Inventory Management, Purchasing

          Bankruptcy forced the DeLorean Motor Company (DMC) to shut down its Belfast, Northern Ireland production facility in 1982, with an inventory of over 1,700 brand new cars and millions of parts. During liquidation, Consolidated International acquired all of DMC’s remaining inventory. Meanwhile, Steven Wynne, a British mechanic specializing in DeLorean maintenance and restoration since 1982, opened a 40,000 square foot warehouse in Houston, Texas, meant to act as a centralized distribution centre for used DMC parts. In 1997, Wynne acquired all DMC inventory from Consolidated International, in addition to the DeLorean Motor Company name and logo.

          Initially, the acquisition was aimed to support Wayne’s maintenance, restoration and parts sales operations. He and his team have serviced a consistent stock of 35-45 DeLoreans belonging to owners from all around the world since 1987. They also sell parts to DeLorean owners and restorers. As those operations were still not considerably cutting into the new DMC’s parts stock, they began assembling brand new DeLoreans themselves.


         A DeLorean requires roughly 2,700 individual parts of which DMC has over 99%, with no opportunities for traditional inventory replenishment. To fill the holes in their inventory, the remaining less than 1% are rather easily reproduced, rebuilt or procured as used parts. As all original DMC technical specifications and drawings were also acquired, they are often able to reproduce parts using the original specs with CAD/CAM and 3D modeling. This, in combination with their current inventory, allows the modern DeLorean Motor Company to produce a maximum of 500 cars, while continuing its additional pursuit to be the most prominent facility for DeLorean service, parts and restoration.


     

        Since 2016, the new DMC has employed Acctivate as its inventory management software. Acctivate is utilized for inventory adjustments when parts are received in the distribution centre, whether reproduced or acquired as used parts. Those adjustments are then automatically integrated into DMC’s web store. Acctivate supports and is used to create assemblies (one part containing multiple parts) in addition to sales order management including open and closed sales order monitoring, the creation of pick tickets and sales order printing. Some service orders, such as full frame-off restorations, require 200-300 line items for labor codes and part codes.

We’re able to build a service order pretty quickly with Acctivate, especially with some of these big restorations– Sarah Heasty, Service Manager, DeLorean Motor Company.

         DMC uses Acctivate’s Business Activity Service Billing module to create service order quotes, where separate subtotals can be created for a customer’s engine, transmission, suspension, etc., providing increased transparency. The Business Activity Scheduling module is employed to track labour hours and parts used for each service order. Labour hour tracking helps with DMC’s capacity planning as parts are pulled prior to service, increasing efficiency.

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Inventory Management, Logistics, Transportation

NOTE: This article was written prior to the recent US corporate tax rate decrease to 21% and increase in the Ontario minimum wage to $14/hour.

Executive Summary

 

            Opening a distribution centre staffed by 501 full time minimum wage employees in Richmond, Virginia would be $2,462,771 per year less expensive than in Cornwall, Ontario. Due in large part to a lower minimum wage rate difference of $1.76 (CAD) and a mandatory employer contribution requirement differential of $625,045 per year, which aid it to surpass its unfavourable current exchange rate difference of 33%. Employees in Richmond generally experience lower quality of life, stemming from shorter, unsubsidized parental leave and un-mandated minimum paid vacation compared to their Canadian counterparts. Richmond’s favorable 5,806 unemployed citizens will provide a more advantageous pool of potential employees should high workplace turnover occur. The one critical unknown relevant factor lies in the lack of a profit forecast, which impedes this report from applying the considerably higher American corporate tax rate of 38.9% compared to the Canadian rate of 15.5%.

 

Introduction

 

The following information was gathered to aid in the site selection determination for a distribution centre comprised of 501 minimum wage employees. Various site selection factors were considered in establishing whether Cornwall, Ontario or Richmond, Virginia would be the most appropriate location given their respected provincial/state and federal staffing constraints. The predominant factor taken into consideration was staffing, which includes wage rates and employee benefit entitlements. Cash flow is another influential factor as it relates to the significant exchange rate in converting CAD to USD. Lastly, employment taxes rounded out the decision making process, as the province of Ontario, the state of Virginia and their respective federal counterparts require differing tax contributions from employers. This report will conclude by evaluating the above mentioned factors and figures to give recommendations as to the advantages and disadvantages of opening a distribution centre in both locations.

 

Background and Discussion

 

            As the predominant motive for the location of this distribution centre is based on overall cost reduction to the organization, it is evident how this situation relates to both an offshore factory and a source factory site selection process. As the facility is to employ 501 full time staff at minimum wage, it relates to both strategies in that regard. Another site selection consideration similarity lies in how the state of Virginia has a low minimum wage rate of $7.25 USD per hour ($9.64 CAD) (“2017 Minimum Wage By State”). The lower Canadian exchange rate balances out the higher Ontario minimum wage rate of $11.40 per hour, to some extent. Whether or not there is to be development of the local population can be argued either way. As 501 employees are to be paid at the minimum wage rate, that would not significantly develop the lives of the local population financially to a large extent. That situation would relate to an Offshore site selection strategy. However, it could be argued that if employees are to be taken from a segment of the population that is currently unemployed, that would in fact contribute to the development of the local population. The latter would put a small dent in either Richmond’s 4.3% unemployment rate (“Richmond, VA Economy At A Glance”) or Cornwall’s rate of 8.1% (Baker, Lois Ann), constituting the site selection decision making process to relate to the Source strategy. The one piece of information that is lacking is whether or not management is to be taken from the selected location’s local population, or whether they are to be expatriates.

 

            Another factor to be considered is the federal corporate tax rate of the country in which the proposed new distribution centre will reside. Canada’s corporate tax rate is relatively low at 15.5% while the rate within the United States is 38.9%. These figures cannot be applied to this particular situation at this time as profit forecasts have yet to be calculated, however they should certainly be taken into consideration. In addition, the WSIB rate of $2.43 per $100 insurable dollars (“2017 Premium Rates”) would likely be required for a distribution centre in Ontario, which provides workplace liability insurance coverage. Amounting to $288,677, this figure was omitted from calculations as it was not requested for analysis.

 

Analysis

 

Staffing

 

            Staffing and human resource factors are critical when determining the site for a distribution centre. As it is after low skilled, minimum wage employees, an analysis of the current minimum wage rates in Ontario and Virginia is crucial. Ontario currently stands at $11.40 per hour (CAD) (“Minimum Wage”) while Virginia has a rate of $7.25 per hour (USD) (“2017 Minimum Wage By State”) or $9.64 CAD. For simplicity, all figures moving forward in this text and its corresponding appendix will be in CAD. Using trendline in Microsoft Excel, we can forecast the Ontario minimum wage rate to climb approximately $0.20 per hour each year, to $12.40 per hour by the year 2022. In contrast, Virginia’s minimum wage unemployment rate has not changed in the past 7 years and is expected to remain constant at $9.64.










With a present rate difference of $1.76 per hour in favour of Richmond, VA and a projected difference of $2.76 in five years, Richmond is clearly less expensive when considering the minimum wage by itself. Gross payroll for a full time employee at minimum wage in Cornwall is $23,712 and $11,879,712 for 501 employees while the equivalent employee in Richmond would cost $20,044 and 501 employees would cost $10,041,986.

 

Employment Insurance

 

            To determine the end dollar amount for employing 501 minimum wage workers in Cornwall and Richmond, taxes and expenses must be considered.  An employer’s contribution requirements include employment insurance (EI), health care costs, minimum vacation requirements and compulsory government pension plan contributions based on the gross employee payroll. In Canada, an employer is to pay EI contributions of 2.632% for each employee’s salary which amounts to $624 per employee or $271,095 for all 501 employees in 2017. The American equivalent of EI is The State Unemployment Tax Act (SUTA) and The Federal Unemployment Tax Act (FUTA). The SUTA rate for new employers in the state of Virginia is 2.53% (Virginia State Tax Information”), which equals $202 per employee and $101,402 for all 501 workers. FUTA is calculated at a rate of 0.6%, equaling $42 per employee and $21,042 for all 501. Combining SUTA and FUTA amounts to $166,651, which will cost the distribution centre $104,444 less than its Canadian counterpart.

 

Healthcare Contribution

 

Opening the distribution centre in Cornwall will require payment of Ontario’s Employer Health Tax at a rate of 1.95% (“Employer Health Tax”). This will amount to $462 per individual and $231,654 for all 501 workers. The state of Virginia charges a Medicare rate of 1.45% (“Employer’s Tax Guide”) amounting to $291 per individual and $145,609 for all 501 employees. Virginia is once again less expensive than Ontario at a differential of $86,045.

 

Vacation Requirements

 

            Vacation requirements are a one sided financial expense, however it requires overall productivity and organizational moral to be taken into account. As the state of Virginia classifies vacation as a fringe benefit, it does not require employers to offer paid vacation time or vacation contributions (“Labor and Employment Law”). However, in Canada, employers are obligated to provide two weeks of paid vacation every year plus vacation pay, which “must be at least four per cent of the “gross” wages (excluding any vacation pay)” (“Vacation”). This expense not only amounts to $948 for the individual and $475,188 for all staff, it will result in decreased overall productivity due to an average of 19.3 employees always being on vacation. This therefor decreases the 501 staff down to 482, while the distribution centre will continue to pay for 501 employees. On the other hand, mandatory vacation time and pay will lead to higher workplace moral and likely increased productivity in the long run.

 

Government Pension Plan

 

            Both locations require tax contributions in the form of government pension plans. The Canada Pension Plan requires a 4.9% contribution by both the employer and the employee on all income between the first $3,500 year and up to $53,000 (“T4032-ON – Payroll Deductions Tables – CPP, EI, And Income Tax Deductions – Ontario – Effective January 1, 2016”). This will amount to $990 per employee and $496,184 for all 501 employees. The United States offers a pension plan in the form of Social Security, where a rate of 6.2% is taxed for each employee (“Employer’s Tax Guide”). Social Security will cost the distribution centre $1,243 per individual and $622,603 for all 501 staff. Social Security is a rare example of an American tax program costing companies more than their Canadian counterpart, accounting for a $126,419 difference in favor of the Canada Pension Plan.

 

Parental Leave

 

            While parental leave does not necessarily cost the organization direct out-of-pocket expenses, there are some less upfront ways in which it affects staffing. The Federal Government of Canada offers 55% of the employee’s salary over a 12-month period, for which one parent is entitled to maternity leave. It was recently announced the individual can extend the same income rate over 18 months, bringing it to 33% of their initial salary (Kohut, Tania). While Canadian employers are not required to contribute any funds to parental leave, it is customary for many organizations to top off that amount to the employee’s regular salary. On the other hand, the state of Virginia requires employers to provide their employees with only 12 weeks of parental leave, which is not subsidized by state or federal governments. The downside of Canada’s 12 to 18-month maternity leave entitlement for employers is they have to maintain that position or an equivalent position for the return of the employee, while benefits of paternal leave include a higher quality of life for the employee and less employee disenchantment. Virginia’s shorter and unsubsidised parental leave forces parents of newborns back to work much sooner, causing a smaller HR burden in the short run, but decreases employee quality of life and workplace moral.

 

Unemployment Rate

 

            A region’s unemployment is an indicator of the availability of labour. The unemployment rate of both Cornwall and Richmond are encouraging for the opening of a sizeable distribution centre. Cornwall’s current unemployment levels sits “at or slightly below national and provincial levels” at 8.1% (June 2015) (Baker, Lois Ann). Virginia’s unemployment rate is nearly half of Cornwall’s, at 4.3% as of January 2017 (“Richmond, VA Economy At A Glance”). One could interpret these figures to show that Cornwall has a larger available labour force, however, when taking their respective total populations into account (Cornwall 46,000 as of 2016) (“Cornwall Demographics & Population Information”) (Richmond 221,679

as of 2016) (“Demographics”) Richmond has roughly 2.6 times the number of unemployed individuals as Cornwall at 9,532 to 3,726 respectively.

 

Region

Population

Unemployment Rate

Number of unemployed

Difference

Cornwall

46,000

8.1%

 3,726

-5,806

Richmond

221,679

4.3%

 9,532

 5,806

 

Exchange Rate

 

         While this report focusses in large part to the staffing factors which affect site selection, as the two proposed locations are located within different countries, the cash flow factor of exchange rates is to be considered. The CAD to USD exchange rate has fluctuated considerable over the past decade ranging from below par to 135.52% (“XE Currency Charts: USD to CAD”). This forecast was derived using a trendline which takes into account each year’s average exchange rate from 2007 to 2016 (“Annual Average Exchange Rates”).

            It determines the recent increase to be rather drastic when compared to less recent years and suggests a less steep climb in the coming 5 years. An above par exchange rate considerably favours setting up the distribution centre in Richmond as it has a direct impact on net payroll expenses.

 

Conclusion

 

            Taking into consideration all required contributions including employment insurance, health care, vacation and government pension plans, the city of Richmond, Virginia is clearly the less expensive option. As setting up a distribution centre, staffed with 501 full time minimum wage employees in Richmond will result in a net payroll of $10,932,642 per year vs $13,395,413 per year in Cornwall, and considering how lower operating costs is the primary objective in this site selection process, the decision is clear. Richmond, Virginia should be selected due to its total net payroll cost savings of $2,462,771 per year when compared to Cornwall, aided by a lower minimum wage rate and a net benefits cost savings advantage of $625,045 per year.

 

Differences

Cornwall, On

Richmond, VA

Benefits and Taxes per Employee Difference

 $1,248

-$1,248

Net Benefits and Taxes Difference

 $625,045

-$625,045

Net Payroll per Employee Difference

 $4,916

-$4,916

Total Net Payroll Difference

 $2,462,771

-$2,462,771

 

            Unsubsidized parental leave and un-mandated minimum vacation requirements run the risk of contributing to decreased workplace moral and overall productivity. However, in Virginia, management will have the option of employing these two benefits should they choose to, as opposed to having them forced upon the organization by the Federal Government of Canada.

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