Business Studies HSC HSC Practice Question 2b – Operations performance objectives

MetroServe Health Logistics (MHL) is a for-profit company that provides same-day delivery of medical supplies (e.g., insulin, dressings, test kits) from a central warehouse to hospitals and pharmacies across a large city.

MHL’s current operations use established technology: handheld barcode scanners, a warehouse management system that allocates pick lists in batch waves, and route planning done each morning by a supervisor using spreadsheet templates and local knowledge. Drivers then follow printed manifests.

Service performance has recently become more volatile due to:

• a rise in urgent orders placed throughout the day (not just in the morning)
• tighter delivery windows requested by hospitals (e.g., “deliver between 2 pm and 3 pm”)
• more frequent stock substitutions when items are unavailable

MHL’s current weekly averages (52 weeks per year) are:

• 8,000 orders shipped per week
• 92% of orders delivered on time (within the delivery window)
• 1.8% picking/packing error rate (wrong item or wrong quantity)
• Average contribution margin of \$11 per order delivered
• Each late delivery triggers an average service recovery cost of \$18 (hotshot courier, extra customer service time, and/or penalty credits)
• Each picking/packing error triggers an average rectification cost of \$65 (returns, re-picks, and expedited redelivery)

Management is considering an operations strategy shift toward higher dependability and speed for urgent orders, while keeping costs controlled.

Two technology pathways are being evaluated:

Pathway A: Established technology optimisation

• Upgrade the existing warehouse management system to enable smaller wave batches every 2 hours and add additional fixed barcode scanners at key handoff points.
• Expected outcomes (once implemented): on-time delivery improves to 95%; picking/packing error rate improves to 1.4%.
• Implementation disruption: for the first 1 week, throughput drops to 7,200 orders shipped (on-time and error rates remain at current levels during that week).
• One-off implementation cost: \$120,000.

Pathway B: Leading-edge technology adoption

• Implement an AI-driven dynamic dispatch platform that continuously re-optimises routes during the day using live traffic and order priority, plus a goods-to-person robotic picking system in the warehouse.
• Expected outcomes (once implemented): on-time delivery improves to 98%; picking/packing error rate improves to 0.7%.
• Implementation disruption: for the first 3 weeks, throughput drops to 6,400 orders shipped per week, and on-time delivery falls to 88% during those weeks due to commissioning (error rate remains at current levels during commissioning).
• One-off implementation cost: \$520,000.

Assume weekly demand is sufficient to sell all orders shipped in every week. Ignore depreciation and tax. Assume the contribution margin per delivered order remains \$11 under both pathways.