Penner PDF

Penner Medical Products

Neil Bennet, warehouse manager at Penner Medical Products (Penner), in Rockford, Illinois, was concerned
about rising costs and delays associated with shipments arriving from an important Canadian supplier. Ken
McCallum, the general manager, had asked Neil to look into the situation and get back to him with
recommendations. It was Monday, April 14, and Neil knew that Ken expected to see his plan by the end of
the week.

PENNER
Penner was a medical supplies distributor and retailer, supplying small and medium‐sized medical practices
for more than 50 years. Company sales were £30 million and Penner employed approximately 120 people.
Management expected a 10 percent increase in sales over the following five years. Penner sold a wide
range of products, such as blood pressure gauges, tongue depressors, scalpels, and specialized furniture.
Customers could purchase products either through Penner’s five retail locations, all of them within a 200‐
mile radius of Rockford, or order directly from its central warehouse. The company took orders from
customers either over the phone or through its website.

Although Penner was a family‐owned business, retirement of key family members resulted in the hiring of
several professional managers to run the company. Ken McCallum had been with the company for less than
one year and was anxious to exploit opportunities to improve profitability.

Penner’s main warehouse was a 30,000 square‐foot building, normally filled with merchandise in excess of
$2 million. The warehouse was staffed by a manager, two receivers, two drivers for local deliveries to
customers, two shippers, and two stock pickers, one of whom was occasionally asked to drive the
company’s two‐ton truck, the biggest delivery truck available. Warehouse workers were paid an average of
$15 per hour.

Niel Bennett started with Penner as a stock picker and was able to progress through the organization as a
result of his effort and dedication. He was promoted to warehouse manager eight months earlier.

STINSON DISTRIBUTION COMPANY
Rising costs and missed delivery dates from Stinson Distribution Company (Stinson), an important supplier
in Ontario, Canada, had been a concern for some time. A medium‐sized company, Stinson had a long‐term
relationship with Penner, supplying a wide variety of specialized equipment for medical offices. Stinson
produced high‐quality products and Penner’s only supplier of this equipment.

Missed delivery dates and incomplete orders from Stinson were resulting in customer complaints and lost
sales. Furthermore, transportation costs were well over budget and senior management viewed inventory
levels as excessive. The controller indicated to Neil that inventory holding costs were 15 percent.

Two days per week, Penner’s two‐ton truck was sent to Stinson, traveling across the border at Detroit.
Under ideal conditions, the one‐way trip took 9 to 10 hours, and the truck, although empty in the first leg of
the trip, was typically fully loaded with approximately $15,000 in goods on its way back to Rockford. The
controller indicated that the cost of operating the two‐ton truck was $55 per hour, including fuel,
insurance, and administrative overhead. Neil observed that fuel costs had increased dramatically lately. He
had tried to share the trips to Ontario with other local businesses to cut down transportation costs, but
such efforts had been sporadic.

Concerns regarding security since 9/11 had resulted in delays at the Detroit border crossing, extending
shipping times and costs for Penner. The duration and timing of delays at the border were highly variable
and could last anywhere from 30 minutes to several hours. Furthermore, incomplete paperwork could add
to these problems, since customs officials had become very thorough when reviewing documentation. Neil
estimated that approximately 25 percent of the goods from Stinson were delayed as a result of paperwork
problems.

The two‐ton truck was also in demand to supply materials to Penner’s customers, making scheduling
deliveries increasingly difficult. Neil had recently resorted to using United Parcel Services (UPS) to handle
rush orders from Stinson, with an appreciable cost premium. He observed that: “At least UPS never messes
up the paperwork and gets the product here on time.” Penner was also currently paying $1,000 per month
to rent space at a warehouse in Windsor used to prepare shipments to cross the border.

EVALUATING OPPORTUNITIES
Neil recognized that his meeting with Ken McCallum was still five days away, but wanted to get started
working on the problem right away. Ken had indicated, “This problem is costing us a lot of money every day
we let it continue. I want a plan in place at the end of the week that will convince me that the problem is
going to get fixed quickly.

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