Case Study Assignment #10 - Case 10-2: Coral Drugs Question: 1. If you were in t

Question

Case Study Assignment #10 - Case 10-2:
Coral Drugs

Question:

1. If you were in the position of Shirley Black, what would you recommend to the vice president of
purchasing? Why?

2. Do you agree with the way Shirley handled the issue so far? What would you have done
differently?

Case 10–2 Coral Drugs

Shirley Black glanced at her watch. It was 1 p.m. on January the 25th, and only two hours remained before her meeting about Coral Dandruff Shampoo with the vice president of purchasing. As merchandise group coordinator at Coral’s head office in Columbus, Ohio, Shirley was trying to decide whether to recommend switching from a large shampoo manufacturer to a small local supplier.

CORAL DRUGS
Coral Drugs was founded in 1962. Since that time, the company had steadily expanded its chain of retail drug stores throughout the state. Currently, Coral operated 114 stores and planned to add an additional 8 to 10 stores over the next five years. Coral’s retail outlets sold both prescribed and over-the-counter pharmaceutical products as well as other drugstore items. This private company’s strategy was focused on the further expansion of its suc- cessful retail operations. Coral had a strong financial posi- tion and intended to pursue any opportunity that had po- tential to increase its bottom line and was related to its retail operations.

CORAL PRIVATE-LABEL PRODUCTS
One such opportunity was the development of Coral private-label products. Since 1980, the company had ag- gressively developed a line of products carrying the Coral name. Currently, Coral stocked over 200 different private- label products. Coral was proud of its ability to bring a product to its shelves that was comparable in quality to the national brands, but offered at least a 25 percent price savings to the consumer. The company was able to sell at a better price than the national brands because it was buying directly from the manufacturer and its advertising expen- ditures were significantly lower. Examples of successful products included Coral Acetaminophen Tablets and Coral Vitamin Supplements.
Coral private-label products were attractive to the company for several reasons. First, the margin on these products averaged 40 percent as compared with 25 per- cent on national brands. Also, the product line was virtu- ally hassle-free. Apart from the initial supplier approval, the sourcing agreement left the manufacturer responsible for all aspects of product development and investment. Consequently, Coral intended to pursue any growth op- portunities this private labeling offered in the future.

SOURCE SELECTION FOR PRIVATE- LABEL PRODUCTS
Coral private-label products were purchased from 26 dif- ferent suppliers. Several sourcing agreements were in contract form, while others were simply an understand- ing between Coral and the manufacturer. The process for developing a sourcing agreement began with an internally generated idea for a potential private-label product. Once the product idea was approved, Coral announced that it was accepting bids from manufacturing operations that wanted to produce the product. Coral carefully analyzed the potential suppliers to ensure that they were able to pro- vide a consistent product that was comparable in quality to the leading national brands and at a price that would provide satisfactory margins. When the bid was accepted, Coral and the manufacturing company worked together to develop the final product.

Sourcing agreements left the manufacturer responsi- ble for almost all aspects of product development. Based on specifications provided by Coral, these manufactur- ers generated the artwork for the product, designed the packaging, invested in any necessary equipment, and performed quality assurance. Once the product received final approval from Coral, the company simply placed an order for the product when stock was required. The order was then delivered FOB to Coral’s central warehouse and shipped from there to the retail stores. Consequently, this high level of supplier autonomy made annual reevaluation of the sourcing arrangements necessary.

SWITCHING THE SOURCING AGREEMENT FOR CORAL DANDRUFF SHAMPOO
In December, Shirley had reviewed the performance of the company that produced Coral Dandruff Shampoo— Twinney Inc. After several requests from Coral to improve delivery terms, Twinney had indicated that it would not alter the terms originally agreed upon. Many of Coral’s concerns were directly related to the location of Twinney’s manufacturing plant 600 miles to the east. Consequently, in early January, Coral announced that it was accepting bids on the future production of the product. A product specification document was sent to manufacturers that were known to have the capability to produce similar products. Twinney was notified prior to the announcement and was asked to submit a bid along with the others.

TWINNEY INCORPORATED
Under the current sourcing agreement, Coral had to order full skids when purchasing its private-label dandruff sham- poo from Twinney. Each skid held 4,000 units. Although the shampoo was considered an excellent product, vol- umes for the regular, fragranced, and trial-sized products averaged only about 20,000 units each annually. Shirley knew that the inventory carrying cost at Coral was around 2 percent a month, and felt that the company had too much
money tied up in such a low-volume product. Furthermore, the three- to four-week lead time required when placing an order had been causing problems. On several occasions, the Coral central warehouse had been stocked out of the products while waiting for a skid to arrive.
Shirley could not understand why a large company like Twinney would be so unwilling to accommodate Coral’s requests for improved shipping terms. Although there had never been any problems with the consistency or quality of the shampoo Coral received, Shirley Black felt that perhaps more beneficial terms could be offered by a manufacturer located closer to Coral’s warehouse. It seemed like a perfect opportunity because Twinney’s in- jection mold for the product had just broken down and the artwork was due for revision soon. The Twinney sourcing agreement was not in contract form and, therefore, Shirley Black believed Coral was not legally obligated to continue purchasing from Twinney.

GORMAN AND IRIZAWA LTD
Out of the many bids received, the most attractive terms were offered by a young local company, Gorman and Irizawa Ltd. (G & I). The bidder agreed to similar responsibilities as those in the existing Twinney agreement, as well as the same pay- ment terms of 2 percent/10, net 30, FOB Coral’s warehouse. G & I also offered several additional advantages.
The first benefit was the cost of the product. As illus- trated in Exhibit 1, G & I undercut the price Twinney was offering on all three products. This cost differential was made even more attractive by the fact that the prices quoted were for 7-ounce bottles of regular and fragranced product and 3-ounce trial-sized bottles. The leading national brand was offered in similar sizes. The existing agreement with Twinney called for the production of smaller 6-ounce and 2-ounce bottles. Coral’s retail selling price was $1.49 for the regular and fragranced shampoo and $0.89 for a trial- size bottle. Shirley believed this was an excellent opportu- nity to pass on more value to the consumer.
The second advantage was G & I’s shipping flexibility. Under the terms of the proposed agreement, the company offered next-day delivery service with no minimum order quantity. G & I was able to offer such favorable terms be- cause its manufacturing facility was located near Coral’s central warehouse.

Shirley believed this was an opportunity to support a small local company. If Coral agreed to source its dandruff shampoo from G & I, the account would be one of G & I’s largest. In a recent tour of the G & I plant, Shirley was im- pressed by the cleanliness of its manufacturing facilities; however, she could not help comparing the relatively small- scale operation to Twinney’s large shampoo factory.

EXHIBIT 1 Coral Drugs Price and Size Comparison for Coral Dandruff Shampoo

Size: Twinney: Size: Growman &Irazawa:
Regular 6oz. 0.72 7oz. 0.70

Fragrance 6oz. 0.85 7oz. 0.75

Trial 2oz. 0.47 3oz. 0.35

Explanation / Answer

1. If I were Shirley Black, I would recommend to the Vice President of purchasing to switch the sourcing agreement for Coral dandruff shampoo from Twinney Incorporated to Gorman and Irizawa Ltd. This is because of the following benefits:

a) Cost benefit: Apart from agreeing to similar responsibilities, payment terms and FOB Coral's warehouse as that of existing Twinney agreement, G & I undercut the price Twinney was offering on all three products. They quoted price for 7- ounce bottles of regular and fragnace product and 3- ounce trial sized bottles against the 6- ounce and 2-ounce size of the similar product manufactured by Twinney, while under cutting the unit price by 2 cents for regular, 10 cents for fragnance and 8 cents for trail sized bottle When compared to Twinney's unit price for similar products.

b) Shipping flexibility: As GI's manufacturing facility was located near Coral's central warehouse, the company offered next day delivery service with no minimum order quantity. This agreement would definitely lower the inventory holding cost, inventory carrying cost and stock-out cost and increase the profit margin.

2. Yes. Shirley handled the issue efficiently. Shirley requested Twinney several times to improve delivery terms before deciding to anoounce that the company was accepting new bids for future production. Twinney was also notified prior to the announcement. Shirley did try to maintain the vendor relationship by communicating with Twinney several times to let Twinney know of company's need. Shirley's inclination towards G & I is also justified on the ground of cost benefit and shipping flexibility that G & I was offering, which would impact customer service level and profit margin positively.

Before giving the entire production contract to G & I and prior to announcement of bid winner, I might consult with the Vice President of purchasing to check if it is viable to place an order to G & I to assess the service level of the young company. If the VP did agree to the proposal, I would then discuss the same with G & I.

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