Case Study 1 A Pain in the Supply Chain

Case Study 1 A Pain in the Supply Chain
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  1 A Pain   in the (Supply) Chain   Adapted from the John Butman HBR Case Study, May 2002 At the end of the trading quarter, stationary supply firm Exceso Corporation is in a panic to meet its wildly ambitious sales goals. The company's aggressive sales promotions are attracting retailers, but can they meet the orders? It was mid-Monday morning on a day in late March as R. Foley Vinton, the CEO of Exceso, guided his visitor Andrea Valdini, a Wall Street market analyst through the Excesso’s Manufacturing Facility # 14. As they closed the door leading out of factory he was relieved not to have the manufacturing noise interrupting his thoughts. Without the factory noise making communication difficult Andrea asked Foley "How many shifts are you running?”   “ Three, ”   replies Foley, “we're essentially running at full capacity." Andrea makes a note of this in her book and asks "How long have you been operating at full capacity?" Foley not wishing to reveal the full truth, said “we shut down the line last week to install those new robots you saw”, leaving out that the installation opportunity only occurred because the large plastic injection-mold machine had broken down and needed repair, yet again! This had stopped the production of their highest selling item, the ClickZipPlus fastener, for a week. “ So now we're running full capacity in an effort to fill all of our orders, ”  he finished. As an automated delivery robot passed by on the way to the storeroom with a pile of ClickZlpPlus boxes, he hopes that the constant problems with the machine will not be a problem for the production schedule in the coming months. "Are you going to meet your sales forecast for the quarter?" asked Andrea. "I set a 9% sales growth target for the quarter. That's what I told the analysts, and that's what my sales team are aiming for." Foley smiles. “ And my sales team usually reaches their targets. ”   “But h ow can Exceso achieve such strong growth in this economic climate? Especially due to the price pressure you're getting from retailers ”  replied Valdini seeking more information for her analysis report. Foley doesn’t answer her question immediately. Instead, he quickly guides her out of the building distracting her with an offer of some refreshments. As they walk into the carpark he remembers nervously the difference between retail orders and actual consumer sales. Later that day in Trenton New Jersey, one of Exceso’ h igh value key account procurement managers is hungry. Alice Dias of Flemings ValuMart, is leaving her office in the East Coast Regional Headquarters to get something to eat. She is late for lunch because she's been on the phone with the Exceso regional sales manager for more than an hour, negotiating purchase terms for a new order of ClickZipPlus. Seeing her Assistant Manager Jane Wendall sitting alone in the lunch room, she joins her at the table. "You want to know how to work the supply chain ’  she says to Jane as she sits down, “ You should talk to me! ”   “Did you get a good deal?”  Jane asks. “I  committed to buying 3,000 cases of the fourpack" replies Alice . “ What ?”  Jane is shocked by this amount of ClipZipPlus’ bought by Alice , “Correct me i f I'm wrong but we only sold only 1,800 cases in the last two quarters combined! Why would you order nearly double that?" says Jane. Alice nods in partial agreement "Correct. But we're buying them at a 6% discount of the normal price." "Wow! ”  exclaimed Jane, “ Exceso must be a little desperate to sell as many ClickZipPlus’  as they can". Alice continues “ They're also committing to increasing how much they contribute to promotion and advertising in newspapers and magazines! This means that we’ll be getting greater discount, when we add that in. And that's not all." She looks at Jane, asking her to guess what other concessions she might have negotiated from Exceso. Jane tries to imagine the most ridiculous sales incentive to close a deal and  2 says " I don’t know… um , they've agreed to deliver on a Sunday?” “ As a matter of fact, they have," says Alice coolly as if she makes this kind of deal all the time. Jane now turns critical. “ Wait a minute. We don't have warehouse space for 3,000 cases, so we'll have to pay for the extra storage somewhere else. That’ll affect our margin wont it? It could end up costing us more than it saves.”   “That would be true,” Alice nods, “ if I planned to keep the whole shipment. But I don't .” She leans forward to explain, “ Exceso is only selling at a 4% discount to our southern region. That means that they are buying ClickZipPlus fourpacks for six cents more than what I just negotiated ”  Jane, finally she realized what Alice had done. “ I'm going to ship half of this order directly to the southern region” Alice tells Jane “S o they get our 6% discount. Then I'm going to sell another 500 cases to a product diversion firm, VXT, at our cost but with an option to buy back at a 3% premium within 6o days ”. Jane was a little surprised by this last point. Product diversion is a practice that upsets the smooth functioning of a supply chain. It is taking goods bought for retail sale in one market or region and diverting these to be sold in another market or region without the knowledge or permission of the seller. “But hey” Jane thought, “If Exceso is selling at such crazy discounts, why not take advantage of it.”  Jane now understood why Alice was so happy with herself, “So we ’ll also have a source of additional inventory but with no carrying costs. Even with VXT’s buyback costs, the price will still be lower than Exceso's!' ” Jane said. Jane also sees the other positive in Alices ’  plan using product diversion , she wasn’t just buying for her region, but was taking advantage of a larger discount opportunity and spreading it over to Flemings ValuMart ’s Southern region as well, helping Flemings’ national profits but at the expense of Exce so’s future sales.  "We will still have 1,000 cases for the quarter to stock our stores. We’ll run these at a special promotion. If that doesn't increase our retail volume by 10%, I would be extremely surprised ,” says Alice.   “ Do you think the Exceso CEO Foley Vinton knows that this is how his sales people achieve the target?”  asks Jane “ Oh, h e knows”  Alice says still smiling at her good fortune. Later that week, Martin Wu, Exceso's head of sales, was thinking how or if his team will meet the sales target set by Foley Vinton. On his way to a meeting to discuss this issue with his sales managers, he meets Foley outside of Exceso ’ s Board Room. “So, Martin!” Foley asks “ How are we doing? Are we making our sales numbers? ”  Martins face signaled what he was abo ut to say, “No Foley we’re not.”  Foley returned Martin’ s gaze. “ But the target was set based on your forecast data. We all agreed to the  plan:”   “ Yes ,” said Martin “b ut that was raw data and not the most up-to-date. It contained errors .”   “ Okay ” responded Foley, seeking more information , “ How far off target are we?” Martin thought a little and responded, “We’ ll do well to grow sales by 3%. ”  Foley remained quiet thinking hopefully “ Okay Martin … , I hear this every quarter … a nd every quarter we make the number .”   "We're doing everything we can”  began Martin, “ We're offering discounts and flexible terms. We've got some good display ideas. We're trying to get some new companies to sell our products. We even agreed to Sunday delivery for Flemings .”  he explained. Foley nodded slowly and answered “That’s good and we've still got a few weeks to go .”  "But, ”  Martin continued "There's really only one way to make the 9% target. I thought we had agreed to stop the channel loading. ” “ Look  ”  says Foley, “The time is  not right to completely stop loading, I’ve just had the analyst from Wall Street visit the factory and she was quite impressed with production capability to meet these sales forecasts ”.   I’m expecting a positive report.”  Moving closer to Martin, Foley confided “What we need now is a lift in the share price. Achieving our sales target is just the right type of news as well as a good analyst report to give us that.”   “ We can review the sales incentive structure in the next quarter, ” conceded Foley as he made moves to enter the Board Room. After visiting Exceso’s factory Andrea Valdini had flown back to New York and had been writing the Exceso market report. As she walked to her office that morning, she stopped at a nearby Flemings ValuMart to check on how Exceso promoted ClickZipPlus in retail stores. She also wanted to buy some fasteners for herself. Walking down the aisle she came to the fasteners display. She sees a single four pack of ClickZipPlus hanging alone, surrounded by empty spaces where other fourpacks and eightpacks should have been. A few of the places normally reserved for Exceso products have  been claimed by Exceso’s competition.  3 The single ClickZlpPlus pack looks to be under siege, surrounded by stronger more confident products. Andrea sees the store manager at the end of the aisle and calls out, “ I'm looking for an eight·pack of ClickZlpPlus, there are none on display.” “I know,”  replies the store manager, “we have none left.”   “ When will you have them?" enquires Andrea. “ We'll have plenty of fourpacks on Monday ;”  the manager says helpfully. “At a special low price too .”  "No eightpacks?" asks Andrea. “No, t hey're having problems with the eights ,”  the store manager reveals. “ I'1l discount a double fourpack for you if you want. ”  He said encouragingly. "But you only have one of them here ,”  Andrea says taking the four pack off the peg. The manager takes on a consultative tone. '” Well, we've got other brands to choose from. The Carlex eightpack is a little cheaper, anyway ” he tells her. " But, what about the quality? ”  asks Andr ea. “Well it's just as good,” the store manager assures her “ OKAY, I'll try the Carlex the”  says Andrea. The manager nods, and says softly shaking his head “ Exceso's a great company, but I don't think they can keep this up much longer ”. Andrea was surprised by the store manager’s comment   “ Can't keep what up much longer? ” she asks. She’d just been at Exceso’s factory producing ClickZipPlus. It was operating at full capacity and there is no stock on the store’s shelves. Andrea wonders “Is it possible that this store manager knows more about Exceso than I do ?”  At the sales meeting Martin Wu is trying to keep control of his sales team. Today he also has support staff attending the meeting, so the room is full with his regional representatives, staffers from promotions, forecasting, and Exceso’s senior key account manager. “ If we go with higher discounts,”  says an experienced sales manager, "we'll move more product. But it's not going to sell through to consumers. It'll end up in a warehouse someplace. That we know for sure, and, then we’ ll be selling less for the next two months as they use up that stock  ” . Another sales team leader who was not a supporter of the high sales target asked “ Do we still need to make a profit? We used to have this good thing called a sales margin. I'd like to see that again, and I’d like our targets to be related to the actual sales, to customers who are using our product! ”  Martin almost laughs, “Of course we still make a profit, but less due to the high discounts." “ Even when you count the cost of display and sampling?”  asks a younger manager, with a frown. “I’m n ot sure ,” Martin admits. “ But we do before the cost of sales.”   “ Okay, but what about manufacturing over- runs?”  asks the experienced manager “ Facility 14 ’s line  was shut down all of last week, and now they're running full capacity at three shifts to meet the production schedule. I’d like to know w hy are they making so much prod uct?”   “ They must be using those srcinal forecasts we developed. But didn’t we update them  with new data? ” interrupts the team leader. “ Well we did, so they must be using the 9% target to guide production, not the actual levels of retail sales that we re-forecasted ” added the experienced manager. Martin thought about this conversation and didn’t like where it was heading. Hoping to shut it down, he interrupts “ Alright, listen, Foley has made a promise to the analysts. The analysts have made a promise to the shareholders. And, I've made a promise to Foley. We have to do whatever it takes to make that sales target!”  At that moment, Joseph Vikas, a key account manager, enters the room. “ Would an order for 40,000 new account cases help?” he asks them.   Everyone’s eyes tum to Vikas. "Who's the new customer?" Martin asks. Vikas smiles and tells them, "Its Regency Brands. They are an overseas trading company. They sell into Eastern Europe, China, and other markers where we have no organization or trading reps .”    4 “ That is a strange combination of sales territories”  comments the experienced manager questioningly. On hearing that, the term ‘product diversion’ flashed through his head. Martin thought “W ith the level of discounts we’ve been offering across different sales regions, w e’ll be in real trouble if this company is a product diverter. ” “ W hat price did you quote?” he asks, half hoping it will be an offer he can refuse. “ Deep discount! If we receive  payment within five days” replies Vikas “ Okay, so what do we know about this compa ny?”  asks the team leader. Vlkas looks at him hard, “W e know they're willing to sign the deal in time for this sale to be included in this quarter’s sales numbers”.  The room falls into in silence, “Well” says Martin, “Let’s do our due diligence on them”   “The offer i s only good until eight p.m. tonight ,”  replies Vikas . “ I suppose I can make a few calls about them, but they appear to be okay to me. ”   “ Well how are they going to pay? ”  asks the experienced manager. “They have a Letter of Credit from London bank." says Vikas. "That I've already checked out. ”  And with that the meeting broke up. Martin sat alone in the room wondering if Vikas’ sale to Regency Brands would come back to haunt them. Andrea is in her office on the Friday morning checking the final draft of her report before it goes to the printer. The report will be released to the market on Monday. "Exceso is a fundamentally sound company," she thinks. “ They're just caught in a little downturn created by flat retail sales and a slow economy. Foley Vinton has an admirable track record. ClickZipPlus is still the market leader, even if the competition is catching up. Excesso has a strong balance sheet. ”  But she can’t stop thinking back to her experience in the Flemings ValuMart. That empty product display still worried her. “It’s  just one store that was out of stock, she thought rationalizing the situation, “ I didn’t take inventory  of every retail outlet in the country, and my evidence is anecdotal, at best. If sales are lower why are they operating at full capacity to manufacture even more product? Their share price hasn't moved at all in the last six months, but they're not alone in that. The economy is slow and many companies have had poor recent stock market performances.” Putting her concerns aside, she thought “Exceso is just going through a bad patch. It should come through it if the consumer demand that seems to be causing the stock outs continues. ”  Late on Friday afternoon Alice Dias’ office phone rings. She doesn't recognize the number displayed; it is from somewhere out of state. She with a smile she picks up the phone, "Hello, this is Alice Dias." "Hello, Ms. Dias,” says an unfamiliar voice. “I represent Regency Brands." “Yes?” replies Alice  politely. “ How may I help you?" “ Actually I am hoping that I can help you ,” says the voi ce . “Regency Brands is in a position to offer a very attractive case discount on the Exceso ClickZipPlus fastener .”  While Alice had just made a good deal she wanted to hear more. “ I believe I already have the lowest discount available, direct from the manufacturer" she tells the voice from Regency. The person from Regency quickly replies , “I  think that I can beat it": “Well , thanks for calling ” says Alice, "I'm listening."
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