Based on the case study, Dream Beauty (DB) is a company which manufactures and distributes cosmetics across the United State. There were changes in their supply chain operations after a new supply chain expert took over. Although costs of supply chain had been increasing, the company annual sales are also increasing, peaking at $130,000,000 for the first time. However, it is recorded that supply chain costs ($50,000,000) and costs of goods sold ($52,000,000) alone are accounted for more than three-quarter of sales ($102,000,000).
There are totally three channels of product distribution for DB and they are retailers, convenience stores and mass merchants. All three channels are profitable for DB while retailers, convenience stores and mass merchants are respectively making 50%, 30% and 20% of the total sales. The products are sold to all three channels on credits, taking a maximum of 45 days although the duration DB desires is only 30 days. DB is employing a three-day fulfilment cycle which consists of order processing, packaging, labeling, and delivery. Although orders are shipped unlabeled to retail and convenience stores, the orders made by mass merchants are needed to be labeled due to the intense pressure given. The company even had to purchase a labelling machine which can process 30 labels per second.
As their three-day fulfilment cycle can fulfill the demand of customers within faster period, DB considers that this cycle should become an industry benchmark. However, to be able to offer this level of customer service, it is estimated that DB has to store 15 percent of total average annual inventory as backup products for customers. The cost of capital is also increased due to these costs. In overall, although DB is performing well from the aspect of customer service, it is witnessed that the company was incurring the following problems:
- Increased cost for supply chain
- Extra work of labelling
- Need to wait for a long period to receive cash, and
- Inventory cost of holding excessive products for three-day cycle.
From the case study, it has been found that Johnson is a Skin Care company that manufactures women’s and men’s organic skincare products. It is Kentucky based company, which develops exciting products for sales through the U.S. retail stores. The company has also distributed its products in international market. The direct customers of the company includes hair salon, spa that provide different wellness services like facial treatment. Due to all these enthusiastic customers, the sales performance of the company is quite impressive.
It has been found that sales figure of the company in recent years is $36 million and the operating profit is over $4.8 million. It has also been found from the case study that product line of the Johnson Skin Care Company is over 100 SKU’s. However, the majority of sales of the company were accounted by three major products. They are such as women’s foot care (WFC), men’s foot care (MFC), body butter (BB). The company is now trying to sell its product through retail stores. It had been estimated by the sales team that the annual sale figure for WFC, MFC and BB would be $15,000,000, $4,500,000 and $2,000,000 respectively. On the other hand, average unit price for these products will be such as $5.00, $4.50 and $6.25 respectively.
Now, after conducting a market research, the company has decided to enter market that is more traditional. The company has decided to sell and distribute its products with the help of retail store for the sales of consumers. As the company is new to this type of channel, the company has developed a new position at the company, Director of logistics. The company has three staging warehouses (SWs) located in New Jersey, Kentucky and California. Regional demand has been aggregated into five regional distribution centers (DCs). It has been assumed by the Director of logistics that overall inventory turnover of the company is 5% per year. Along with that, the company historically had inventory carrying cost of 18%.
2.0 Plan to include optimization of operation
2.1 Ordering process
It has been found that, the company has only two contact manufacturers. Women’s foot care products are produced in the California plant. Om the other hand, men’s foot care products and Body Butter are produced in the New Jersey plant. All these products are single sourced. It has decreased the productivity, speed of workflow and efficiency. In order to overcome this flaw, the company can increase investment in order processing. The company can install a sales order processing system. It can help the company to take benefit of online processing and high frequency direct contact with customers. It can be integrated with other systems like cash, inventory and ledger system. It can also make sure that online transaction provides faster transaction to users compare to manual order processing system (Varley 2014).
2.2 Labeling products
Menon et al. (2016) stated that, in the era of intense competition, companies are trying to introduce value-added services (VAS) to promote their products. Form the case study, it has been found that all the products of the company in two different manufacturing plants and label them as well. Now, the company can purchase an integrated labeling machine for all products, which will operate only mass merchants. It will help to increase value of products for customers and customer loyalty. It will also help the company to increase price of the products, as to cover increased cost of supply chain.
It has been found form the case study that, the packaging cost of the Johnson Skin Care company is $0.50 for each products. It is more than labor cost for each product, which is $ 0.40. Average unit per carton for WFC, MFC and BB are such as 27, 12 and 20. In this section, the company has huge opportunity to make improvement and cut down the cost. The company can install integrated packaging system to develop standardized master carton that are packed to their maximum capacity, while products are not mixed at the same time. Although, the company needs primary investment for the installation, it will reduce the total supply chain cost and increase efficiency of packaging.
From the case study it has been found that, the company has decided to sell and distribute its products with the help of retail store for the sales of consumers. It will increase the allocation cost in supply chain. Al though, the company is still profitable by using this cost allocation framework, there is some areas that can be improved.
3.1 New framework of cost allocation
In accordance to the optimization plan proposed in the section 2.0, a new framework for cost allocation has been provided below.
Shipping cost: Furuichi and Otsuka (2015) mentioned that, if a supplier uses a specific company to distribute all its products, then the supplier possess a great bargaining power over the price of shipping. Johnson Skin Care Company has to consider their factor. It needs to develop new contract with companies that provide cheaper shipping cost or, it can negotiate rate of shipping with the current company.
Selection of delivery style: Gunasekaran et al. (2015) mentioned that, an appropriate choice of delivery system can reduce the cost of the company and increase customer satisfaction. There are various modes of delivery available for the company such as train, bus, planes and ships. Train is the most cost effective one, while plane is the fastest but expensive as well. On the other hand, ship is neither slow nor very expensive. Johnson Skin Care Company should strategically select delivery framework to reduce cost of supply chain.
The changed proposed in the current cost allocation framework will be like below
4.0 Pricing point of product
There are three types of price, which a company can use in market. They are given below in the table:
Closs and Bolumole (2015) stated that, it is a bottom-line selling approach, which only consist the cost of product manufacturing. However, labeling, packing and distribution costs are also included in it.
According to Dallmeier (2016), retail price is which end customers have to pay for purchasing a product. It is higher than cost price leaving some profit margin to the retailers. Keystone pricing is the most common method employed by retailers. In this case, price of retails are 50% higher than original cost price (Khan 2016).
In this case, an intermediary purchases products from the manufacturers (B2B) and sell them to customers (B2C). Although, intermediaries are only allowed to sale products at a fixed price, a moderately higher margin of profit has been provided to them, in order maintain relationship (Dallmeier 2016).
Table 3: Different types of pricing
(Source: created by Author)
It is essential for a company to understand that, various factors can significantly affect the price of a product. According to Bansal (2014), there are some major areas, which required to consider while setting the price of a specific product. These factors are such as level of competition in a market for a specific product, market demand, product positioning and level of disposable income of customers. If the customers have good level of disposable income and the product has good position in the market, a company can select high pricing strategy to increase its profitability in the market.
Among all the different pricing policies such as psychological pricing, penetration pricing and cost-oriented pricing, cost-plus pricing is the most commonly used pricing policy used by companies. In this pricing strategy, costs of products are determined first, and then a specific percentage of original cost is added to the sales price (Monger 2012). As the production cost and overhead cost fluctuate significantly due to different type of products, the Johnson Skin Care company should use cost-plus pricing to reduce loss of profit.
5.0 Supplier Selection Policy
In order to survive in the intensely competitive market, organizations need to realize the importance of creating supplier base, so that they can meet the requirements of products. Niine and Koppel (2014) mentioned that companies should not only consider about the development of existing supplier base, but also need to consider new suppliers. Because, new suppliers can provide benefits such as higher commitment to meet deadline and low labor cost. Bowersox et al. (2013) mentioned that development of this kind supplier base can reduce the bargaining power of suppliers. In addition, it can increase the potential on fresh and quality certified suppliers and reduce the risk of supply failure.
In order to develop such supplier base during the screening phase of suppliers, buying organizations adopt different types of assessment methods. Supplier audit program is a major example of supplier assessment methods used by companies. It helps a buyer organization to understand the capabilities of its suppliers and the nature of the organization. Cross-functional teams of buyer organization usually conduct this supplier audit program. This team includes members from different functional areas such as quality control, purchasing, logistics and manufacturing.
In order to meet the quality of products, all the materials provided by suppliers have to be evaluated consistently. It is required for all suppliers to have ISO 9000 certification (Bowersox et al. 2013).
As there are many suppliers, Johnson Skin Care company has to evaluate the cost of employing them. It includes cost materials and goods, logistics costs, ordering costs and material costs are included in it (Chopra and Meindl 2013).
Capacity and reliability
The buying company has to assess supplier’s capability. They need to determine whether the supplier can meet large order, or they need to select other suppliers to subsidize when the order is large. It includes factors such as conformance of products and lead-time (Lapinskait? and Kuckailyt? 2014).
In order to develop long-term financial relationship with suppliers, it is required examine its financial capability. Carter et al. (2017) stated that various financial ratios can help a company to determine whether suppliers can afford price of materials and labor costs to fulfill huge orders.
5.2 Monitoring Performance
After selection of the suppliers, it is required to evaluate the performance of the suppliers continuously. Heide et al. (2014) stated that, most of the companies set a performance goal for their suppliers and measure their performance against that goals. Many companies use scoreboard that contain valuable attributes for them. Based on that, companies measure the performance of suppliers and provide feedback for improvement.
5.3 Supplier Development
Hashemi et al. (2015) stated that companies needed to make investment to enhance the capabilities and performance of the suppliers. Through supplier’s development, a company can get better opportunity in cost negotiation, cost reduction, and streamline operation. It can also minimize the development of defective products from suppliers.
5.4 Suggestion for Johnson Skin Care Company
Before selecting supplier, the Johnson Skin Care Company has to strategically and carefully evaluate supplier’s statistics. After that, the company has to develop performance goals for their suppliers and measure supplier’s performance against the set goals. Depending on the performance of suppliers, management of Johnson Skin Care Company needs to provide feedback to the suppliers and encourage them to enhance their performance. The company can also invest to improve the capability and performance of the suppliers. It can enhance relationship with suppliers and help the company to get benefits such as better cost negotiation, cost reduction.
6.0 Inventory control method
It has been found that many companies focus on using high inventory to get rid of risks related with shortage of materials. However, it is a costly process. In the present world of business, the role of procurement process is to maintain continuous supply along with maximum investment on inventory (Bowersox et al. 2013). A company can use different inventory control strategy. For example, a company can maintain different levels of stock to avoid over stocking or under stocking of materials. Some specific inventory control methods have been suggested for the Johnson Skin Care Company. They are such as Two Bin method, Just-In-Time approach and Vendor managed inventory. They are discussed below:
6.1 Two Bin Method
In this method, two warehouses or locations are utilized for inventory storage. When the stock of the main warehouse is totally consumed, it is refilled with stocks from the reserve bin (Validi et al. 2015). All the reserve bins are refilled by purchasing product from suppliers. From this case study, it has been found that the company is trying to find out alternative networks related with assignment of staging warehouses to the distribution centers. Hence, Two-bin method can become useful for the company.
6.2 Just-in-Time Approach (JIT)
Chen et al. (2014) mentioned that, without any holding period or much lead time, JIT approach can help to deliver inventory to manufacturing sites within time for use. From the case study, it had been found that the new logistic manager Bob had assumed that the overall inventory turnover rate would be five per year. He also came to know that previously the company had inventory carrying cost of 18 percent based on average inventory for the year. Implementation of JIT approach can increase the inventory turnover. It in terms will reduce inventory-holding costs.
6.3 Vendor Managed Inventory
VMI is a supply chain model, where the respective buyers provide information related with level of material to the suppliers. In this case, buyers give full responsibility to supplier to maintain the desired level of inventory (Romano 2015). By implementing this model, buyers can get many benefits. They do not have to maintain significant safety stock. In addition, it can enable buyers to gain more profit, as lower inventory is required. In order to make this model more cost effective, Johnson Skin Care Company needs to implement Warehouse Management System (WMS) or Enterprise Resource Planning (ERP) system.
Packaging Cost Optimization
7.0 Network Distribution Framework
Fang et al. (2014) argued that, distribution framework is not only the steps in which materials can be moved from suppliers to manufacturers, but also includes steps to deliver finalized products to customers form warehouses. It has been found that distribution framework can directly influence the customer value and cost of supply chain. Hence, in order to reduce costs related with supply chain, the Johnson Skin Care company needs to focus on developing new distribution framework.
Yuan et al. (2015) stated that, in order to develop an appropriate distribution framework, there are some specific factors need to be considered. They are such as mode distribution, cost of transport and type of carriers. It has been found that there are mainly five modes of distribution available. They are such as air, rail, ship, motor and pipeline. It has been found that different modes of distribution have different benefits. For example, rail is most cheap and cost effective, motor is reliable, air mode is for fast and premium service, and shipping mode is used for global commerce. On the other hand, pipeline is used mainly for the distribution of fluid products.
It has been found from the case study that, the Johnson Skin Care Company mainly uses truck (motor) for product distribution. In order to increase efficiency of distribution network, the company needs to use rail and shipping carrier alongside motor carriers. In addition, the company can also use aero planes to send products swiftly to premium customers. Hence, the company needs to develop strategic plan to make effective utilization of distribution framework and reduce the cost of distribution.
7.1 Introduction of online distribution channels
Validi et al. (2015) stated that, with technological advancements, many companies are using online selling strategy to increase revenue. It has been found that major proportions of the cosmetic sales are made through online. Hence, Johnson Skin Care Company can add online distribution channel to improve its sales performance. It can provide various competitive advantage to the company such as cheaper price, customer convenience, more personalize experience and connectivity with customers from social networks.
The company has decided to provide three-day fulfillment cycle to all the three channels of distribution without any discrimination. However, the company itself has some confusion related with this practice. In order to maintain 20% of total average annual inventory in the warehouse of Johnson Skin Care Company, this three-day cycle is definitely triggering the high cost of capital. In recommendation, it can be suggested that,
- Johnson Skin Care Company should only use three-day cycle only for premium merchants that take huge amount of orders.
- For channels such as retail stores and convenience stores, Johnson Skin Care Company has to encourage them to exmine the product level in regular basis. The company has to make these stores understand that they should make new orders before they run out of products. It can help the company to cut down the inventory storing cost drastically while making equal profit at the same time.
In conclusion it can be stated that Johnson Skin Care Company is facing issues related with high cost of supply chain. It has reduced the profit margin for the organization. In order to solve reduce the cost of supply chain; the company needs implement some major strategies. The company has to make optimization of operation, strategic selection of suppliers and develop efficient inventory control method. The company also needs to think about pricing strategy and cost allocation framework to increase level of profitability level.
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