OPIM Case Study I want you to answer the Questions from the case study about the warehousing strategy S w W12772 WAREHOUSING STRATEGY AT VOLKSWAG

OPIM Case Study I want you to answer the Questions from the case study about the warehousing strategy S w

W12772

WAREHOUSING STRATEGY AT VOLKSWAG

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OPIM Case Study I want you to answer the Questions from the case study about the warehousing strategy S w

W12772

WAREHOUSING STRATEGY AT VOLKSWAGEN GROUP CANADA
INC. (VGCA)

Adam Bortolussi wrote this case under the supervision of P. Fraser Johnson solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.

Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmittal without its written permission.
Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request
permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, c/o Richard Ivey School of
Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-
mail cases@ivey.uwo.ca.

Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-03-05

It was Tuesday, January 18, 2011, and Kym Meisner, director of warehousing and logistics at Volkswagen
Group Canada Inc. (VGCA), was reviewing a presentation by the sales and marketing team regarding the
five-year growth plan for both the Volkswagen and Audi vehicle brands in Canada. In her 20 years
working for VGCA, Kym had never seen such aggressive growth targets attributed to new car launches,
product facelifts and expected increases in year-over-year vehicle sales volume. She had already heard
concerns from Dave Cook, the warehouse manager of VGCA’s parts distribution centre in Toronto,
Ontario, regarding the limited space available in the warehouse. She wondered to herself how they could
possibly make room for the inventory of additional new parts needed to supply the growing network of
dealerships across the country.

Kym had scheduled a meeting with Dave and the other members of the warehouse team the following
afternoon to work on a plan for the distribution centre. She was particularly interested in the changes, if
any, that would be needed to the size and layout of the warehouse to accommodate the company’s growth
plans. Kym decided to do some quick analysis to prepare for the meeting on Wednesday.

VOLKSWAGEN GROUP1

The Volkswagen Group, headquartered in Wolfsburg, Germany, was one of the world’s leading
automobile manufacturers and the largest carmaker in Europe. The company represented nine brands from
seven European countries: Volkswagen, Audi, SEAT, Skoda, Volkswagen Commercial Vehicles, Bentley,
Bugatti, Lamborghini and Scania. Each brand had its own character and operated as an independent entity
on the market. The product range extended from low-consumption small cars to luxury-class vehicles. In
the commercial vehicle sector, the product offering spanned pickups, buses and heavy trucks.

1
Source: Volkswagen Group Website. http://www.volkswagenag.com/content/vwcorp/content/en/the_group.html.

December 27, 2011.

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May 2022.

Page 2 9B12D002

The Volkswagen Group was a global brand that sold and distributed vehicles in 153 countries, supported
by 62 production plants in 15 European countries and a further seven countries in the Americas, Asia and
Africa. Around the world, nearly 400,000 employees produced approximately 30,000 vehicles per day or
were involved in other vehicle-related services.

With its nine brands, the Volkswagen Group had a presence in all important automotive markets around
the world. Key sales markets included western Europe, China, Brazil, the United States, Russia and
Mexico. The company had been able to increase its market share in 2010 despite a tough economic climate
and competitive marketplace. In fiscal year 2010, the Volkswagen Group delivered 7,205,094 vehicles to
customers worldwide, an increase of approximately 15 per cent from 2009, thus achieving a new record for
the company. The delivery figures in each of the 12 months of the reporting period were higher than in the
corresponding prior-year periods, when sales had, in some cases, been negatively affected by the
consequences of the financial and economic crisis. Demand for Volkswagen Group models exceeded the
previous year’s demand in all models and in almost all markets. Exhibit 1 provides an overview of the
deliveries to customers by market and of the respective passenger-car market shares of the Volkswagen
Group in fiscal year 2010.

Growth Strategy2

Much of Volkswagen’s current and future expected growth was attributed to what was termed “Strategy
2016,” which was a global strategy that had originated at the corporate level and was pushed down to each
group at the country level. The key element of Volkswagen’s Strategy 2016 was to position the
Volkswagen Group as a global, economic and environmental leader among automobile manufacturers. The
company expected to achieve this objective by using intelligent product innovations and technologies;
paying particular attention to an environmentally friendly orientation; and by promoting a continuous focus
on improving productivity, quality and customer satisfaction. The Volkswagen Group’s aim was to be the
most successful and fascinating automaker in the world by 2016.

Deliveries in North America3

Although the growth in the passenger car market in the United States had slowed somewhat in the second
half of 2010, the Volkswagen Group’s sales figures had increased by 21 per cent in 2010 from 2009 as a
whole. The car models that had recorded the highest growth rates were the new Beetle, Golf, Tiguan,
Passat CC, Audi A5, Audi A6, Audi A5 Coupe and Audi Q5 models (see Exhibit 2). In Canada, deliveries
to customers had increased by 16 per cent year-over-year. Particularly strong demand was recorded for the
Golf, Tiguan, Audi 4 and Audi Q5 models.

VOLKSWAGEN GROUP CANADA INC.4

Parts Distribution Network

VGCA operated one Parts Distribution Centre (PDC) located in Toronto, Ontario. The PDC was also part

2Source: Internal documents, March 30, 2011.
3Source: Volkswagen Group Website, Annual Report 2010.
http://www.volkswagenag.com/content/vwcorp/info_center/en/themes/2011/03/Annual_Report_2010.html, December 27,
2011.
4 Source: Internal documents, March 30, 2011.

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May 2022.

Page 3 9B12D002

of a larger North American distribution network that included seven large PDCs situated across different
regions of the United States. The PDCs were responsible for storing the inventory of spare parts for
distribution to dealerships across the country. These parts were used for general maintenance and repair for
vehicles owned by Volkswagen customers. The PDC was not responsible for the storage and distribution
of new vehicles, which were transported directly to dealerships from the Port of Halifax.

Of the seven U.S. PDCs, the largest was located in Newark, New Jersey, where all parts for North
American markets were received from the German manufacturers. The Newark PDC was the only PDC
referred to as a slow-moving PDC, which stocked 100 per cent of Volkswagen parts. The fast-moving
PDCs, such as the one in Toronto, carried 60 to 80 per cent of the most commonly ordered stock-keeping
units (SKUs). Parts not stored at the Toronto PDC could be acquired by placing a special order to the
Newark PDC, for shipment first to Toronto and subsequently to the dealer.

VGCA 2016 Growth Plans

In the previous year, VGCA sold approximately 69,000 vehicles in Canada across both the Volkswagen
and Audi brands. The sale of spare parts shipped out of the Toronto PDC to Canadian dealerships
amounted to $200 million in revenue.

VGCA had aggressive plans to grow the volume of new car sales annually by 10 per cent per year over the
next five years. The growth of spare parts sold to dealerships was expected to increase at this same rate.
This increase included the ability to service the demand of an additional 17 new dealerships scheduled to
open in new markets across the country during this period, primarily in Ontario and British Columbia.

New Vehicle Launch and Facelifts

VGCA’s plan included four new vehicle model launches and four new facelifts to existing models each
year for the next three years for a total of 12 new vehicles and 12 facelifts (see Exhibit 3). Approximately
75 per cent of all SKUs would be kept in inventory at the fast-moving Toronto PDC. Each new vehicle
model would add 3,000 new SKUs, and each new facelift would add 1,000 new SKUs. The Toronto PDC
already housed more than 80,000 total active SKUs.

TORONTO PDC5

Warehouse Size

The Toronto PDC was a 160,000-square-foot facility that was 400 feet in length and 400 feet in width with
a 30-foot ceiling (see Exhibit 4). Typically, 20 per cent of the warehouse space was occupied by racking
that was stacked to the ceiling. Wide aisles enabled staff to pick product throughout the facility. The
warehouse had an additional 40,000 cubic feet of unused space in the warehouse that could be installed
with new racking to store more parts.

The Toronto PDC supplied parts to 122 Volkswagen and Audi car dealerships across Canada and, at any
one time, held, on average, $20 million in inventory. VGCA had a master service level agreement with the
Canadian dealerships that committed the Toronto PDC to deliver parts within 24 hours of order receipt.

5 Internal documents, March 30, 2011.

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May 2022.

Page 4 9B12D002

The internal service level for filling orders accurately and within 24 hours was targeted at 95 per cent.
Current service levels were at 93 per cent.

Bin Storage Requirements

The racking used for storing parts in the warehouse was made up of two bin sizes. Small bins, which
represented 25 per cent of the total, had a capacity of 10 cubic feet, while the large bins had a capacity of
100 cubic feet. Typically, one bin was sufficient to store as many parts as were needed for each type of
SKU. The warehouse had 80,000 total bins available, of which 64,000 bins were utilized. Kym estimated
that the warehouse had capacity for an additional 16,000 SKUs to fill the remaining empty bins, but was
concerned that the warehouse might not be sufficient to handle the expected SKU growth over the next five
years (see Exhibit 5).

THE DECISION

As a starting point for the meeting on Wednesday, Kym wanted to first identify the capacity constraints on
the Toronto PDC using a five-year time horizon and then evaluate the possible options.

Expecting that expansion would be likely, Kym identified three alternatives: Expanding the existing
warehouse, building and leasing a new warehouse in a different location and outsourcing all or part of the
warehouse to a third party. Each option had advantages and disadvantages that needed to be weighed
carefully (see Exhibit 6).

During the meeting the following day regarding alternatives for expansion, Kym wanted to consider at
least four factors. First, timing was a consideration. Kym was concerned that a long delay would
compromise the Toronto PDC’s service levels. Second, any expansion would need to minimize disruptions
to the existing facility. Current service levels were slightly below target, and Kym did not want to
negatively affect warehouse performance in this area. Third, the Toronto PDC serviced a vast geographic
region, and Kym recognized that setting up a warehouse in Western Canada might provide opportunities to
improve customer service. She was concerned, however, that opening a new PDC might lead to higher
inventory levels. Lastly, the final decision needed to be cost-effective. The automotive industry globally
was still in a difficult period, which meant that every capital expenditure would be thoroughly scrutinized.

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May 2022.

Page 5 9B12D002

Exhibit 1

VOLKSWAGEN DELIVERIES TO CUSTOMERS, BY MARKET, 2009–2010

Deliveries (Units) Share of Passenger Car Market (%)
Territory 2010 2009 Change (%) 2010 2009

Europe/Remaining Markets 3,599,951 3,492,438 3.1%
Western Europe 2,902,948 2,917,888 -0.5% 21.0% 20.9%
Germany 1,038,596 1,246,571 -16.7% 35.1% 34.2%
United Kingdom 381,175 341,888 11.5% 17.2% 16.1%
France 270,527 260,799 3.7% 11.2% 11.3%
Spain 246,125 224,692 9.5% 23.8% 23.2%
Italy 242,732 237,760 2.1% 11.5% 10.1%

Central and Eastern Europe 429,485 385,320 11.5% 13.4% 13.4%
Russia 133,503 95,208 40.2% 7.1% 6.5%
Czech Republic 81,932 77,952 5.1% 45.6% 43.7%
Poland 81,639 79,120 3.2% 22.8% 22.4%

Remaining Markets 267,518 189,230 41.4%
Turkey 87,434 49,094 78.1% 11.9% 10.3%
South Africa 72,279 52,758 37.0% 19.9% 19.3%

North America 549,578 467,769 17.5% 3.9% 3.7%
USA 360,287 297,973 20.9% 3.1% 2.9%
Mexico 129,548 118,391 9.4% 15.7% 15.6%
Canada 59,743 51,405 16.2% 3.8% 3.5%

South America 907,778 825,851 9.9% 19.6% 21.7%
Brazil 727,790 697,279 4.4% 22.9% 25.4%
Argentina 135,628 103,445 31.1% 24.2% 26.9%

Asia-Pacific 2,145,787 1,550,261 38.5% 9.6% 8.6%
China 1,924,649 1,400,514 37.4% 16.8% 16.5%
Japan 63,998 53,904 18.7% 1.5% 1.4%
India 53,555 19,002 181.8% 2.5% 1.1%

Worldwide 7,203,094 6,336,319 13.7% 11.4% 11.2%
VW Passenger Vehicles 4,502,827 3,954,551 13.9%
Audi 1,092,411 949,729 15.0%
Skoda 762,600 684,226 11.5%
SEAT 339,501 336,683 0.8%
Bentley 5,117 4,616 10.9%
Lamborghini 1,302 1,515 -14.1%
VW Commercial Vehicles 435,584 361,506 20.5%
Scanta 63,712 43,443 46.7%
Bugatti 40 50 -20.0%

Source: Volkswagen Group Website, Annual Report 2010.
http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/2011/03/Volkswagen_AG_Geschaeftsbericht_201
0.-bin.acq/qual-BinaryStorageItem.Single.File/GB_2010_e.pdf. December 27, 2011.

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May 2022.

Page 6 9B12D002

Exhibit 2

2011 VOLKSWAGEN AND AUDI VEHICLE MODELS IN CANADA

Source: Volkswagen Canada Website. http://www.vw.ca/en/models.html. December 27, 2011.
Source: Audi Canada Website. http://www.audi.ca/ca/brand/en/models.html. December 27, 2011.

For the exclusive use of R. Bahassan, 2021.

This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to
May 2022.

Page 7 9B12D002

Exhibit 3

NUMBER OF THE VOLKSWAGEN GROUPS’ NEW MODEL LAUNCHES AND FACELIFTS FOR THE

NEXT FIVE YEARS

Year 1 Year 2 Year 3 Year 4 Year 5
New Model Launches 4 4 4 0 0
Facelifts 4 4 4 0 0

Source: Internal documents, March 30, 2011.

Exhibit 4

LAYOUT OF VOLKSWAGEN GROUP CANADA’S TORONTO PARTS DISTRIBUTION CENTRE

Source: Internal documents, March 30, 2011.

DM

>
>
>
>

>
>
>

>
>
>

>
>

AA AB AC AH AJ AK AL AM DC DD DECA CB CC DA DB EG EH FAEC ED EE EFEBDF DG DH DK DL

Large Bin
Racking

Loading Dock

Staging Area

Production
Office

Width: 400 feet

Le
n
g
th

:
4
0
0
f
ee

t

Height:
30 feet

Maintenance
Room

Small Bin
Racking

Misc.
Storage

Small Bin
Racking

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Page 8 9B12D002

Exhibit 5

VOLKSWAGEN GROUP CANADA’S CURRENT BIN INVENTORY

Occupied Empty Total Size
Large Bins 16,000 4,000 20,000 100 ft

3

Small Bins 48,000 12,000 60,000 10 ft
3

* 1 Bin = 1 SKU Type

Source: Internal documents, March 30, 2011.

Exhibit 6

TIME AND COSTS ASSOCIATED WITH EXPANSION OPTIONS FOR VOLKSWAGEN GROUP
CANADA’S TORONTO PARTS DISTRIBUTION CENTRE

Expanding the

Existing
Warehouse

Leasing a New
Warehouse

Outsourcing all/part
of the Warehouse to

a 3rd Party
Cost $80 per square foot $120 per square

foot
$120 per square foot

Time 6–8 months 2 years Immediate
Lease Terms 10-Year Extension 20-Year Lease 10-Year Contract

Management Control High High Low

Source: Internal documents, March 30, 2011.

For the exclusive use of R. Bahassan, 2021.

This document is authorized for use only by Rawan Bahassan in OPM 511-F21-Dr. Salim Aljazzar taught by Dr. Salim Aljazzar, University of Business and Technology (UBT) from Nov 2021 to
May 2022.

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