Strategies for PRC's Direct-to-Consumer Fulfillment Model

Background

Gordon Winter, chief executive officer of Pain Relief Corporation (PRC), is feeling stressed out. Theproducer of Transcutaneous Electrical Nerve Stimulation (TENS) unit, a battery-operated device thatpeople use to treat pain, is faced with a new opportunity but Winter is not sure how to approach it. TheFood and Drug Administration has changed the rules and low current TENS units can be sold directly toconsumers, starting in three months. Previously, they required a medical prescription for short term useand could be rented from medical device companies.The market potential is huge thanks to the aging population, PRC could sell through national drugstorechains, pharmacies, and Amazon, but Winter has some reservations. His past experience as chief supplychain officer for a power tools manufacturer has him remembering all the fulfillment issues whendealing with large retailers. He recalls retailers wanting small, frequent shipments to a large number oflocations with faster and faster service, advanced shipping notifications, and RFID tags on all productsfor inventory visibility. Of course, the retailers want to buy products at a wholesale price and sell themat a healthy mark up.Winter wants to avoid those headaches and protect PRC’s profit margins. He believes the consumermarket will be served through an e-Commerce direct sales model. PRC will require an easy-to-useconsumer Web site, a strong marketing campaign, and excellent fulfillment capabilities if he is tocompete effectively with the global TENS manufacturers that will flock to Amazon for rapid marketaccess.PRC has started production of three consumer TENX models at the company’s factory outside Louisville,Kentucky. The inventory is being held in the PRC distribution centre (DC) next to the factory, awaitingtheir release date. The DC, currently fills orders for medical device companies and Winter thinks thatconsumer orders could also be fulfilled there with a bit of effort.Winter calls a meeting with his supply chain leadership team about pursuing the e-Commerce methodand to get their recommendations regarding fulfillment. All are in agreement that direct-to-consumer isthe way to go. After some brainstorming, the team identified 3 options to serve the U.S. market :

• Option 1 – upgrade the existing PRC DC’s in Kentucky to handle both consumer orders andmedical device company orders.

• Option 2 – Expand the PRC fulfillment network. Establish regional DCs in Reno, Nevada, andColumbus, Ohio to complement the existing Kentucky DC.

• Option 3 – outsource fulfillment to a capable 3PL company. This would allow PRC to focus onproduction, demand planning, and marketing.

In supporting PRC’s long term goal, Winter is also considering a proposal to expand internationally forinitial discussion at the board:

• Establish international DCs in Shanghai, China and Frankfurt, Germany. There is also the concernof whether the international network should be operated by the company or outsource to a 3PL.Winter’s next step is to fully evaluate the options and choose a path forward before his upcomingmeeting with PRC’s board of directors. They will ask tough questions and Winter must be confident inhis recommendations.

Case questions:

1. Compare and contrast the three options from the perspective of customer service. Which doyou believe will provide the best level of service? Why?

2. Compare and contrast the three options from the perspective of cost. Which one do you believewill provide the most economical solution for PRC?

3. What types of functional and cost trade-offs will Winter need to analyse?

4. Which distribution option do you feel gives PRC the best opportunity for future success? Why?

5. How should PRC leverage automation for its consumer fulfillment processes?

6. What are the key issues, challenges and benefits of expanding internationally?