THE ABC PHILIPPINES STORY

by Adolfo Carlos P. Umali

ABC Philippines Inc. is the Philippine affiliate of ABC International, Inc. with main offices in San Francisco, California. ABC is a worldwide organization with operations in over 100 countries. It was established in 1895 in Sacramento, California.A little over 50 years after ABC’s founding, the Dela Cruz family organized Farmacia Dela Cruz in 1947 at Cavite City. It pioneered in the manufacture of various pharmaceutical preparations and grew to be a leading drug company in the Philippines. In 1956, Farmacia Dela Cruz negotiated with ABC International, Inc. to establish the first Philippine – American joint venture in the pharmaceutical industry.

In 1966, this joint venture assumed a new name, ABC Dela Cruz Laboratories Incorporated. That same year saw the inauguration of their manufacturing plant for infant nutritional products in the Philippines. A year later, two revolutionary infant formulas were introduced in the market: Avtum and Avna.

Avtum was launched the first whey-dominant infant milk powder in the Philippines, especially formulated to closely resemble human milk. Through the years and despite competition, Avtum remained the market leader in the premium segment of the infant dietetics market. Avna meanwhile was breakthrough in the company’s effort to provide the Filipino masses with a premium quality infant formula that was readily affordable. Avna has penetrated the remotest barrios of the country, catapulting ABC to its current number one position in the Philippine nutritional market.

In 1988, ABC merged with Meyers International. The company’s pharmaceutical product sales were enhanced by the addition of the Meyers’ product line. ABC further expanded to add over-the-counter or consumer product lines, such as multivitamins in the Philippine market.

With business rapidly building up towards the 90s, ABC found itself with inadequate facilities to keep up with the growing demand. Thus, in 1991, construction started on a huge nutritional manufacturing plant in Carmona, Cavite. The plant, costing 700 million pesos, sits on an 11-hectare site of what used to be rice lands. The Carmona plant has the capacity to produce a combined total monthly volume of 1.8 million kilograms of infant formulas, weaning formulas and other nutritional products. The company’s output doubled in 1994.

The new plant features a 13,000 square meter warehouse with a capacity for 16,000 pallets (48’x48’) using high rise narrow aisle rack systems and a fleet of electric forklifts which are 100% emission free. But the heart of the warehouse system is the JVE Advanced Warehouse Management System, currently the most advanced materials management system in the industry. It ensures inventory accuracy while providing super fast processing times for materials transactions, both incoming and outgoing.

Unlike other companies wherein materials and shipping departments are separate from the warehouse, ABC’s warehousing department spans all materials handling and storage activities from the time a raw or packaging material is received up to the time that is to be shipped out as finished good. It is staffed with 60 people and it operates 24 hours a day, seven days a week.

Today, ABC averages 6 billion pesos in annual local sales with a target of another half billion pesos in export sales to the Philippine’s ASEAN neighbors and it ranks among the top 100 corporations in the country.

POINT OF VIEW

The analysis of the case takes the point of view of a management consultant.

PROBLEM ANALYSIS

To identify and prioritize problems at the ABC warehouse according to seriousness, urgency and growth potential the survey method, tally sheet and Pareto Analysis were used in the problem analysis. Period covered was from July to December 2000.

Based on the Pareto analysis, the one problem in the warehouse that must be prioritized since it dominates the other problems (60%) is the delayed receipt of packaging material deliveries.

PROBLEM DEFINITION

What has to be done to avoid the delays in the receiving of packaging materials at the ABC warehouse?

IDENTIFICATION OF THE ROOT CAUSE/S

At this point it can now be told that the root causes of the delays in the receiving of packaging material deliveries can be attributed to:

• over deliveries
• lack of warehouse space.

OBJECTIVES OF THE STUDY

• To analyze and solve a real life planning and control problem in the workplace.
• To eradicate the delays in the receiving of packaging materials at the least possible cost.

ALTERNATIVE COURSES OF ACTION

• Advantages

• Will adopt the newest technology in materials handling technology.
• Configured to ABC’s worldwide standard warehouse lay out.
• Over crowding eliminated thus ensuring inventory accuracy.
• Safer workplace because of more room for materials traffic.
• Can handle drastic change in volume.

• Disadvantages

• Very costly at the estimated price of Ps 78,000,000.
• Pay back is computed at 25 years.
• Money could have been spent at other income generating endeavors.
• Will be a white elephant once volume dorps.

• Advantages

• Not configured to ABC’s worldwide standard warehouse lay out but still conforming to ABC’s GMP (good manufacturing practices) standards.
• Over crowding eliminated thus ensuring inventory accuracy.
• Safer workplace because of more room for materials traffic.
• Can handle drastic change in volume.

• Disadvantages

• Very costly at the monthly rental rate of Ps 750,000.
• Money could have been spent at other income generating endeavors.
• Stocks to be exposed on risk once transferred from plant to leased warehouse.

• Advantages

• No capital expenditure.
• Savings in inventory carrying cost.

• Disadvantages

• Will entail planning and close monitoring.
• May not be able to handle drastic change in volumes since no increase in floor space but only reduction in stock levels. .

RECOMMENDATION

The economic benefit of alternative no. 3 (optimizing the inventory levels of packaging materials at ABC Philippines) far outweighs the advantages of the first two alternatives. It must also be noted that disadvantages that are associated with it are not that significant except perhaps for the second one but because of the country’s current economic situation Marketing does not see any meteoric rise in sales in the next two or three years. It is therefore recommended that ABC adopt alternative no. 3.

PLAN OF ACTION

The next question here is how to optimize the inventory levels:

• Data Input: Production Schedule (Jan to Mar 2001)
• Data Input: Actual Production Output (Jan to Mar 2001)
• Computation for the number of PM pallets (1 pallet = 1 bin space) which are to be used by Production basis the Production Schedule.
• Computation for the number of PM pallets which were used by Production basis the Actual Production Output.
• Determination of QA inspection lead time.
• Comparison between Production Schedule and Output to determine differences in quantities and run dates.
• Basis QA lead time and Production Schedule / Output deviations, the optimal days supply of PMs is determined.

Results are as follows:

• Number of PM pallets used by Production per day : 125
• Warehouse PM Capacity : 13 Days Supply (based on above usage)
• Committed QA inspection lead time: 4 Days
• Production Deviation in Quantities (schedule vs actual) : Negligible
• Production Deviation in Run Dates (schedule vs actual) : 1 to 2 Days

Implementation Procedure:

• Basis Production’s deviations in run dates (maximum of two) and QA inspection lead times Maximum of four), only six days supply of PMs must be maintained at the warehouse. PPIC to schedule deliveries basis Production Schedule plus allowance for PM rejection.
• Purchasing to negotiate with suppliers minimum delivery parcels and closely coordinate with PPIC for optimal delivery quantity.
• Warehouse to monitor and control PM inventory levels using the JVE Advanced Warehouse Management System.

CONTINGENCY PLAN

The only potential failure of the chosen alternative is in the event that there would be a meteoric rise in the sales of infant milk thus requiring more packaging materials to be brought in at the ABC warehouse. In which case the volume could not be handled anymore by the physical facility and the only alternative left is to add warehouse space. There are two options here, one is to construct and the other one is to lease. Since construction takes no less than nine months, the immediate action is to lease then make a sensitivity if leasing is cheaper than constructing or vice versa. It is not only a matter of which is cheaper here but also an analysis of the environment if the rise is only temporary or not. But then again with the current economic situation that we are facing, the substantial increase that would require additional warehouse space in the next two or three years is very very remote.