Specialty Foods and Beverage
Case: Specialty Foods and Beverage (SF) is a privately held small tea company that imports tea (and some other tea-related food and beverage products) from several suppliers abroad and markets these products to both wholesale and retail customers, primarily in the USA The company was founded in 1989 by Sam Westgood, Sheila Westgood, and Bob Jonas. The idea had been hatched some years earlier when they had met with some friends and discussed the lack of high-quality tea in the United States. Sensing an unmet demand, they resolved to develop a tea to meet the needs of consumers desiring high quality tea. They managed to acquire some "angel" funding and soon developed a devoted following of their brand. They developed unique packaging, including a striking set of graphics and slogans, and they were off and running. As marketers, the founders were extraordinarily successful. Unfortunately, they were less successful as business operators. They sold the business to Tim Casey in 1992. Under Tim’s ownership, more effective business practices were put in place. More effort was spent attracting wholesale business instead of direct appeals to retail customers. The wholesale market constitutes about 85% of their business. Our examination of the supply chain process for SF begins with the sourcing of raw materials (primarily tea) in several Asian countries-China, India, Taiwan, Japan, and Sri Lanka. A relatively small portion of the goods are imported directly from these countries by SF; the majority of the goods are imported from Twinhof (TH), located in a suburb of London. This company processes the teas according to proprietary specifications for SF. SF is a relatively small customer of TH; as such, SF only produces specialized blends in batches about twice a year. More frequent production runs are considered economically infeasible by SF, as each run requires TH to adjust the settings on the production equipment to the proper specifications. There is substantial time and cost associated with this set up process, effectively limiting the number of runs per year. At present, TH only ships to SF in container size lots; each container holds about 10,000 kilos of tea. Purchase orders are generated from the production facilities just outside Indianapolis, Indiana. The chief of purchasing also functions as the controller of the company; although product purchases rarely vary in quality, there are times when a particular specialized ingredient for the tea blend is unavailable. In these cases, substitute ingredients need to be identified; this will occasionally result in production delays. Further, any changes in the production formula need to be cleared with the head of Sales & Marketing. This division is based in Los Angeles, however, since California accounts for the largest concentration of sales. TH requires a three-month lead time from SF to deliver the orders. This lead time is established as: 1) two months to acquire/process the tea from the source, and 2) one-month transit time to SF. In the current arrangement, some of the "favorites" (high volume tea) are produced and shipped on a regular schedule. Other products are ordered and shipped on an irregular basis The shipments arrive in Indianapolis in large sealed bags. Upon arrival at the plant, the tea is packaged into retail-sized containers, which are then held until shipped to a retailer (and, in some cases, directly to the consumer). Typically, about two months-worth of sales are held as inventory. However, this average inventory size masks several problems associated with inventory management. Order volume is not only seasonal, but also irregular. Although many of the retailers with which SF does business order tea on a relatively predictable basis, some of the large customers order infrequently, and these large orders (often in excess of $200,000 per order) are not wholly predictable. The processing plant is able to pack approximately $100,000 worth of tea per day (about 20,000 lbs). Although SF usually has sufficient quantities of packaged product available for shipment, they are sometimes caught "short" on large orders. In some cases, the delay caused by the limited processing capacity results in SF needing to air freight orders to these customers. Management of SF feels this to be necessary since the potential loss of business to these large customers would be disastrous. As noted above, large orders (from the biggest customers) are made directly to headquarters in Indianapolis. However, most of the orders are smaller, and are made by members of sales representative organizations hired by SF. SF is too small a company to have their own
nationwide sales force. Regional sales organizations are hired to "service" the accounts; the size of the accounts varies widely. Some are as small as $1,000/year (annual sales). The sales representatives ("reps") receive 10% of the amount sold; payment is made to the reps upon receipt of funds by SF. The volume of sales order may be described as moderately predictable. Like any consumer product, though, there is a substantial degree of uncertainty in the order patterns, particularly in the peak order months of July through October. Orders are sent by fax, phone and via the firm’s website. The firm would prefer to have all orders sent electronically but many of the sales reps continue to use the phone or fax. When SF’s sales managers push the reps to use the website, some complain the process is "complicated". Many of these reps have been in the business for fifteen or more years and are reluctant to change their method of doing business. SF management suspects many find using the phone or fox simpler and are unwilling to make the investment in learning the web technology SF feels that some sales are "left on the table" since the sales representative organizations are of varying efficiency. Anecdotal evidence suggests that some retailers order product from competitors if the sales representatives do not make timely visits to the store. In effect, if shelf inventory disappears and no sales representative appears to take an order, the retailer will simply fill the shelf space with other items (usually from a competitor). In most cases, the retailer has limited loyalty to the SF brand. The extent of lost sales from lack of attention is unknown, but believed to be substantial. A further complication to SF order flow and inventory management is the reluctance of most retailers to keep much inventory in house. This often results in calls from retailers, either directly or through the sales representatives, to send a shipment "yesterday". These orders are frequent, and tend to be small. They are also irregular in their timing. Payment terms for SF’s customers are net 30. In theory, the thirty-day time period starts at the time that an order is shipped from Indianapolis. Typically, the invoice is mailed or faxed to the customer; a copy of the invoice is also sent with the physical shipment In practice, the average collection period averages 52 days. Some smaller companies with weaker credit histories have different payment requirements. Some pay with credit cards; others must pay in cash prior to delivery. These accounts represent less than 5% of total revenues, however. The Marketing team, at the request of Casey, began a systematic study of the marketing practices of the firm. In the past year and a half, the number of tea varieties ("stock keeping units", or SKUs) sold to retailers has nearly doubled. The company has always introduced new blends on a periodic basis, especially in anticipation of the winter holiday season. Last year, a line of green teas that appealed to a more health conscious public was very successful. However, other new product launches were less successful. A new line linked to a successful healthy snack proved to be a "bust". Wholesale customers were also concerned about the number of SKUs that the company requested them to carry. In many cases, some of the newer products were not selling well, and they were collecting dust on the shelves. This problem is especially acute in smaller retail outlets that are not well serviced by the sales rep groups. This situation is a "lose-lose" for all concerned; SF is foregoing sales that could be generated with a better selling product, and the retail outlet has idle shelf space. In the longer run, the retail outlet is likely to eliminate some shelf space allocated to SF. A second issue involved the long-standing policy of selling only to "quality" commercial customers. The owner and VP of Sales periodically received requests from "mass" retailers such as Safeway, Target, Costco, and Walmart to carry their product Acquiring these new customers would boost sales substantially but profit margins would erode as these large customers would require discount pricing. Further, SF is concerned that selling through these outlets would erode the brand image In the early years of SFs operations, product pricing appeared to have little effect on demand. The typical customer was willing to pay a higher price for the perceived higher quality. In recent years a number of competitors have entered the market and, though many current SF customers remain intensely loyal, this has caused more pricing pressure from retailers. With increases in materials costs, this has inevitably resulted in a reduction in profit margins. Although pricing decisions are generally associated with marketing, such decisions inevitably impact profitability. Both Tim Casey and the controller have a strong desire to maintain substantial gross profit margins. In the early years of SFs operations, product pricing appeared to have little effect on demand. The typical customer was willing to pay a higher price for the perceived higher quality. In recent years a number of competitors have entered the market and, though many current SF customers remain intensely loyal, this has caused more pricing pressure from retailers. With increases in materials costs, this has inevitably resulted in a reduction in profit margins. Although pricing decisions are generally associated with marketing, such decisions inevitably impact profitability. Both Tim Casey and the controller have a strong desire to maintain substantial gross profit margins.
1.What is the setting or background of the case?
2.What are the problems or issues or challenges raised in the case?
3.What probably solutions were implemented?
4.In your own point of view what alternative/s course of action you will do/suggest?
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