,000 invent-ory @ 15% 9,000 STAFFING: WAREHOUSE MANAGER/SALESMAN 13,000 FULL TIME SALESMAN with expenses... 13,000 SECRETARY/CLERK 5,500 FULL TIME WAREHOUSEMAN 8,000 PART TIME WAREHOUSEMAN 4,000 MISCELLAN-EOUS telex, phone, business tax, etc.... 3,000 ESTIMATED ANNUAL OPERATING COSTS OF FACILITY 6 8,500 Source: A.B.C.'s Vancouver warehouse manager. 1972 1973 SALES: L e t h b r i d g e 1 * 224,714 ? 262,484 Med. Hat 63,581 63,581 . Cran-Kimb. 39,276 39,276 .Leth. T e r r . 34,211 34,211 361,782 399,552 GROSS PROFIT @ 20* 72,356 79,910 LESS: Increased c o s t of l a n d i n g goods a t -Lethbridge vs. Calgary 5,960 6,558 Cost of S t r a t e g y 3 68,500 68,500 P r o f i t p r i o r shipment to customers (2,104) 4;852 LESS: Transport c o s t , warehouse to customer Lethbridge 1,663 1,943 Med. Hat 1,925 1,925 Cran-Kimb. 1,853 1,853 Leth. T e r r . 728 728 NET PROFIT (8,273) (1,597) Discount rat e @ 15% 1.0 .8607 DISCOUNTED NET PROFITS (8,273) (1,175) TOTAL DISCOUNTED PROFITS OVER TEN YEARS = * 70,598 NOTES: (See f o l l o w i n g page) TABLE XXIV PROFITABILITY OF LETHBRIDGE WAREHOUSE 1974 1975 1976 1977 308,417 63,581 39,276 34,21] 445.485 89,907 377,183 63,581 39,276 34.211 514,251' 102,850 437,658 63,581 39,276 34,211 564,726 112,945 $ '564,72(5 112,945 1978 564,726 112:945 1979 564,726 112,945 1980 554,725 112,945 1981 554,726 112,945 7,338 68,500 13,259 8,470 68,500 25,880 9,497 6B,500 34,948 9,497 68,500 34,948 9,497 68,500 . 34,948 34,948 34,948 34,948 2,283 1,925 1,853 728 6,477 .7408 4,798 2,792 1,925 1,853 728 18,582 .6376 11,848 3,240 1,925 1,853 728 27,202 .5488 14,929 27,202 • 4724 12,850 27,202 .4066 11,060 27,202 • 3494 9,518 27,202 • 3012 8,193 27,202 • .2592 7,051 CO VD TABLE XXIV (Continued) 90. NOTES: 1See Table VIII, p.. 52. 2 It was assumed that landing goods at Lethbridge would r e s u l t i n an increased cost of 75£ per cwt. versus Calgary. This assumption was pre-dicted upon Lethbridge 1s geographical location and the fact smaller warehouses tend to have a higher cost of sales as indicated by Table XXI, P-3See Table XXI, p.82.. 4 Transport costs to customers estimated by regression l i n e s of Chapter V. 91. P r o f i t a b i l i t y of Maintaining the Status Quo Results from the Delphi i n Chapter Four tended to indicate that A.B.C.'s e x i s t i n g market share at Lethbridge was about twenty per cent. Accordingly, i t was assumed that t h i s market share could be main-tained over the ten year time period under consideration without any changes i n d i s t r i b u t i o n or s e l l i n g practices. Calculations i n Table XXV indicate that discounted net p r o f i t s of $110,004 would r e s u l t from keeping the status quo at Lethbridge. Conclusion on Lethbridge Strategies Although a l l strategies indicated discounted net p r o f i t s , the strategies of increased sales coverage and maintaining the status quo were vastly superior to that of establishing a warehouse. The analysis did not, however, indicate c l e a r l y whether the strategy of increas-ing sales coverage or maintaining the status quo would be the most desirable since both of these strategies had almost i d e n t i c a l discounted benefits. Nevertheless, i t appeared that intangible considerations, such as gaining a larger market share, would tend to favor the strategy of increased sales coverage. The analysis did reveal, however, that the strategy TABLE XXV PROFITABILITY OF MAINTAINING STATUS QUO 1972 1973 1974 1975 1976 1977 SALES: Lethbridge * 169,980 *• 183, ,171 * 197,513 * 213 ,138 5 230, 954 $ Med. Hat 63,581 63, ,581 . 63,581 63 ,581 63, ,581 Cran-Kimb. 39,276 39,276 . 39,276 39 ,276 39, 276 Leth. Terr. 34,211 34, ,211 34,211 34,211 34, 211 307,948 320, ,230 334,581 350 ,206 368, 022 368,022 GROSS PROFIT @ 20% 61,409 64, ,048 66,016 70 ,604 73, 604 73,604 LESS: Cost of Cal. warehouse operation ? $3.04 per cwt-2 20,502 21, ,383 22,341 23 ,384 24, 575 Cost of salesmen _ 13,000 13, ,000 13,000 •• 13 ,000 13, 000 13,000 Profit prior to ship-ment to customers 27,907 29, ,665 . 30,675 33 ,657 36, 029 36,029 LESS: Transport cost ^ warehouse to customers Lethbridge 5,170 5, ,572 6,008 6 ,483 7, 026 Med. Hat 3,038 3, ,038 3,038 3 ,038 3, 038 Cran-Kimb. 2,277 2, ,277 2,277 2 ,277 , 2, 277 Leth. Terr. 1,043 1, ,043 1,043 1 ,043 1, 043 NET PROFIT 16,379 17, ,735 18,369 20 ,816 22, 465 22,465 Discount rate @ 15% 1.0 .! !607 .7408 .6376 .5488 .4724 DISCOUNTED NET PROFITS 16,379 15, ,265 13,563 13 ,272 12, 239 10,612 TOTAL DISCOUNTED PROFITS OVER TEN YEARS 1 110,004 NOTES: It i s assumed a market share of 20% of potential can be maintained. 2 Estimated cost of distribution from Calgary warehouse: includes handling, of f i c e , and administration costs in Chapter V, Tab la XXI, p. S T . , . ^Transport costs to customers estimated by regression lines of Chapter V . 1978 1979 1 9 8 0 1981 5 $ * 368,022 - ^68 ,022 3 6 8 0 2 2 - , , „ 73,604 73,604 3§|;ggJ 3^ ;022 13,000 13,000 13,000 1 3 , 0 0 0 36,029 36,029 36,029 36,029 22,465 22,465 22,465 22,465 .4066 -3499 .3012 .2592 9,134 7,861 6,766 5,823 i ID of establishing a Lethbridge warehouse was at best a marginal venture. In fact, i t was possible that establishment of a warehouse was even less desirable than the analysis had indicated since the other two strategies may have been underestimated as to t h e i r p r o f i t a b i l i t y . Reference to Tables XXII and XXV reveals that these strategies were allocated Calgary d i s t r i b u t i o n costs on an average cost rather than a marginal cost basis. Thus, the analysis did not consider the l i k e l y occurrence that increased through-put at the Calgary warehouse from increased Lethbridge sales could be handled with l i t t l e or no increase i n warehouse costs. In short, then, the analysis i n d i c -ated that although a Lethbridge warehouse could generate much increased sales, i t could not generate such sales economically. OPTIMALITY OF THE EXISTING DISTRIBUTION NETWORK Optimality of the e x i s t i n g d i s t r i b u t i o n net-work was determined by using the transportation model. In a l l , f i v e solutions of the transportation model were made with each solution using d i f f e r e n t assumptions and-constraints. These solutions were obtained with the aid of two computer package programmes from the University 94. of B r i t i s h Columbia c a l l e d "U.B.C. TRAN" and "U.B.C. 34 LIP". The "U.B.C. TRAN" programme was used on a l l runs since i t was an extremely e f f i c i e n t algorithm, while the "U.B.C. LIP" programme was used only for the purpose of obtaining a s e n s i t i v i t y analysis of the optimal solution since the "U.B.C. TRAN" pro-gramme did not provide this information. The objective function of a l l solutions was to minimize d i s t r i b u t i o n costs which were defined as the landed cost of goods at each warehouse (the d e f i n i t i o n adopted i n Chapter Five which included cost of goods sold) plus transport costs to customers. Solution One: Unrestricted Supply of Goods at a l l  Warehouses In t h i s solution each warehouse was given a supply of goods such that i t was ensured a supply of goods which would not be r e s t r i c t i v e upon the optimal solution. Under th i s assumption i t was found that three warehouses did not ship goods to any market. These warehouses were Prince Rupert, Prince George, and Regina. The optimal solution produced a t o t a l cost of $17,964,323.40. Solution Two: Restricted Supply of Goods at a l l  Warehouses The i n i t i a l solution was u n r e a l i s t i c i n that 34 _ , Author's note: I.B.M. has simi l a r transportation algoarithms i n th e i r M?P.S. 360 serie s . 95. warehouses were not r e s t r i c t e d to the annual volume of goods they could physically handle and ship. There-for, Solution Two had as i t s objective function to minimize variable d i s t r i b u t i o n costs subject to the constraints that: (1) goods demanded by customers had to be shipped to customers (this constraint was i m p l i c i t i n Solution One), and (2) warehouses could not ship more goods than i t was possible for t h e i r f a c i l i t i e s to handle. Solution Two resulted i n an optimal solution which produced a t o t a l cost of $17,970,491.00. Several factors were i s o l a t e d to explain t h i s higher cost solution: 1. Only two warehouses, Prince George and Prince Rupert, did not ship any goods. 2. Markets which were served most e f f i c i e n t l y by Saskatoon i n Solution One could no longer be shipped from th i s warehouse because i t had approached the maximum volumes of goods i t could ship. As a r e s u l t , i t was economic to have the warehouses of Calgary, Edmonton, and Regina serve some of the markets served by Saskatoon i n Solution One. 3. Like the Saskatoon warehouse, the V i c t o r i a 96. warehouse could not ship the same volume of goods as i t did i n Solution One. As a r e s u l t , some goods which were shipped from the V i c t o r i a warehouse i n Solution One required shipment from the Vancouver warehouse. Solution Three: Restricted Supply of Goods at a l l Ware- houses, but Increased Supply at Saskatoon due to I n s t a l l - ation of High Rack Shelving Since the constrained warehouse capacity of Solution Two necessitated one extra warehouse over Solution One, plus increased d i s t r i b u t i o n costs from use of that warehouse, means of avoiding t h i s p o s s i -b i l i t y were investigated. It was found that for a c a p i t a l cost of $15,000.00 the Saskatoon warehouse could i n s t a l l high rack shelving and have i t s capacity increased by approximately 30%. Incorporating t h i s new supply constraint at Saskatoon resulted i n an opt-imal solution with a t o t a l cost of $17,966,421.00. In th i s solution three warehouses, Prince George, Prince Rupert and Rggfna did not ship any goods. Thus, Solution Three produced lower d i s t r i b u t i o n costs than Solution Two and had the added advantage of requiring one less warehouse. Therefore, to prove that t h i s solution was an improvement i t was only necessary to j u s t i f y the expense of a c a p i t a l expenditure of $15,000.00 at Saskatoon. This was not d i f f i c u l t since the Regina warehouse had an estimated market value of $340,000.00. Solution Four: Deletion of the V i c t o r i a Warehouse Review of Solution Three revealed that the V i c t o r i a warehouse did not ship goods s i g n i f i c a n t l y cheaper to i t s markets than they could be shipped from the Vancouver warehouse. In l i g h t of t h i s observation and also since there were some reservations about the costs of d i s t r i b u t i o n from the V i c t o r i a warehouse being too low (see Chapter V, p. 81), i t was decided that i t might be advantageous to measure the increased d i s t r i b u t i o n costs which would r e s u l t from closure of the V i c t o r i a warehouse. The optimal solution which resulted produced a t o t a l cost of $17,974,191.00. Thus closure of the V i c t o r i a warehouse increased d i s t r i b u t i o n costs by only $7,769.00 over Solution Three. Since the V i c t o r i a warehouse had an estimated market value of $116,500.00 i t could be proved that on a cost basis i t 35 was economic to abandon th i s warehouse. Author's note: This decision was j u s t i f i e d on the assumption that funds set free from the sale of the V i c t o r i a warehouse could be reinvested at A.B.C.'s cost of c a p i t a l . 98. Solution Five: S e n s i t i v i t y of the Optimal S o l u t i o n —  (Solution Four") : Since review of Solution Four indicated i t to be a least cost solution where no further improvements could be made, the s e n s i t i v i t y of th i s solution was tested. S p e c i f i c a l l y , the solution was monitored to measure the a f f e c t of a change i n : 1. The constraints placed upon the solution, i..e;„ how much could the supply of goods available at each warehouse and the amount of goods demanded by each market change before the optimal solution would be affected, and 2. The cost c o e f f i c i e n t s , i . e . , how much could the costs of d i s t r i b u t i o n from each ware-house to each market change before the -J optimal solution would be affected. S e n s i t i v i t y of Supply Constraints: It i s use-f u l to know how much excess capacity i s available i n the optimal solution, since i t i s possible that estimated capacities of warehouses are fa u l t y . Also, t h i s inform-ation i s h e l p f u l i n determining longer range plans for increased warehouse space. TABLE XXVI SENSITIVITY OF OPTIMAL SOLUTION TO WAREHOUSE CAPACITY Warehouses i n o p t i m a l s o l u t i o n A n n u a l s u p p l y o f warehouse i n tons 1 Annual s u p p l y o f warehouses i n tons where o p t i m a l s o l u -t i o n i s a f f e c t e d Vancouver 8165 7923 C a l g a r y 3 1 5 0 * 1828 Edmonton 6035 3623 Saskatoon 4148* 4148 Winnipeg 4558 3216 Thunder Bay 705 631 *NOTE: Ann u a l s u p p l y o f t h e s e warehouses i s an e s t i m a t e o f l i k e l y c a p a c i t y w i t h i n s t a l l -a t i o n o f h i g h r a c k s h e l v i n g . Source: A.B.C. Widget P l a n n i n g Manual. Ta b l e XXVI i n d i c a t e s , w i t h the e x c e p t i o n o f the Winnipeg and Edmonton warehouse, t h a t the o p t i m a l s o l u -t i o n has v e r y l i t t l e s l a c k c a p a c i t y . T h i s s u g g e s t s t h a t , i f the o p t i m a l s o l u t i o n d i s t r i b u t i o n p a t t e r n was implemented, i n s t a l l a t i o n o f h i g h r a c k s h e l v i n g a t Vancouver and e x p a n s i o n o f s t o r a g e space a t C a l g a r y and Saskatoon c o u l d be imminent. I t s h o u l d be n o t e d , 100. however, that the problem of increased storage space at Calgary cannot be attributed to the optimal solution since Calgary serves the same markets under the optimal solution as i t does at present. Also, i t should be noted that the supply constraints used were calculated on the assumption that e x i s t i n g space u t i l i z a t i o n was proportional, i . e . , a warehouse operating at seventy per cent capacity having an annual throughput of seventy ponscwould have a throughput of one hundred tons at one hundred per cent capacity. In r e a l i t y , because of the "square root a f f e c t on safety stock," there i s probably considerably more capacity than indicated. This i s p a r t i c u l a r l y true of the Vancouver warehouse which combines the inventory of three other warehouses i n the optimal solution. Thus, i t would appear the only r e a l capacity problem the optimal solution might create i s at the Saskatoon warehouse. S e n s i t i v i t y of Demand: By def i n i t o n , s e n s i t i v i t y of demand tests how much the volume of goods shipped to any one market can increase before the optimal solution i s affected. In a sense, demand s e n s i t i v i t y may be viewed as s i m i l a r to the s e n s i t i v i t y of supply since any one market can always demand at lea s t a volume of goods equal to the excess supply which i s 101. available at the warehouse from which i t draws goods. Thus, demand s e n s i t i v i t y i s only of i n t e r e s t when pa r t i c u l a r markets such as Lethbridge are under study. It should be noted that the increased demand created by any of the Lethbridge strategies over the f i v e year period would not be of s u f f i c i e n t magnitude by i t s e l f to a f f e c t the optimal solution. S e n s i t i v i t y of Cost C o e f f i c i e n t s : Cost co-e f f i c i e n t s can be changed by a variety of i n s t i t u t i o n a l and/or economic factors and are often subject to errors i n estimation. Therefore, i t i s desirable to know how much cost c o e f f i c i e n t s can increase before the optimal solution i s affected. At f i r s t glance, Table XXVII would appear to reveal the optimal solution i s extremely sensitive to changes i n the cost of d i s t r i -bution from each warehouse to each market. However, i t must be remembered that d i s t r i b u t i o n costs were defined to include the cost of goods so, i n r e a l i t y , there i s probably about $700 per ton which i s not a true 3 6 d i s t r i b u t i o n cost. Thus, the optimal solution i s much less sensitive than i t appears and i t i s possible to 3 fi Author's note: If the gross cost of goods per hundred-weight i n Table XXI are converted to a cost per ton, they represent a cost per ton of: $722.40 at Vanc-ouver, $722.40 at V i c t o r i a , $767.00 at Prince George, $768.00 at Prince Rupert, $717.40 at Calgary, $717.40 at Edmonton, $745.50 at Regina, $735.20 at Saskatoon, $744.80 at Winnipeg, and $745.20 at Thunder Bay. TABLE XXVII SENSITIVITY OF OPTIMAL SOLUTION TO COST COEFFICIENTS From warehouse to market, in optimal solu-tion FROM VANCOUVER To: Vancouver Penticton Kelowna Powell R. Chilliwack Nanaimo Alberni Campbell R. Nelson/Trail Kamloops Victoria Duncan Sydney (Cont'd) Optimal solution cost per ton '787.70 828.70 807.00 837.10 843.80 834.30 829.10 824.70 830.50 Upper bound on cost per ton 836.80 C O 839.20 837.00 O O Warehouse determining upper bound of optimum None (1) Calgary None None None Calgary Calgary None None Cost per ton of warehouse currently serv-ing market 787.70 828.70 807.00 837.10 ,843.80 834.30 829.10 818.20 823.40 Warehouse currently serving market Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver Vancouver •Victoria •Victoria Continued on Page 103 TABLE XXVII (Continued) From Warehouse to market in optimal solu-tion FROM VANCOUVER To: Pr. George Pr. Geo. Terr. Pr. Rupert Kitimat Terrace FROM CALGARY To: Calgary Red Deer Lethbridge Med. Hat Cranbrook/ Kimberly Leth. Terr. Optimal solution cost per ton '837.40 839.10 846.60 845.70 845.20 783.50 802.50 807.90 818.40 827.60 802.50 Upper bound on cost per ton '839.70 841.30 849.10 848.20 847.60 816.40 802.50 831.30 831.80 837.10 831.30 Warehouse determining upper bound of optimum Edmonton Edmonton Edmonton Edmonton Edmonton Edmonton Edmonton Edmonton Saskatoon Vancouver Edmonton (2) Cost per ton of warehouse currently serv-ing market 869.10 90.1.90 880.00 920.30 i 915.80 783.50 802.50 807.90 818.40 827.60 802.50 Warehouse currently serving market *Pr. George *Pr. George *Pr. George *Pr. Rupert Pr. Rupert Calgary Calgary Calgary Calgary Calgary Calgary Continued on Page .104 From warehouse to market in optimal solu-tion FROM EDMONTON To: Edmonton Gr. Prairie FROM SASKATOON To: Saskatoon N. Battleford Regina Pr. Albert Moose Jaw Yorkton Weyburn Swift Current Optimal solution cost per ton 783.20 827.80 791.40 806.20 810.90 806.40 809. 70. 813.90 815.80 812.00 TABLE XXVII (Continued) Upper bound on cost per ton Warehouse determining upper bound of optimum 807.90 840.70 Calgary Calgary 822.80 819.50 812.20 826.10 826.10 830.60 827.80 822.50 Edmonton Edmonton Regina Edmonton Regina Edmonton Regina Calgary Cost per ton of warehouse currently serv-ing market Warehouse currently serving market 783.20 827.80 Edmonton Edmonton 791.40 806.20 812.20 806.40 826.10 831.10 827.80 833.10 Saskatoon Saskatoon *Regina Saskatoon *Regina *Regina *Regina *Regina Continued on Page. 105. o From warehouse to market in optimal solu-tion , ':. , FROM WINNIPEG To: Winnipeg Wpg. Terr.#.i30 Wpg. Terr.#207 Wpg. Terr.#255 Kenora Dauphin Brandon FROM THUNDER BAY To: Thunder Bay Th. Bay Terr. Optimal solution cost per ton 804.60 815.40 815.40 815.40 843.10 825.10 820.60 827.40 841.90 TABLE XXVII (Continued) Upper bound on cost per ton Warehouse determining upper bound of optimum Cost per ton of warehouse currently serv-ing market Warehouse currently serving market O O '832.00 834.70 None None None None None Saskatoon Saskatoon 804.60 815.40 815.40 815.40 843.10 825.10 820.60 Winnipeg Winnipeg Winnipeg Winnipeg Winnipeg Winnipeg Winnipeg 859.80 856.60 Winnipeg Winnipeg 827.40 841.90 Thunder Bay Thunder Bay Continued on Page 106 o 106. TABLE XXVII (Continued) NOTES: (1) An upper bound of i n f i n i t y occurs when the model does not allow a li n k whereby a market can be served by another warehouse. This occurs in markets where i t i s obvious the market w i l l a l -ways be served by a certain warehouse. (2) I f the upper bound on the cost c o e f f i c i e n t s of the optimal solution i s equal to that of the warehouse which serves a market, then, t h i s market can be served by one of two warehouses at equal cost. Denotes that the optimal solution results i n a market being served from a d i f f e r e n t warehouse than at present. 107. make several observations by reviewing Table XXVII: 1. Markets formerly served by Prince George and Prince Rupert, but served by Vancouver i n the optimal solution, are extremely i n s e n s i t -ive to changes i n cost between the Vancouver, Prince George, and Prince Rupert warehouses. D i s t r i b u t i o n to these markets, however, i s extremely sensitive to changes i n costs between the Vancouver and Edmonton ware-houses. This l a t t e r finding i s of consider-able i n t e r e s t should the Vancouver warehouse become strained for capacity since supply v i a the Edmonton warehouse, which has considerable excess capacity, could be made at l i t t l e incremental cost. In ldrght of the information developed i n Chapter Five regarding Edmonton costs of d i s t r i b u t i o n , i t i s l i k e l y that Edmonton i s a very compet^-ative d i s t r i b u t i o n a lternative to Vancouver. These findings also tend to support the premise that from a d i s t r i b u t i o n cost view-point the Prince George and Prince Rupert f a c i l i t i e s should be closed. 108, 2. The market of Red Deer which i s served by the Calgary warehouse i n the optimal solution can be served with equal e f f i c i e n c y from the Edmonton warehouse. Thus, i t i s possible to r e l i e v e capacity problems at the Calgary warehouse with no increase i n cost by simply serving t h i s market v i a the Edmonton ware-house . 3. Markets formerly served from the Regina warehouse, with the exception of the Regina market i t s e l f , are a l l f a i r l y i n s e n s i t i v e to changes i n d i s t r i b u t i o n costs. It should be noted, however, that the smallest error i n the data used could r e s u l t i n i t being more e f f i c i e n t for the market of Regina to be served from the Regina warehouse. 4. The two markets served by the Thunder Bay ware-house are both f a i r l y i n s e n s i t i v e to changes i n cost which suggests there are strong economic reasons for maintaining existance of t h i s rather small warehouse. The A f f e c t of Increased Lethbridge Demand Since Lethbridge i s best supplied from the Calgary warehouse which has capacity problems, implem-entation of the strategy of increased sales coverage 109. at Lethbridge would increase the burden placed upon thi s warehouse. By 19 76 annual Lethbridge sales i n tons are estimated to be 377.4 tons versus 134 tons at present so there w i l l be an increment of 24 3.4 tons. Reference to Table XXVI indicates that the Calgary warehouse has only 332 tons of excess capacity. However, th i s could be increased by a further 335 tons i f the Red Deer market was served by the Edmonton warehouse. Therefore, i t would appear that any strategy implemented at Lethbridge would not create a volume of increased sales which could not be handled by the Calgary warehouse. In fa c t , by serving Red Deer from Edmonton the capacity problem at Calgary would be reduced even i f there were' increased Leth-bridge sales. Conclusions on the Optimal Solution Although the d i s t r i b u t i o n system envisioned under the optimal solution i s a d e f i n i t e 'improvement when compared to the e x i s t i n g d i s t r i b u t i o n network (see Figures 4 and 5), there are several factors which are not e a s i l y measureable and were not incorporated into the model. Therefore, i t i s useful to review a l l the measureable and immeasureable factors which might r e s u l t i f the optimal solution was implemented. I—1 o FIGURE 5 MARKETS SERVED BY WAREHOUSES. IN THE. PROPOSED OPTIMAL DISTRIBUTION NETWORK 112. Reduction i n Measureable Costs Variable Costs: Table XXVIII reviews the changes i n variable d i s t r i b u t i o n costs which would have resulted i n 19 70 i f the optimal solution had been implemented. It indicates a decrease i n variable d i s t r i b u t i o n costs of approximately $70,000 per annum. Fixed Costs: The optimal solution results i n four warehouses—Prince George, Prince Rupert, Regina, and V i c t o r i a — b e i n g abandoned. Two of these warehouses, Prince George and Prince Rupert, are leased f a c i l i t i e s , while V i c t o r i a and Regina are company-owned warehouses. The annual occupancy costs of the Prince George and Prince Rupert f a c i l i t i e s are respectively $12,700 and $6,200 so abandonment of these warehouses would d decrease annual costs by $18,900. The sale of the V i c t o r i a and Regina warehouses would r e s u l t i n r e a l i z -ation of a c a p i t a l inflow of approximately $116,500 and $340,000 respectively. Implementation of the oppimal solution would, however, require expansion of warehouse space at Saskatoon through i n s t a l l a t i o n of high rack shelving at a cost of $15,000. Reduction i n Inventory: One of the most important costs which was not r e f l e c t e d i n the trans-portation model i s that of inventory commitment. With TABLE XXVIII DECREASED VARIABLE DISTRIBUTION COSTS WHICH WOULD HAVE RESULTED WITH THE OPTIMAL SOLUTION DURING THE YEAR 197 0 Market Optimal Solution Previous Distribution Saving Tons Total distribution Warehouse supplying Cost per ton Warehouse supplying Cost per ton per ton under optimum demanded by market cost saving with • optimal solution Victoria Vancouver $ 824.70 Victoria $ 818.20 $(6.50) 944 $ (6,136.00) Duncan/ Sydney Vancouver 830.50 Victoria 823.40 (7.10) 230 (1,633.00) Pr. George Vancouver 837.40 Pr. George 869.10 31.70 596 18,893.20 Pr. Geo. Terr. Vancouver 839.10 Pr. George 901.90 62. 80 256 16,076.80 Pr. Rupert Vancouver 846.60 Pr. Rupert 880.00 33.40 187 6,245.80 Kitimat Vancouver 845.70 Pr. Rupert 920.30 74.60 140 10,444.00 Terrace Vancouver 845.20 Pr. Rupert 915.80 70.60 140 9,884.00 Regina Saskatoon 810.90 Regina 812.20 1.30 887 1,153.10 Moose Jaw Saskatoon 809.70 Regina 826.10 16.40 246 4,034.40 Yorkton Saskatoon 813.90 Regina 831.10 17.20 220 3,784.00 Weybucn Saskatoon 815.80 Regina 827.80 12.00 200 2,400.00 Swift Current Saskatoon 812.00 Regina 833.10 21.10 228 . 4,810.80 TOTAL. $ 69.957.10 114. fewer warehouses there would be a considerable d i v e r s i t y factor on safety stock which would r e s u l t i n a s i g n i f i -cant inventory decrease. Unfortunately, i t was not possible to quantify the magnitude of t h i s saving due to data l i m i t a t i o n s , but on the basis of the average inventory figures i n Table XXIX I t would appear that inventory commitment would be decreased well i n excess of $100,000. For example, i t i s quite l i k e l y that with amalgamation of the Prince George, Prince Rupert and V i c t o r i a stocks with those of the Vancouver warehouse, that at a minimum the Prince George and Prince Rupert stocks could be eliminated. TABLE XXIX AVERAGE WAREHOUSE INVENTORY Warehouse Average Inventory i n Dollars Winnipeg Thunder Bay Regina V i c t o r i a Vancouver Saskatoon Calgary Edmonton Prince George Prince Rupert 538,115.00 85,933.00 237,637.00 366,418.00 360,046.00 466,274.00 781,378.00 147,965.00 59,000.00 58,000.00 Source: A.B.C. Inventory Analysis 115. Reduction i n Corporate Overhead: The transport-ation model did not include costs for the s t a f f and control costs r e s u l t i n g from administration of a warehouse system. With fewer warehouses i t i s l i k e l y that corporate overhead could be reduced or at a minimum better control could be exercised without increased cost. Economies from Larger D i s t r i b u t i o n Centres: The optimizing model used was s t a t i c i n the sense that i t assumed, regardless of warehouse throughput, the costs of d i s t r i b u t i o n would remain the same. Although the data used for analysis did not c l e a r l y show that warehouses with more throughput were more e f f i c i e n t , i t would seem l o g i c a l that with reduction i n the number of warehouses there would be some reduction i n s t a f f . There would also appear to be other areas where fewer, but larger warehouses, would produce economies: 1. Purchase Discounts: Analysis i n Chapter Five strongly indicated the larger warehouses were able to secure a greater saving per unit of goods purchased through purchase discounts. 2. Negotiation of Prepaid Freight: Many of A.B.C.'s suppliers, including i t s parent company, supply goods under a p r i c i n g structure which does not r e f l e c t the true cost of f r e i g h t . With fewer warehouses there should be an increase i n truckload and carload purchases which may allow negotiation with major suppliers for a reduction i n purchase p r i c e . Consolidation of Customer Del i v e r i e s ; The cost input used for transportation costs to customers i n the transportation model was derived from L.T.L. f r e i g h t rates for i n t e r c i t y shipments. With elimination of warehouses at such major markets as Regina, Prince George, and V i c t o r i a , i t i s possible that the volume of f r e i g h t could sustain consolidation rather than the e x i s t i n g practice of shipment of orders i n d i v i d u a l l y . Decreased Customer Service: In Chapter Four;, extensive analysis of customer service requirements was undertaken. Although the Lethbridge market was considered parochial, i t was found that customer service required at Lethbridge was not that c r i t i c a l . Therefore, implementation of the optimal solution would l i k e l y have an impact only on those markets at which warehouses formerly existed. This impact should not be great, however, since with the possible except-ion of Prince Rupert, there would be no d i f f i c u l t y i n 117. g i v i n g these markets t h i r d day s e r v i c e or b e t t e r . I t should a l s o be noted t h a t the o p t i m a l s o l u t i o n would r e s u l t i n l a r g e r d i s t r i b u t i o n c e n t r e s a t those markets which have the g r e a t e s t c o n c e n t r a t i o n o f demand and hence these markets should be p r o v i d e d b e t t e r customer s e r v i c e . Although the p r e c e d i n g has i n d i c a t e d f a i r l y c l e a r l y t h a t the d i s t r i b u t i o n network proposed would not s e r i o u s l y d e t e r s a l e s , i t i s p o s s i b l e to analyze t h i s problem i n a more concre t e manner. I f i t i s assumed t h a t s a l e s l o s s w i l l o n l y r e s u l t i n those markets which f o r m e r l y had warehouses, then the maxi-mum l o s s which c o u l d r e s u l t from decreased customer s e r v i c e i s the l o s s o f a l l s a l e s i n these markets. In t h i s event, the l o s s would be the net p r o f i t on s a l e s before tax which i s approximately 3.7 per cent 37 f o r A.B.C. I f the customer s e r v i c e q u e s t i o n i s viewed i n t h i s context, i t can e a s i l y be compared wit h the c o s t savings which would r e s u l t from the o p t i m a l s o l u t i o n i f a l l the measureable c o s t savings of the o p t i m a l s o l u t i o n are a n n u a l i z e d . Table XXX co n t a i n s such an a n a l y s i s and demonstrates t h a t even i f the e n t i r e s a l e s o f the Regina, V i c t o r i a , P r i n c e George, and P r i n c e Rupert markets were l o s t , the 37 A.B.C. Widget Co. had a bef o r e tax net p r o f i t on s a l e s o f 3.7 per cent f o r 1972. optimal solution would s t i l l produce an annualized cost reduction of $60,363. Table XXX also shows that a sales loss of $4,050,514. would be necessary before a l l the tangible benefits of the optimal solution were eroded. 119. TABLE XXX MAXIMUM SALES LOSS PERMISSIBLE IN 19 70 BEFORE OPTIMAL SOLUTION COSTS SAVINGS DISSAPPEAR Sales at markets formerly having g a warehouse Regina -829,302 V i c t o r i a 868,936 Pr. Geo. 548,664 Pr. Rup. 172 ,181 Maximum sales g loss possible: 2,419,083 Net p r o f i t on sales before tax: 3.7% Maximum loss i n p r o f i t before tax possible: '. 89,506 Annualized cost reduction from implementation of the optimal solution: Capital Cost Savings: Regina warehouse 340,000 V i c t o r i a warehouse 116,500 Inventory reduction 100,000 TOTAL 556,500 Less c a p i t a l cost for shelving at Saskatoon warehouse 15,000 Net Capital Cost Saving 541,500 Annualized Capital Cost Saving at 15% 81,168 Decreased Occupancy Costs: Pr. Geo. warehouse 12,700 Pr. Rup. warehouse 6,200 ' ^ Annual Saving: 18,900 Decreased annual variable d i s t r i b u t i o n ,-^) $ costs a r i s i n g from the optimal solution:- 49,801 Annualized cost reduction from optimal ^ solution before t a x : 1 4 9 , 8 6 9 MAXIMUM SALES LOSS BEFORE BENEFITS OF * OPTIMAL SOLUTION DISSAPPEAR: $149,869T3.7% 4,050,514 EXCESS OF ANNUALIZED COST SAVINGS OVER NET PROFIT BEFORE TAX OF MAXIMUM SALES g LOSS: $149,000 less $89,506 * 60,363 Continued on Page 120 120. TABLE XXX (Continued) NOTES: (1) Reference t o Table XXVIII i n d i c a t e s t h a t the o p t i m a l s o l u t i o n decreases annual v a r i a b l e d i s t r i b u t i o n c o s t s by $69,957. However, when i t i s assumed t h a t a l l s a l e s are l o s t i n c i t i e s where warehouses would be abandoned, then i n the i n t e r e s t s o f c o n s e r v a t i v e e s t i m a t e s , i t i s necessary t o exclude any savings on the s a l e s o f these c i t i e s . (2) There i s l i k e l y t o be a tax advantage through d e p r e c i -a t i o n o f warehouses which i s not c o n s i d e r e d i n the a n a l y s i s . CHAPTER SEVEN SUMMARY AND CONCLUSIONS Summary This study has attempted to discover a more optimal d i s t r i b u t i o n system for the A.B.C. Widget Company. In solving problems such as t h i s , i t i s necessary to derive a d i s t r i b u t i o n system which achieves cost minimization without severely deterior-ating sales through reduced customer service. In f u l f i l l i n g these dual and often opposing goals i t i s necessary to gain a proxy measure of the importance of customer service and have a model which adequately minimizes costs. To achieve t h i s , a l i n e a r program-ming model, a p r o f i t a b i l i t y analysis, and a subjective estimating procedure, known as the Delphi, were used. A c r i t i c a l obstacle i n the study's development was derivation of cost input since few firms have information systems which are oriented towards analysis of physical d i s t r i b u t i o n a c t i v i t i e s . Commensurate with t h i s problem was development of a model which ensured the analysis compared d i s t r i b u t i o n of similar products from each warehouse. This problem i s one of the more important shortcomings of the analysis when 122. the t r a n s p o r t a t i o n model i s s o l v e d . The methodology of the study a l s o s u f f e r s from model inadequacies, but these too are the r e s u l t o f data and/or f i n a n c i a l l i m i t a t i o n s . The most obvious shortcoming of the methodology i s t h a t i t uses a l i n e a r r a t h e r than a n o n - l i n e a r o p t i m i z i n g model which may have r e s u l t e d i n a b i a s towards too many ware-houses due to the e x i s t e n c e o f economies of s c a l e . N e v e r t h e l e s s , i n s p i t e o f t h i s and oth e r l i m i t a t i o n s which have been noted throughout the t e x t o f the study, i t would appear t h a t the hypotheses of i n v e s t i g a t i o n are supported, t h a t i s : 1. The e x i s t i n g d i s t r i b u t i o n system i s too d e c e n t r a l -i z e d and has more warehouses than i s o p t i m a l , and 2. Esta b l i s h m e n t o f a warehouse a t Le t h b r i d g e i s not economic. Con c l u s i o n s The f i n d i n g s i n d i c a t e t h a t the warehouses of P r i n c e George, P r i n c e Rupert, V i c t o r i a , and Regina i n c r e a s e the c o s t s o f d i s t r i b u t i o n f o r the A.B.C. Widget Company. Th e r e f o r e , s i n c e the f i n d i n g s a l s o i n d i c a t e t h a t i t i s u n l i k e l y the c o s t s o f decreased customer s e r v i c e are s i g n i f i c a n t , s t r o n g c o n s i d e r a t i o n should 123. be given to abandonment of these f a c i l i t i e s . With implementation of the derived optimal d i s t r i b u t i o n system A.B.C.'s variable costs of d i s t r i b u t i o n would be decreased by approximately $70,000 annually and there would be a c a p i t a l cost recovery of approxim-ately $450,000 from disposal of the Regina and V i c t o r i a warehouses. The optimal solution also would decrease rental costs by $18,9 00 annually when leases were terminated at the Prince Rupert and Prince George warehouses and r e s u l t i n a guestimated reduction of inventory commitment i n excess of $100,000. Implem-entation of the optimal solution would, however, require increasing warehouse capacity at the Saskatoon warehouse immediately at a c a p i t a l cost of $15,000 to i n s t a l l high rack shelving. The optimal solution also might r e s u l t i n the necessity to expand storage space at Saskatoon and i n s t a l l high rack shelving at Vancouver within the next few years, but i t i s l i k e l y the costs of t h i s p o s s i b i l i t y would be more than o f f s e t by intangible benefits stemming from the optimal solution. The- findings towards a more centralized d i s t r i b u t i o n network are supported by the analysis of the p r o f i t a b i l i t y of various alternatives which could be used to stimulate Lethbridge sales. Although a 124. warehouse at Lethbridge would dramatically increase market share, t h i s alternative i s the least p r o f i t -able of those available. It would appear that, even i f a corporate goal was market share rather than p r o f i t a b i l i t y , the establishment of a Lethbridge warehouse would be questionable i n l i g h t of the high market share and p r o f i t a b i l i t y which could be obtained by increasing Lethbridge sales coverage. In conjunction with the Lethbridge analysis, the Delphi indicates the customer service require-ments at Lethbridge have low e l a s t i c i t y . One of the more important findings i s that customers do not demand next day service and i t would appear that three day delivery i s acceptable. Another important finding i s the importance of nationally held accounts i n the industry which suggests that the l e v e l of service the firm gives to a l l of i t s markets combined i s of more importance than the l e v e l of service i t may give parochial markets. Areas for Further Study This study, although being very s p e c i f i c i n purpose, has by necessity been preliminary i n much of i t s analysis due to resource and data l i m i t a t i o n s . As a r e s u l t , the analysis has some shortcomings, which could 125. be r e c t i f i e d with further study. There are also some theoretic a l shortcomings i n the analysis which suggest areas for useful research. Use of the Delphi: The author has numerous reservations about using subjective estimating proced-ures such as the Delphi. F i r s t l y , the analysis of th i s study indicates, as have other studies, that those experts whose i n i t i a l estimates are furthest from the group mean have a tendency to dramatically revise t h e i r estimates. The question arises as to the competence of these experts since the re s u l t s of t h i s study would tend to indicate that the changes are due to group pressure, not revelations of i n s i g h t gained from feed-back. Therefore, i t might be useful to investigate procedures which could remove experts who tend to have a strong group mean bias. Secondly, i t would appear that, although having experts delay i n making estimates u n t i l s u f f i c i e n t problem formulation and data has been generated may improve the accuracy of making estimates and help overcome the problem of experts not r e v i s i n g estimates, t h i s approach lengthens the process and creates d i f f i c u l t i e s i n maintaining a high response rate. It i s highly unlik e l y that individuals i n a corporate 126. environment concerned with day to-day operations can be s u f f i c i e n t l y motivated to commit the time required for good estimates over several questionnaire rounds. Thirdly, there i s some question as to whether the d i v i s i o n s of labor i n the larger corporation lends i t s e l f to application of the Delphi since i t i s d i f f i c u l t to have true experts. For example, those persons who possess the knowledge of day to day operations which allows them to make good estimates are i n the lower management level s and often lack the detachment to make unbiased estimates. There i s also evidence to suggest the reverse i s true. One of the experts who dropped out of the Delphi had a doctor-ate i n physical d i s t r i b u t i o n , but f e l t his knowledge of day to day operations was so l i m i t e d as to make his estimates worthless. A l l of these findings suggest that i t might be useful to test the accuracy of the Delphi when i t i s used i n the corporate environment. Perhaps i t would be b e n e f i c i a l to study forecasting problems which can be accurately handled by regression analysis so that the results of the Delphi can be authenticated. Homogeneity of Output: This study has attempted to examine the firm's numerous products as homogeneous on the premise that each warehouse d i s t r i b u t e s e s s e n t i a l l y the same product mix. The analysis under-taken to support such an approach i s not conclusive and i t might be desirable to use a multi product transport-ation model. A model u t i l i z i n g a few basic product groups would probably be s u f f i c i e n t , but t h i s i s not possible with A.B.C.'s current data. Since A.B.C. i s presently i n the process of computerizing i t s information systems, i t would be desirable to implement a system which breaks down sales into product groups i n which the sales value, average landed cost, and weight are noted. S i m i l a r l y , i t would be desirable i f the same information allowed a more precise documentation of shipment destinations. Economies of Scale i n Warehouses; Much of the l i t e r a t u r e on warehouse location suggests that larger warehouses have economies of scale. Throughout t h i s study there have been numerous indicators that t h i s phenomena may occur. However, data i s not r e a d i l y available to assess t h i s p o s s i b i l i t y and proper analysis would require extensive research. Concluding Comments Although i t has been noted a more detailed analysis i s required i n many areas of t h i s study, the r e s u l t s of the study are f a i r l y conclusive i n that the optimal solution i s not highly sensitive to i t s cost c o e f f i c i e n t s . Thus, i n spite of possible errors i n the data input, p a r t i c u l a r l y those a r i s i n g from the p o s s i b i l i t y of non-homogeneous output between ware-houses, there are clear indicators that A.B.C. has too many d i s t r i b u t i o n centres. The fact that a l i n e a r rather than a non-linear model has been used for analysis does not detract from t h i s conclusion; i n fact, i t gives credence to i t . If i t i s true that a l i n e a r transportation model has a bias towards too many warehouses when optimized, then i t i s only possible that A.B.C. should c e n t r a l i z e i t s d i s t r i b u t i o n system more than the analysis indicates. Given th i s conclusion the only obstacle preventing A.B.C. from securing a more e f f i c i e n t d i s t r i b u t i o n network i s that of implementation, and here some caution should be exercised. Simultaneous closure of four warehouses would create immeasureable operational d i f f i c u l t i e s and expose the firm to considerable r i s k . Accordingly, abandonment of warehouses should proceed i n stages with the i n i t i a l warehouse closed being Prince Rupert. After measurement of the ramifications of closing t h i s f a c i l i t y are monitored, the other three warehouses should be closed so that a more optimal number of warehouses i s achieved. 129. BIBLIOGRAPHY American Management Association. A New Approach to . Physical D i s t r i b u t i o n , New York: American Management Association, 1967. Ballow, R.H. "Dynamic Warehouse Location Analysis," Journal of Marketing Research, volume V, August, 1968, pp. 271-276. Bender, P. P r i n c i p a l s of Physical D i s t r i b u t i o n Systems  Configuration Design, Washington: Marketing Publications Inc., 1971. Bowersox D., Smykay E., and Lalonde B. Physical D i s t r i b u t i o n Management, New York: The McMillan Company, 1968. Dalkey, N.C. "Delphi" The Rand Corporation, Santa Monica: Paper 3704, 1967. » "Experiments i n Group Prediction," The Rand Corporation, Santa Monica: Paper 3820, 1968. 2_. "Predicting the Future," The Rand Corporation, Santa Monica: Paper 3948, 1968. . and Hemler 0. 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Marks, N.E. and Taylor, K.M. (eds.) Marketing L o g i s t i c s : Perspectives and Viewpoints. New York: John Wiley & Sons, 1967. Mossman, F.H. and Mortman, N. L o g i s t i c s of D i s t r i b u t i o n . Boston: A l l y n and Bacon, 1964. Ruppenthal, K.M. and McKinnell, H.A. (eds.) Business  L o g i s t i c s i n American Industry. Stanford, C a l i f o r n i a : Stanford University, 1968. Smith, L.H. and Williams, D.R. S t a t i s t i c a l Analysis for  Business: A Conceptual Approach. Belmont, C a l i f o r n i a : Belmont Publishing Company, 1971. Stewart, W.M. "Physical D i s t r i b u t i o n : Key to Improved Volume and P r o f i t s , " Journal of Marketing, volume 29, January, 1968, pp. 66-70. APPENDIX QUESTIONNAIRE DISTRIBUTED FOR THE DELPHI 131. This exercise i s part of a study which i s attempt-ing to use the opinion of experts to estimate sales potential at Lethbridge, Alberta. You have been chosen as one of several experts for this study. While th i s exercise i s i n progress, please do not discuss i t with anyone, p a r t i c u l a r l y other experts whom you might discover are p a r t i c i p a t i n g i n t h i s exercise. It i s e s s e n t i a l to the v a l i d i t y of your answers that you arrive at them independently. You are at l i b e r t y , however, to consult whatever data or information you f e e l might help you form an opinion throughout t h i s exercise. Your evaluation of the problem w i l l be kept c o n f i - d e n t i a l , as t h i s study i s being conducted by an outside consultant. The general problem with which we w i l l be concerned i s as follows: 1. ASSUMING THERE WERE NO COMPETITORS FOR THE FULL LINE OF PRODUCTS DISTRIBUTED BY A.B.C. WIDGET CO., WHAT FACTORS WOULD YOU CONSIDER IN ORDER TO AID YOU IN DECIDING UPON THE TOTAL SALES POTENTIAL OF LETHBRIDGE OVER THE NEXT FIVE YEARS? 2. ASSUMING YOU WISHED TO STIMULATE SALES AT LETHBRIDGE, WHAT SORT OF BACKGROUND INFORMATION WOULD YOU LIKE TO KNOW ABOUT A.B.C. WIDGET COMPANY'S PRESENT SERVICE TO LETHBRIDGE AND COMPETITION AT LETHBRIDGE? PLEASE RETURN ANSWERS TO THE ABOVE TWO QUESTIONS AS QUICKLY AS POSSIBLE (within two days of receiving them) TO: Brian J. Pratt 805 W 54th Ave. Vancouver, B.C. 132. As a r e s u l t of the f i r s t round of responses, i t appears that the problems for which we are t r y i n g with your help to solve break down into the following categ-ories : QUESTION #1: Assuming there were no competitors for the f u l l l i n e of products d i s t r i b u t e d by A.B.C., what factors would you consider i n order to aid you i n deciding upon the t o t a l sales potential of Lethbridge over the next f i v e years. GENERAL BREAKDOWN OF FACTORS CONSIDERED RELEVENT BY ALL EXPERTS COMBINED. 1. D e f i n i t i o n of the Lethbridge trading area and growth of the trading area. 2. Economic base of Lethbridge, i . e . , what key industries support the area. 3. Expansion of the Lethbridge area. a) New industry expansion at Lethbridge. b) Growth of u n i v e r s i t i e s — U n i v e r s i t y of Lethbridge --University of Medicine Hat c) Expansion of e x i s t i n g industry at Lethbridge. d) % of business f a i l u r e s at Lethbridge for 1969 and 1970. 4. Economic and Demographic facts about Lethbridge. a) R e t a i l sales of Lethbridge and number of r e t a i l outlets. b) Population and population growth of Lethbridge. c) Buying income per capita or per household at Lethbridge. d) Value of manufacturing production and growth in manufacturing production at Lethbridge. e) L i s t of e x i s t i n g manufacturing firms at Lethbridge. f) Enrollment of a l l education at Lethbridge. g) Bank debits i n Lethbridge as compared to other major centres i n southern Alberta. 133. 5. Concessions f o r manufacturers to l o c a t e i n Let h b r i d g e . 6. Large r e t a i l chains a c t i v e i n L e t h b r i d g e . a) L i s t of those chains which purchase through c o n t r o l l e d buying arrangements from other c i t i e s . b) Growth i n group or co-op buying i n Lethbridge, 7. E x i s t i n g s a l e s volume o f A.B.C. at L e t h b r i d g e . a) Breakdown of e x i s t i n g s a l e s by account. b) Sales t e r r i t o r y volume. ON THE BASIS OF THE ABOVE BREAKDOWN OF FACTORS, WE WOULD LIKE ANSWERS TO THE FOLLOWING QUESTIONS: 1. DOES THE PRECEDING BREAKDOWN OF THE PROBLEM AGREE WITH YOUR INTUITIVE APPROACH TO A SOLUTION? IF NOT, EXPLAIN IN DETAIL; IN PARTICULAR, ARE THERE MAJOR FACTORS IN ADDITION TO THOSE LISTED ABOVE WHICH SHOULD BE TAKEN INTO CONSIDERATION. 2. ARE THERE ANY FACTORS LISTED IN THE PRECEDING BREAKDOWN WHICH APPEAR TO BE IRRELEVANT? IF THERE ARE, WOULD YOU EXPLAIN WHY YOU CONSIDER THEM IRRELEVANT. 3. ARE THERE ANY GENERAL COMMENTS WHICH YOU WISH TO MAKE? QUESTION #2: Assuming you wished t o s t i m u l a t e s a l e s at Le t h b r i d g e , what s o r t of background i n f o r m a t i o n would you l i k e t o know about A.B.C.'s present s e r v i c e t o L e t h -b r i d g e and comp e t i t i o n at Le t h b r i d g e . GENERAL BREAKDOWN OF FACTORS CONSIDERED RELEVENT BY ALL EXPERTS COMBINED. Who are the competitors a t Le t h b r i d g e and what f a c i l i t i e s do they have: Are competitors; a) paper merchants b) wholesale s t a t i o n e r s c) grocery w h o l e s a l e r s d) d i r e c t s e l l e r s 134 What l i n e s of goods do Lethbridge competitors handle, i . e . p r i n t i n g , i n d u s t r i a l , or resale goods. If a major competitor has a warehouse at Leth-bridge, what i s the t o t a l square footage of warehouse and o f f i c e space, what i s the number of salesmen they employ and what area do they serve from t h i s warehouse. 2. Type of service A.B.C. presently gives Lethbridge. a) Are prices competitive? b) From where i s Lethbridge presently served and what i s the time i t takes from order taking to delivery on the average? c) Are shipments to Lethbridge prepaid by A.B.C? d) Is there special delivery service for sea-sonal items such as school supplies, drive in trade, and Christmas lines? e) Are customers encouraged to phone orders c o l l e c t ? f) Quality of salesman now servicing Lethbridge and % of his time- spent i n Lethbridge. 3. Number and types of wholesalers i n Lethbridge handling AB.C.'s l i n e s at present—what l i n e s do they handle and what support are they given by A.B.C. 4. History of Lethbridge sales volume and t e r r i t o r y sales volume. ON THE BASIS OF THE ABOVE BREAKDOWN OF FACTORS, WE WOULD LIKE ANSWERS TO THE FOLLOWING QUESTIONS: 1. ARE THERE MAJOR FACTORS IN ADDITION TO THOSE LISTED ABOVE WHICH SHOULD BE TAKEN INTO CONSIDER-ATION? IF THERE ARE, WOULD YOU PLEASE LIST THEM AND EXPLAIN WHY YOU CONSIDER THESE NEW FACTORS IMPORTANT. 2. ARE THERE ANY FACTORS LISTED IN THE PRECEDING BREAKDOWN WHICH APPEAR TO BE IRRELEVANT? IF THESE ARE, WOULD YOU EXPLAIN WHY YOU CONSIDER THEM IRRELEVANT. 3. ARE THERE ANY GENERAL COMMENTS WHICH YOU WISH TO MAKE? 135. In addition to the asked for answers on the f i r s t questionnaire, many of in d i v i d u a l respondents made suggestions on how sales might be stimulated at Leth-bridge. Since many individuals thought i t was important to l i s t some general strategies, a summary of the strategies suggested i s given below: 1. Esta b l i s h a branch warehouse at Lethbridge. 2. E s t a b l i s h a warehouse at Lethbridge that would only handle extremely fa s t moving items (suggested size was approximately 3000 square feet) . 3. Improve delivery time to Lethbridge ( i t was suggested to have same day or next day ser v i c e ) . 4. Increase sales coverage of Lethbridge and the surrounding area ( i t was suggested another salesman i n addition to the one presently serving Lethbridge be assigned). Therefore, on t h i s questionnaire, i t has been decided to ask one further question: CAN YOU SUGGEST ANY DIFFERENT STRATEGIES THAN THOSE LISTED ABOVE TO STIMULATE SALES AT LETHBRIDGE? PLEASE RETURN ANSWERS TO THE ABOVE QUESTIONS AS QUICKLY AS POSSIBLE (within two days of receiving them) TO: Brian J. Pratt 805 W 54th Ave. Vancouver, B.C. 135 a. As a r e s u l t of the second round of responses, i t appears some of the experts are confused as to whether we are tr y i n g to arrive at a sales pot e n t i a l estimate for Lethbridge, or the sales t e r r i t o r y of which Leth-bridge i s a part. We are trying to arrive at sales pote n t i a l for Lethbridge only. COMMENTS ON FACTORS SUGGESTED TO ESTABLISH LETHBRIDGE  SALES POTENTIAL. Most experts thought the general breakdown of factors on the l a s t questionnaire was adequate, a l -though some factors were thought to be more important than others. I t was suggested that information on the t e r t i a r y a c t i v i t y and wholesale a c t i v i t y at Lethbridge should be added to the l i s t of relevent factors since these types of a c t i v i t y were becoming increasingly important to A.B.C. It was also mentioned that business f a i l u r e s i n the past at Lethbridge might not be useful. It was also suggested that bank debits would be more useful i f compared to a c i t y of the same region as Lethbridge which was of si m i l a r size such as Medicine Hat. COMMENTS ON FACTORS SUGGESTED ON BACKGROUND INFORMATION  ABOUT A.B.C. SERVICE TO LETHBRIDGE AND COMPETITION AT  LETHBRIDGE. A l l experts considered the l i s t of factors generated on the l a s t questionnaire to be relevent. It was pointed out that i t might be desirable to know i f any changes have been made recently i n the Lethbridge 136. sales t e r r i t o r y . I t was also suggested that the trading margin i n the Southern Alberta Region might be too h i g h — data was supplied i n d i c a t i n g that the S.A.R. had the highest trading margin i n the Prairies--20.9%. COMMENTS ON SUGGESTED STRATEGIES TO STIMULATE SALES Generally the experts were i n agreement with the strategies proposed. It was suggested that lowering prices and providing additional services to customers; e.g. o f f e r i n g non-profit items for customer convenience., provide greater order writing and restocking services for customers, might be additional strategies. The point was also raised that strategies might be more meaningful afte r sales potential was determined. GENERAL COMMENTS Not a l l of the experts general comments are includ-ed here since many of the queries w i l l be explained when data on factors suggested on the l a s t questionnaire i s esamined. It was mentioned that caution should be used i n forecasting sales potential due to the agrarian-based economy of Lethbridge. I t was also mentioned that one should consider the extent of preference to buy l o c a l l y i n Lethbridge. In order to aid i n your estimates of Lethbridge sales p o t e n t i a l , the data requested through the l a s t two questionnaires w i l l be supplied. FACTORS: I. THE LETHBRIDGE TRADING AREA The Lethbridge Development Commission estimates that Lethbridge's R e t a i l Trade area has a population of 170,000, while i t s Wholesale Trade area has a popululation of 270,000. However, i t should be noted that census t r a c t information indicates the l a t t e r figure i s i n excess of the combined population of census d i v i s i o n s 1, 2, 3, and 4, which include Medicine Hat, Drumheller, Cardston and Youngstown. An a r t i c l e i n the Trade and Commerce Journal, October 1970, indicated the Lethbridge trading area had a population of only 118,000 in 1970. II . ECONOMIC BASE OF LETHBRIDGE i . e . what key indust-r i e s support the area. The Lethbridge Development Commission states that "Manufacturing industry i n Southern Alberta i s broadly based...(but) as would be expected the i r r i g a t e d lands and dryland farming areas make for heavy emphasis on manufacture a l l i e d to agriculture" The following i s a l i s t of Lethbridge 1s industries and manufacturers which should allow each expert to ascertain his own d e f i n i t i o n of the Lethbridge economic base. 138. OFFICE OF: ECONOMIC DEVELOPMENT COMMISSION JULY, 1970 LETHBRIDGE INDUSTRIES (Firms primarily engaged i n manufacturing and processing) Size of Firm i s indicated by the following code: (A) 1 to 5 employees (B) 6 to 15 employees (C) 16 to 25 employees (D) 26 to 50 employees (E) 51 to 100 employees (F) 101 to 200 employees (G) 201 to 500 employees (Indicates companies presently under development) A ALBERTA CANNING CO. 28 Street & 2 Avenue A.N. (E) Frozen french f r i e d potatoes, peas, carrots, beans and corn ART SIGN CO. 333 - 4 Avenue S, *AQUA TECH LTD. AUTOMATIC ELECTRIC (CANADA) LIMITED (A) Show cars, p l a s t i c l e t t e r s for signs, signs metal, signs painted (B) Activated carbon (F) Telephone and communi-cation equipment 139. B BASTEDO FURNITURE & UPHOLSTERY 522 - 5 Street S. BELL'S WELDING LTD. 317 - 4 Street S. (B) Custom upholstery (A) Hitches, truck bumpers, ornamental iron BLACK DENTAL LABORATORY 430 - 7 Street S. (A) BOISE-CASCADE MFG. & DISTRIBUTORS LTD. Kenyon F i e l d (F) Dental Laboratories Metal and wooden truck boxes stock racks BONN BROS. CONSTRUCTION LIMITED 518 - 21 Street N. (B) Concrete products C CANADA•PACKERS LTD. #3 Highway East (F) Fresh and frozen meats CANADA PACKERS LTD, 208 - 26 Street N. *CANADA PACKERS LTD, (B) Livestock feed service m i l l Hide processing plant CANADIAN DRESSED MEATS LTD. Box 1118 (E) Fresh and frozen meats CANADIAN SUGAR FACTORIES LTD. 3 Ave. & 10 St. S. (G) Granulated sugar, molasses, beet pulp CATELLI FOOD PRODUCTS LTD. 104 - 13th St. N. (D) Macaroni, noodles, spaghetti, pickles CENTRAL ALBERTA DAIRY POOL LTD. 411 - 4 Street S. i(A) Dairy products, honey CHEMSTONE VENEERING CO. LTD. 424 - 6 Street N. 140, (A) Concrete archit-ectural stone CHINOOK BOTTLING LTD. 2907 - 2 Avenue A.S. (C) Carbonated beverages CITY PACKERS LTD. Box 626 (B) Fresh meats CITY SIGN CO. 527 - 6 Street S. (A) Signs COMMERCIAL SIGNS 314 - 3 Avenue S. (A) Signs CONSOLIDATED CONCRETE LTD. Box 877 (C) Concrete products CORNWALL CANNING CO. 1 Ave. & 23 St. N. CREST SHOP 2 La f f e r t y Block (F) Canned and frozen foods, carbonated beverages (A) Crests and badges CRESTLINE BUILDERS MARKET LTD. 123 - 30 Street N. (B) Laminated wooden arches CUSTOM AUTO UPHOLSTERY 215 - 12 Street B. South (A) Auto upholstery CUSTOM ENGINE & PARTS LTD. 1605 - 3 Avenue S. (B) Rebuilt engines, ornamental i r o n -work, tanks DAN'S REPAIR SHOP 1117 - 3 Avenue S. (A) Machine shop 141. DAVCO PROCESSORS LTD. 1257 - 2 Avenue A.N. (A) Edible packing plant, by-products and i n -gredients for cat and dog food producers DENTAL ARTS LABORATORY 4 Metropolitan Bldg. (A) Dental laboratories DEXAL VENETIAN BLINDS 1832 - 6 Avenue N. (A) Venetian blinds DIETRICH DENTURE CLINIC 304 - 5th St. S. (A) Dental laboratories DUCAN INDUSTRIES LTD. 2333 - 2 Avenue N. (F) Canvas products EAST END WELDING SHOP 16 05 - 3 Avenue S. (A) Tanks, ornamental iron ECONOMY FEED SERVICE LTD. 2 Avenue & 34 Street N. (C) Livestock and poultry feeds EDWARDS ROD WEEDER LTD. 3102 - 5 Avenue N. (C) A g r i c u l t u r a l implem-ents (rod weeders and attachments) ELLISON MILLING AND ELEVATOR LTD. 1301 - 2 Avenue S. (F) Flour, feed, food FELSEN CONSTRUCTION & MANUFACTURING LTD. Box 214 (A) Wooden cabinets, desks, frames FLEXA-HOPPERS LTD. Kenyon F i e l d (B) F l e x i b l e grain hoppers 142. FOUR STAR MILLWORK CO. LTD. 242 - 12 Street B.N. (A) Millwork FOX LETHBRIDGE DENTAL LABORATORY 204 Medical Dental Bldg. (A) Dental laboratories FRACHE BROS. LTD. Box 425 (D) F l o r i s t s FRED'S RED OWL BAKERY 421 Mayor Magrath Drive (A) Bakery products GAST. FURNITURE MANU-FACTURING & UPHOLSTERY (A) Cushions, draperies, furniture upholster-ing GRAHAM AND JOHNSON UPHOLSTERY & HOME FURNISHINGS 4 1 1 - 3 Avenue S. (A) Custom upholstery H HAICO MANUFACTURING LTD. Box 427 (C) Travel t r a i l e r s , truck campers, motor homes HAN'S MACHINE SHOP 12 76 - 2 Avenue S. (A) Machinists HEINITZ PRINTERS & STATIONERS 324 - 9th Street S. (A) P r i n t i n g and bookbinding HILLTOP MILLWORK Box 393 (A) Wooden cabinets HOOK SIGNS (LETHBRIDGE) LTD. Box 176 (C) Signs 143. HORTON STEEL WORKS LTD. 2 9 02 - 5 Avenue N. HUNT WELDING SERVICES LTD. 2005 - 2 Avenue S. I I.G.A. MIHALIK'S 642 - 13 Street N. IMPERIAL OPTICAL LTD. 505 - 7 Street S. J JEN'S UNIFORM CENTRE #7 La f f e r t y Block K KIRCHNER MACHINE CO. 2419 - 2 Avenue N. KITAGAWA MOULDING 249 - 12 Street A.N. L LAKEVIEW BAKERY 2622 - 10 Avenue S. LETHBRIDGE BATTERY CO. 217 - 12 Street B. South LETHBRIDGE BOTTLING LTD. 237 - 12 Street B.N. LETHBRIDGE COLLIERIES LTD. 413 - 8 Street S. LETHBRIDGE CONCRETE PRODUCTS 9 Avenue & 6 Street N. (D) Steel f a b r i c a t i n g , tanks, vessels (A) Machine shop, s t r u c t u r a l s t e e l (A) Bakery products (B) Spectacle lenses (A) Uniforms (C) A g r i c u l t u r a l implements (A) Wooden cabinets, millwork (B) Bread, bakery products (A) Battery manufacturing (B) Carbonated beverages (B) Coke manufacturing (D) Concrete blocks, t r a n s i t mix, concrete LETHBRIDGE GLASS CO. 1267 - 3 Avenue S. (B) 144. Mirrors, plate glass LETHBRIDGE HERALD CO, LTD. 504 - 7th Street S. (F) P r i n t i n g and publish-ing LETHBRIDGE INDUSTRIES LTD. 1117 - 2 Avenue A.N. (B) Machine shop, chain sprackets LETHBRIDGE IRON WORKS LTD. 1 2 0 - 1 Avenue S. (D) Castings, forgings, s t e e l work, tanks LETHBRIDGE RENDERING CO, Box 626 (B) Meat scrap and tallow LETHBRIDGE SASH AND DOOR FACTORY 40 3 - 5 Avenue S. (C) Sash, doors, furniture, mi11work LETHBRIDGE UPHOLSTERY 6 1 1 - 6 Avenue S. (A) Upholstery LIBERTY BOILERS (LETHBRIDGE) LTD. 1402 - 2 Avenue S. (B) B o i l e r s , tanks, smoke-stacks LILYDALE POULTRY SALES 303 - 24 Street N. (D) Poultry products LIMB AND BRACE CO. 210 - 13 Street S. (A) Orthopedic braces, etc. MAJOR IRRIGATION LTD. 2125 - 2 Avenue S. (B) I r r i g a t i o n sprinkler supplies MARK I I I MANUFACTURING LTD. 424 - 6 S t r e e t N. (C) Truck campers 145. MARQUIS PASTRY SHOP 4 Avenue S. (A) Bread, bakery products MARVAN BUILDING SUPPLIES 240 - 13 S t r e e t N. (A) Cabinet makers *MOORE BUSINESS FORMS LTD. (E) Business forms manufacturing MOUNTAIN MINERALS LTD. 3405 - 6 Avenue S. (B) B a r y t e s , p y r o p h y l l i t e , s l a t e Mc McGAVIN-TOASTMASTER SALES LTD. 1502 - 3 Avenue S. (E) Bread, bakery products N NATIONAL NEON DISPLAYS LTD. 315 S t a f f o r d D r i v e (C) E l e c t r i c s i g n s NEUFELDT INDUSTRIES LTD. Box 597 (B) Land l e v e l l e r s , t r u c k bumpers, boxes, pipe t r a i l e r s and propane c o n s t r u c t i o n h e a t e r s NIVEN TRUCK EQUIPMENT LTD. 216 - 1 Avenue S. (B) Machine shop, boxes, h o i s t s NORD PRECAST CONCRETE LTD. Box 727 (B) Ornamental concrete products NORTH LETHBRIDGE MILLWORK 120 North Mayor Magrath D r i v e (A) M i l l w o r k NORTH SIDE BAKERY 428 - 13 S t r e e t N. 146, (B) Bread, bakery products OLD COUNTRY SAUSAGE SHOP 424 - 13 S t r e e t N. (A) S p e c i a l t y sausages OLIVER CHEMICAL CO. (LETHBRIDGE) LTD. 241 S t a f f o r d D r i v e (D) I r r i g a t i o n equipment, h y d r a u l i c hose assemb-l i e s , stock waterers PARAMOUNT PRINTERS 1207 - 3 Avenue S. (B) P r i n t i n g , rubber stamps PREBUILT INDUSTRIES LTD. Box 249 (F) P r e f a b r i c a t e d d w e l l -i n g s , t r a v e l t r a i l e r s , i n d u s t r i a l camps, motor homes PURITY BOTTLING LTD. 1421 - 3 Avenue S. (B) Carbonated beverages PURITY DAIRY 516 - 5 Avenue S. QUALITY BAKERY 1640 Mayor Magrath Dr. (D) M i l k , i c e cream, d a i r y products (A) Bread, bakery products REVELSTOKE TRANSIT MIX 16 S t r e e t & 3 Avenue N. (B) T r a n s i t mix concrete RITT METALS LTD. 136 N. Mayor Magrath Dr. (C) Stock waterers, c o i n s o r t e r s ROBINS PRINTING CO. LTD. 1269 - 3 Avenue S. (B) P r i n t i n g , l i t h o g r a p h y SICKS' LETHBRIDGE BREWERY LTD. 1 Street & 2 Avenue S, 147, (F) Malt liquors SILVER STAR INDUSTRIES 4 Street & 6 Avenue S. (B) P l a s t i c s a i l boats, t r a i l e r s , f u r n iture, hard tops SOUTHALTA PRODUCE CO. LTD. 316 - 4 Street S. (A) Poultry products SOUTHERN DENTAL LABORATORY 212 Woolworth Bldg. (A) Dental laboratories SOUTHERN FEEDS LTD. 3227 - 2 Avenue N. (B) Livestock and poultry feeds SOUTHERN PRINTING CO. LTD. 12 33 - 2 Avenue S. (B) P r i n t i n g SOUTHERN STAMP & STENCIL 1233 - 2 Avenue S. (A) Rubber Stamps SPUDNUT AND ICE CREAM BAR 1102 - 5 Avenue S. (A) Bakery products STUBBS HOMEMADE CHOCOLATES (A) Chocolates STUBER-CASCADE MANUFACTURING #1 Hangar-Kenyon F i e l d (B) Truck boxes SUMMIT LIME WORKS LTD. Box 700 (A) Lime and limestone SUNBURST CERAMICS LTD. Box 700 SUNDQUIST CONSTRUCTION 222 - 12 Street B.N. *SWIFT CANADIAN COMPANY TANCO MILLWORK PRODUCTS 1601 - 3 Avenue S. TENNANT, REX J. 312 - 3 Street S. TOLLESTRUP SAND & GRAVEL CO. Box 474 TRANS-CANADA FREEZERS LTD. 2 Avenue & 28 Street N. TRIANGLE WOOD PRODUCTS LTD. 1221 - 2 Avenue N. UNION MILK CO. LTD. 434 - 8th Street S. UNIVERSAL INSECT CONTROL VALLEY FEEDERS LTD. Box 614 VALUE VILLAGE BAKE SHOP 538 - 13 Street S. 148. (B) Ceramic products (B) Transit mix concrete (F) Fresh and frozen meats (A) Millwork (A) Auto brake parts (A) Sand and gravel (C) Food freezing (A) Custom wood furniture (B) Dairy products (A) Insect control products (B( Custom livestock feeding (B) Bakery products 149. VAN REE'S UPHOLSTERY & WOODWORK 304 - 13 Street N. (A) Upholstery VICTORY EQUIPMENT LTD. 920 - 2 Avenue N. (B) A g r i c u l t u r a l implem-ents, blades and multiple hitches W WELDED PRODUCTS 210 - 1 Avenue S. (A) Steel storage tanks WERMUTH, PAUL CABINET SHO% 130 - 22 Street N. (A) Cabinet maker WESTERN CANADIAN SEED PROCESSORS LTD. Box 99 (F) Vegetable, salad and cooking o i l s , shorten-ing, margarine WESTERN METAL FABRICATORS LTD. 1501 - 2 Avenue S. (D) Structural s t e e l WOODMASTERS MILLWORK PRODUCTS 251 - 12 Street B.N. (A) Combine and tractor cabs WOOLWORTH, F.W. & CO. LTD. 601 - 4 Avenue S. (A) Bakery products 150. I I I . KNOWN EXPANSION PLANS FOR LETHBRIDGE (known plans to November, 1970) UNIVERSITY OF Lethbridge--In 1969 t h i s i n s t i t u t i o n had an enrollment of 1261 students. The University of Lethbridge estimates by 19 75 the population of faculty students and s t a f f w i l l be i n excess of 5000. This expansion w i l l be generated through c a p i t a l expenditures of $13,000,00- during the period 1969-72 and $14,000,000 during the period 1972-75. Hotels—Two new hotels are to be constructed pro-viding rooms for 400 and convention f a c i l i t i e s for 1400. Moore Business Forms—Is constructing a 35,000 sq. f t . plant. I n i t i a l employment i s estimated at 25-30 persons and may e v e n t i a l l y r i s e to 100. Aqua-Tech (a producer of activated carbon) i s currently constructing a $216,000 plant. I t i s estimated t h i s plant w i l l employ 11 persons. Swifts Meats—Is constructing a packing and k i l l i n g plant. Estimated construction cost i s $3,600,000 and employment w i l l be 122 persons. Canadian Dressed Meats--Is expanding i t s packing plant. Construction costs w i l l be $557,000. 151. Canada Packers—Is constructing a hide processing plant. There i s a p o s s i b i l i t y that International D i s t i l l - ers and Vinters of London w i l l construct a $6,000,000 d i s t i l l e r y . Data on Business F a i l u r e s — t h i s data has not yet been secured, i t w i l l be supplied on the next questionnaire. ECONOMIC AND DEMOGRAPHIC FACTORS Ret a i l Sales of Lethbridge Year $ Value 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 65,000,000 55,100,000 58,400,000 60,300,000 60,044 ,000 77,132,830 72,704,681 71,659,882 74,000,000 86,197,000 In 1969 there were 340 r e t a i l outlets i n Lethbridge. 152. Population and Population Growth of Lethbridge POPULATION OF LETHBRIDGE 1960 — 1970 Year Population % Change-Over Previous Year 1960 33,696 1961 34,911 2.7 1962 35,722 2.1 1963 36,251 1.4 1964 36,717 1.3 1965 36,805 0.2 1966 37,837 2.8 1967 38,022 0.3 1968 37,760 (-0.7 1969 38,749 2.6 1970 39,552* 2.0 * Estimate Source: Lethbridge Development Commission, S t a t i s t i c a l Review, A p r i l , 1970 Income per Capita The most current data available was for the month December, 1969. AVERAGE WEEKLY WAGES AND NUMBER OF EMPLOYEES Number of Wages Employees 96.00 5,458 110.00 3,047 117.00 77,008 Lethbridge Medicine Hat Calgary 153. Value of Manufacturing Production and i t s Growth  at Lethbridge MANUFACTURING INDUSTRY PRODUCTION 1961—1969 Year No. of est a b l i s h -ments No. of employ-ees Salary & wages Value of product-ion 1961 64 1413 $ 5,309,000 $ 39,314,000 1962 64 1338 5,023,000 40,972,000 1963 75 1636 6,558,071 55,848,651 1964 80 1352 5,555,000 66,082,000 1965 83 1964 7,840,525 81,438,224 1966 86 2379 10,336,421 96,972,729 1967 87 2307 10,745,774 106,219,558 1963 82 2388 12,146,508 129 ,720 ,292 1969* 83 2429 13,069,643 140,487,076 * Estimate by Alberta Bureau of S t a t i s t i c s , a l l other figures from D.B.S. Catalogue # 31-209. Source: Lethbridge Development Commission, S t a t i s t i c a l Review, A p r i l , 1970 154. Enrollment of a l l Education at Lethbridge for  the year 1969 Public School 7,495 Separate Schools 2,192 Community College (vocational) 670 University of Lethbridge 1,353 Total Enrollment 11,710 Bank Debits i n Lethbridge as Compared to Other Southern Alberta Centres 1965 Lethbridge $ 695,785,000 Calgary 15,495,880,000 Medicine Hat 322,256,000 % increase 1969 65-69 1,213,452,000 74.4% 25,470,161,000 64.4% 487,684,000 50.9% Concessions for Manufacturers to Locate i n Lethbridge Lethbridge comes under the Federal Govern-ments Regional Development Incentives Plan. This plan provides for payment of 20-25% of c a p i t a l expenditures for manufacturing plants, but i t i s due to end i n July, 19 72. Discussion with Mr. D. O'Connel, Director of Economic Development for Lethbridge, has indicated there i s a p o s s i b i l i t y t h i s plan may be extended u n t i l 19 75. Large R e t a i l Chains Active at Lethbridge and t h e i r  Buying Arrangements Loblaws purchase from A.B.C. Calgary Safeway purchase from C.I.P. Midwest Paper Lethbridge Simpson S e a r s p u r c h a s e from A.B.C. Calgary Eatons purchase some from A.B.C. Calgary, balance from C.I.P. Midwest Paper Lethbridge 155. Woolco purchase stationery from A.B.C. Calgary purchase bags from Midwest Paper Lethbridge Kresgies purchase from C.I.P. Midwest Paper Woolworths purchase from C.I.P. Midwest Paper Dairy Queen....purchase everything from A.B.C. A & W purchase everything from C.I.P. Midwest Kentucky Fried Chicken..purchase from. C.I.P. Midwest Lethbridge and Price Wilson Winnipeg and Calgary Growth of Co-Ops—Co-ops have looked into the Lethbridge area for stores, but to date no plans have been made available. VII. E x i s t i n g Sales Volume of A.B.C. at Lethbridge The following sales are by account, but i t should be noted they are for the f i r s t 10 months of 1970 o n l y — t h e y are warehouse sales only and hence exclude m i l l shipments. Scott Paper 109 Silverwood Dairies 121 South A l t a . Produce 60 Southern Stationers 5,536 Spudnut Shop 268 Stubbs Pharmacy 1,50 8 Tom's Pizza 188 Univ. of Lethbridge 2,975 Versa Food Services 578 Woolworths 19 8 Woolco 9,382 Zell e r s 4,139 A l t a . Broom 115 Baalim Wholesale 405 C.I.P. Midwest Paper 3,72 6 Chinook Stationers 62 Eatons 874 Heintz Printers - 5,037 Horne and P r i t c h f i e l d (IGA).. 1,474 Kresgies 257 Lethbridge Bldg. Supplies.... 1,080 156. Lethbridge Comm. College.... 3,374 Lethbridge Industries 44 Lethbridge Jr. College 451 Leth. School Dist. #51 3,194 Lethbridge (C.J.C.H. TV) 142 Loblaws 29,551 MacDonalds Cons 2,809 McGavins Toastmaster 184 McKenzie Jewellers 213 Metropolitan Stores 364 Dairy Queen 4,281 Paramount Printers 825 Peters Dairy Bar 6,446 Pro v i n c i a l Vet. Supply 314 Purity Coop (Dairy) 1,140 Queen Do-Nut Shop 1,735 Robins Printers 2,897 Misc 7,140 Total Sales (excluding ex- g mill ) Jan-Oct. 31, 1970 ^103,196.00 The following i s a breakdown of t o t a l Lethbridge Sales excluding ex-mill shipments: Jan.—Dec. 31, 1969 $102,223 Jan.—Oct. 31, 1969 83,337 Jan.—Oct. 31, 1970 103,196 Lethbridge Sales T e r r i t o r y Volume History T e r r i t o r y sales 1969—^204,439.00 Te r r i t o r y sales 1970—^256,841.00 Additional Information Requested from last round of  Questionnaire Wholesale Trade Volume 1968 1969 % increase 68-69 Calgary $469,997,000 $517,920,000 10.2% Lethbridge 36,563,000 40,382,000 10.4% Medicine Hat 11,549,000 11,771,000 1.9% 157. BACKGROUND INFORMATION REQUESTED ON COMPETITION AT  LETHBRIDGE AND A.B.C. SERVICE TO LETHBRIDGE I. Ccmpetition at IJethbridge 1. C.I.P. Midwest Paper—Midwest Paper has a ware-house at Lethbridge and carry stationery, indust-r i a l and printing lines, however, most of their printing lines sold in Lethbridge are shipped from their Calgary warehouse. Midwest's Lethbridge warehouse serves as far north as Nanton, (Nanton is approximately 80 miles north of Lethbridge and 50 miles south of Calgary) as far east as Medicine Hat and as far west as Creston, B.C. Midwest has two f u l l time salesmen at Lethbridge and a manager who works some Lethbridge accounts. 2. Southam Stationers—handle wholesale i both of these and resale lines I are not pro-^tected on 3. MacDonalds Cons.—handle a few items JA.B.C. lines Jhandled 4. Scott National Fruit II. Type of Service A.B.C. presently gives Lethbridge 1. Lethbridge is presently served from the Calgary warehouse—average delivery time is approximately 2-3 days. 2. Freight charges on shipments to Lethbridge are usually prepaid by A.B.C. 3. There are no special delivery arrangements for seasonal lines. 4. Customers are encouraged to phone orders collect— there is a Zenith number to Calgary. 5. Background on present sales rep.—the present sales-man serving Lethbridge has been working the area for a l i t t l e over a year (the previous salesman was replaced). The present salesman is young and has l i t t l e experience, but is described as aggress-ive. Presently the Lethbridge salesman spends approximately 40% of his working days in Lethbridge. Since he has taken over the Lethbridge position, sales have increased considerably. 158. QUESTIONS I. ON THE BASIS OF THE ABOVE INFORMATION, AND ANY OTHER INFORM-ATION YOU MAY WISH TO CONSULT, WE WOULD LIKE YOU TO ESTIMATE THE PRESENT SALES POTENTIAL FOR A.B.C. PRODUCTS AT LETHBRIDGE ASSUMING THERE WAS NO COMPETITION AT LETHBRIDGE. We -would like these estimates to be three point estimates, i.e. three estimates should be made: 1. An estimate which you are 90% sure is not too high. 2. An estimate which you are 50% sure i s not high, and 3. An estimate which you are only 10% sure i s not too high. 1 1 ' IF POSSIBLE, WE WOULD LIKE YOU TO EXPLAIN HOW YOU ARRIVED AT YOUR SALES POTENTIAL ESTIMATES i . e . , HOW DID YOU USE THE DATA SUPPLIED TO YOU. If you f e e l you could raike better estimates with further information, either hew inform-ation or more detailed information, please request i t when you send your answers to the above questions. PLEASE RETURN ANSWERS TO THE ABOVE QUESTIONS AS QUICKLY AS POSSIBLE TO: Brian J. Pratt 805 W 54th Ave. Vancouver, B.C. As a r e s u l t of the t h i r d round of thi s exercise, the following estimates of ex i s t i n g sales pot e n t i a l at Lethbridge for the entire l i n e of A.B.C. products, assuming there was no competition, were made: 159. A l l Estimates i n Thousands of Dollars Estimate : Expert Number certainty 1 1 2' 3 4 5 6 7 8 90% $ 475. 500 300 668 700 1,190 300 1,103 50% 525 600 400 896 900 1,485 325 1,800 10% 600 750 500 1,260 1,200 1,930 345 2,200 Below i s a general summary of how experts used v a r i -ous information and interpreted data: 1. The l i s t of Lethbridge industries was reviewed and, on the basis of personal experience, each was rated as to po t e n t i a l consumption of paper and a l l i e d products. 2. Ex i s t i n g accounts held by A.B.C. at Lethbridge were reviewed:--it was estimated that A.B.C. sales at Leth-bridge on the basis of the f i r s t 10 months of 1970 were $140,000 for the year of 1970; i t was thought there was l i k e l y to be consider-able pot e n t i a l for some accounts already held by A.B.C. at Lethbridge, notably p r i n t e r s , wholesalers, the school d i s -t r i c t , d a i r i e s , and i n p a r t i c u l a r , the University of Lethbridge. i t was noted by one expert, who i s quite f a m i l i a r with s i t u a t i o n at Lethbridge, that A.B.C. sales of i n d u s t r i a l l i n e s at Lethbridge was almost non-existant; i t was also noted that the $3,726 purchased from A.B.C. by Midwest during the f i r s t 10 months of 1970 consisted of meatboards and t r a y s — i t was estimated t h i s represented only 10% of 160. the t o t a l packaging m a t e r i a l s s o l d by Midwest a t Let h b r i d g e d u r i n g 1970. i t was thought there were 182 p o t e n t i a l accounts i n L e t h b r i d g e o f which A.B.C. h e l d only 38, i t was reasoned t h e r e f o r e , t h a t p r e s e n t A.B.C. s a l e s might r e p r e s e n t o n l y 21% o f t o t a l L e t h b r i d g e s a l e s . 3. I t was thought the p o t e n t i a l accounts i n L e t h -b r i d g e should be d i v i d e d i n t o two g r o u p s — t h o s e which purchase through buying arrangements made at L e t h b r i d g e , and those made n a t i o n a l l y . I t was a l s o noted t h a t the l a r g e r e t a i l c h a i n o u t l e t s should be con s i d e r e d f o r p o t e n t i a l , but because these buying arrangements were o f t e n not made a t L e t h b r i d g e , the busi n e s s may not be a v a i l a b l e to A.B.C. 4. I t was thought t h a t p o t e n t i a l s a l e s c o u l d be d e r i v e d by r a t i n g the a c t i v i t y o f c o m p e t i t i o n . I t was g e n e r a l l y f e l t t h a t a g e n e r a l l i n e salesmen of compet-i t i o n would generate annual s a l e s of $250-300,000. Estimates of Midwest a c t i v i t y a t Le t h b r i d g e were t h a t they e f f e c t i v e l y had 1% to Ih salesmen. I t was estimated other c o m p e t i t i o n a t L e t h b r i d g e - - o u t s i d e s h i p p e r s , MacDonalds Cons., S c o t t N a t i o n a l F r u i t and Southam P r i n t e r s might have annual s a l e s o f $125-187,000 of A.B.C. type products. 5. I t was thought the known expansion p l a n s f o r 161. industry, etc. was generally oriented to users of paper and related products. 6. The considerable volume of wholesale trade at Lethbridge was thought to be important—two theories were proposed as to how t h i s information could be used to e s t a b l i s h Lethbridge p o t e n t i a l : One, was that 15% of annual wholesale trade volume or $4,200,000 would lend i t s e l f to consumption of paper and related products. The other referenced Alberta Business trends which indicated for Alberta as a whole, paper and related products account-ed for 1%% of wholesale trade volume. QUESTIONS: #1. On the basis of the estimates made by other experts and the information generated during t h i s round, WOULD YOU CARE TO REVISE YOUR ORIGINAL ESTIMATES OF THE EXISTING SALES POTENTIAL OF A.B.C. TYPE PRODUCTS AT LETH-BRIDGE ONLY, ASSUMING THERE WAS NO COMPETITION? Again, we would l i k e 90%, 50% and 10% estimates. If possible we would l i k e to know how your revised estimates were made. #2. We would also l i k e you to estimate, i n %, the annual growth rate you would expect for the Lethbridge po t e n t i a l during each of the next f i v e years. We would l i k e percentage increments i n growth on a 90%, 50% and 10% basis for each year 1972, 1973...1976 as a percentage 162. increase over the previous year i . e . 1972/71, 1973/72, etc. #3. E a r l i e r i n t h i s exercise three basic strategies were suggested for increasing A.B.C. sales at Lethbridge. We would l i k e you to consider the following strategies from a s t r i c t sales generation viewpoint: a) Improve delivery times to Lethbridge so that most orders can be served on a next day basis, i . e . , a customer placing an order Monday could receive the goods be-fore his closing time on Tuesday. b) Increase "the sales coverage at Leth-bridge, so that there would be a f u l l time salesman serving the City of Lethbridge only. c) Esta b l i s h a small l o c a l warehouse at Lethbridge which would carry fast moving products. FOR EACH OF THE ABOVE STRATEGIES WE WOULD LIKE YOU TO MAKE 90%, 50% and 10% ESTIMATES OF PERCENTAGE MARKET SHARE A.B.C. WOULD RECEIVE AT LETHBRIDGE FOR EACH OF THE NEXT FIVE YEARS, i . e . 1972 to 1976. Any comments as to how you evaluated these strategies would be appreciated. PLEASE RETURN ANSWERS TO THE ABOVE QUESTIONS AS QUICKLY AS POSSIBLE TO: Brian J. Pratt 805 W 54th Ave. Vancouver, B.C. 163. LETHBRIDGE QUESTIONNAIRE As a r e s u l t of the l a s t round of t h i s exercise the following results were obtained: 1. Estimates of e x i s t i n g p o t e n t i a l of Lethbridge only for the entire l i n e of A.B.C. type products, assuming there was no competition: A l l Estimates i n Thousands of Dollars Estimate Expert Number certainty 1 2 3 4 5 6 7 8 90% $ : 650 500 500 668 700 1,190 1,000 750 50% 825 600 600 896 900 1,485 1,250 860 10% 1 ,000 750 800 1,260 1,200 1,930 1,500 1,034 Generally, there was not a great deal of additional information generated as to how the revised estimates of pot e n t i a l were derived. However, one further method of estimating pot e n t i a l was given: It was noted that t o t a l paper and paper related wholesale sales for Alberta was $14.15 per capita for 1970. Alberta Paper and.related Wholesale Sales 1970--^22 , 972 ,000 Population of Alberta 1970 1,624,000 It was thought, however, that Lethbridge 1s per capita paper and related wholesale sales would be greater than the Alberta average due to the high wholesale trade per capita at Lethbridge. 19 70 Wholesale Trade per capita: Edmonton y2,2 09 Calgary 2,239 Lethbridge 2,80 8 164 1968-1969 Lethbridge /; Wholesale Trade increase. 1965-1969 avg. Annual Lethbridge Manufacturing Industry Production increase. 1965-1969 avg. Annual Lethbridge Population increase , 1965-1969 avg. Annual Lethbridge R e t a i l Sales increase 10.4% 15.0% 1.8% 3.0% Below i s a l i s t of the estimates of annual growth of the Lethbridge Potential: Estimates are i n % Year 1972 1973 1974 1975 1976 Estimate certainty % 5 90 50 10 90 50 10 90 50 10 90 50 10 90 50 .10 Expert #1 12 16 22 10 17 20 10 18 18 10 15 20 10 12% 20 Expert #2 5 6 7 6 7 8 7 8 9 8 9 10 9 10 11 #3 5 10 10 7 10 10 # # # # # # 10 12 15 5 8 11 6 8 9 4 6 8 4 6 7 4 6 7 #5 1 3 10 2 4 10 3 5 10 2 4 10 3 5 10 #6 7 9 12 7 9 12 7 9 12 7 9 12 7 9 12 #7 4 7 12 6 9 12 6 9 14 6 9 14 6 9 14 #8 14 16 18 14 16 18 14 16 18 14 16 18 14 16 18 #expert #3 did not give estimates for these years. 165. 2. Estimates of the annual percentage growth rate of Lethbridge potential for the years 1972 through to 1976. There were several factors considered by the various experts i n determining the annual growth rates of the pote n t i a l at Lethbridge. a) It was noted that the Economic Council of Canada i n i t s Sixth Annual Review—Perspective 1975, i n d i c -ated r e a l G.N.P. ( i n f l a t i o n free G.N.P.) for Canada would increase by 5.5% per annum. It was thought that with Lethbridge's current expansion i t s G.N.P. growth would be considerably above th i s figure. b) It was thought that with the current e c o l -o g i c a l and pollution controversy which may become more prominent over the next few years, that some of the poly f i l m business might well revert to paper products. c) One expert chose to rel a t e growth of potent-i a l to A.B.C. January to October 31 experience at Lethbridge for 1969 and 1970 which was respective sales of $84,000 and $103,000 or a 22% increase. It was thought that t h i s increase would not be true for the Lethbridge potential and would have to be mitigated by the growth rates of the following economic factors: 166, 3. Results of the evaluation of the three s t r a t -egies for stimulating sales at Lethbridge: Generally, there were few reasons given for the making of these estimates. Several experts commented that they f e l t improvement of delivery times to Lethbridge (Plan A below) would have a negligable influence on stimulating sales, since there was s t i l l l i k e l y to be some customer d i s s a t i s f a c t i o n from delays i n c r e d i t notes, invoicing and returned shipments. There also appeared to be a consensus of a few experts who thought that the present market share.of A.B.C. at Lethbridge was somewhere around 20%. Below i s a summary of the estimates of market share under each of the strategies. Plan A—estimates of market share of p o t e n t i a l by improving delivery times so that most orders could be f i l l e d on a next day service basis Estimates are i n % Year Estimate certainty Expert #1 1972 1973 1974 1975 1976 #1 29 32 40 31 34 40 31 34 40 32 35 40 ' 32 35 40 #2 8 10 12 .9 11 14 10 12 15 12 13 16 13 14 18 #3 25 30 35 28 34 38 30 35 39 37 38 40 40 42 .44 #4 21% 22 23 22 24 24h 23 25 26 24 26 28 25 28 29 #5 20 22 25 21 23 26 22 24 27 22 24 27 22 24 27 8 12 20 10 15 22 12 18 24 14 21 25 14 21 25 N.'B'. experts #6"and #8 did not answer this' question 167. Plan B—estimates of market share of potential by increasing sales coverage so that there would be one f u l l time salesman serving the c i t y of Lethbridge. Estimates are i n % Year 1972 1973 1974 Estimate certainty % 90 50 10 . 90 50 10 , 90 50 10 1975 1976 90 50 10 90 50 10 Expert #1 32 28 45 • 33 39 45 34 40 47 36 42 48 37 45 52 #2 12 15 18 13 17 20 15 19 22 17 21 23 18 23 24 #3 30 35 40 33 38 44 35 45 48 40 45 47 45 46 49 #4 21 22 23 22 23 25 24 24% 26 25 26 28 26 28 29% #5 25 30 35 30 32 37 32 33 39 33 34 40 34 35 43 #7 9 14 21 11 15 22 12 18 24 14 22 26 16 24 30 #8 26 30 40 28 32 42 30 34 44 32 36 46 34 38 50 N.B. expert #6 did not answer t h i s question Plan C—estimates of market share of pot e n t i a l by establishing a l o c a l warehouse at Lethbridge which would carry fast moving products. Estimates are i n Year 1972 Estimate Certainty $ 90 50 10 1973 90 50 10 1974 1975 1976 90 50 10 .90 50 10 .90 50 10 s Expert #1 40 44 50 42 46 55 45 50 55 48 55 60 51 60 60 #2 18 20 25 20 25 30 23 30 35 25 35 40 30 40 45 #3 32 36 42 35 40 45 38 46 49 41 46 49 46 47 50 #4 21% 22 23 23 24 25 24 25% 27 26 27 29 27 29 31 #5 30 40 50 30 45 55 40 50 60 50 55 60 50 60 65 #7 12 16 22 14 18 26 17 20 29 , 22 24 33 24 27 35 N.B. expert #6 did not answer th i s question 168. QUESTIONS: 1. It i s l i k e l y that at the completion of th i s round the exercise w i l l be completed. In order to determine the cost of conducting exercises such as t h i s , we would be interested i n knowing approximat-ely how many man hours you spent on thi s exercise. 2. On the basis of the estimates made by other experts and t h i s information generated on th i s round, WOULD YOU CARE TO REVISE YOUR PRESENT ESTIMATES OF THE EXISTING SALES POTENTIAL OF A.B.C. TYPE PRODUCTS AT LETHBRIDGE ONLY, ASSUMING THERE WAS NO COMPETIT-ION. Again would l i k e 90%, 50% and 10% estimates. It i s not necessary to give reasons for any changes you wish to make on th i s round. WE WOULD ALSO LIKE YOU TO MAKE TWO ADDITIONAL ESTIMATES FOR THE ABOVE QUESTION—a) ONE AT WHICH YOU ARE WILLING TO BET AND GIVE TWO TO ONE ODDS THE EXISTING LETHBRIDGE POTENTIAL LIES BELOW ( i . e . you are twice as sure the poten t i a l l i e s below your estimate as above) and, b) ONE AT WHICH YOU ARE WILLING TO BET AND GIVE TWO TO ONE ODDS THE EXISTING LETHBRIDGE POTENTIAL LIES ABOVE. 169. 3. On the basis of the estimates made by other experts and the information generated during t h i s round, WOULD YOU CARE TO REVISE YOUR ORIGINAL ESTIMATES OF THE INCREMENTAL ANNUAL % GROWTH RATE YOU WOULD EXPECT FOR LETHBRIDGE POTENTIAL FOR EACH OF THE .1: NEXT FIVE YEARS. Again we would l i k e the percent-age increments on a 90%, 50% and 10% basis for each of the years 1972 to 1976. 4. On the basis of the estimates made by other experts and the information generated during t h i s round, WOULD YOU CARE TO REVISE YOUR ORIGINAL ESTIMATES OF THE PERCENTAGE MARKET SHARE YOU" WOULD EXPECT A.B.C. WOULD RECEIVE OF THE LETHBRIDGE POTENTIAL FOR EACH OF THE NEXT FIVE YEARS UNDER THE FOLLOW-ING STRATEGIES: a) Improve delivery times to Lethbridge so that most orders could be f i l l e d on a next day basis. b) Increase sales coverage at Lethbridge, so that there would be a f u l l time salesman serving the City of Lethbridge. c) Esta b l i s h a small l o c a l warehouse at Lethbridge which would carry faster moving products. For each of the above strategies, we would also 

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