GB570 Unit 9 Chain Redesign Proposal Example

Shipping Direct to Two Chains: A Unit 9 Chain Redesign Proposal for an Olive Oil Brand

[Student Name]

Purdue University Global

GB570: Managing the Value Chain

Unit 9 Chain Redesign Proposal

[Instructor Name]

[Date]

The company, its customers, the distributor and every figure are composite and illustrative; the frameworks and sources cited are real.

Summary for the Leadership Team

Alder Quay should ship directly to the distribution centers of its two largest grocery customers, Lakeshore Market and Prairie Fresh, and stop routing their orders through its regional distributor. After freight, retailer deductions, financing, a coordinator, a shelf-check broker and a price concession the chains will expect, the change would add about $97,000 a year, about 20 cents a bottle. The main risk is that the distributor, which would still carry 74 percent of Alder Quay's volume, gives the brand less attention in its other accounts. The proposal therefore starts with one chain for six months and states the results needed to continue.

The Current Chain

Alder Quay sells about 1.9 million bottles a year. The two chains buy about 494,000 of them, 26 percent of volume, all through a distributor based in Joliet. The distributor buys at $9.80 and sells to the chains at $11.30. Rosenbloom (2013) describes a channel member's work as a set of flows, of product, ownership, information and payment, and the distributor's flows for these two accounts are listed below, because a redesign that assumes the distributor does nothing usually fails.

Storage. It holds about three weeks of Alder Quay stock in its warehouse.

Delivery. It delivers mixed loads to the chains' distribution centers twice a week, combining Alder Quay with other suppliers' products.

Ordering and invoicing. It receives the chains' orders through electronic data interchange and invoices them.

Shelf checks. Its sales representatives visit stores to check facings, fix shelf tags and report out-of-stocks.

Credit. It pays Alder Quay in 21 days and waits about 45 days for the chains to pay it.

What the Redesign Changes

Each function goes to one of three places. Two move to Alder Quay: delivery, which becomes direct full-truckload shipments from its Chicago plant to the two distribution centers, and ordering and invoicing, which require Alder Quay to set up its own electronic ordering connection and hire a logistics coordinator. Shelf checks go to a food broker, which already visits both chains' stores for other suppliers and would charge by the bottle. Storage largely disappears, because both chains run their own distribution centers and Alder Quay already holds finished stock at its plant. Credit moves to Alder Quay, which would now wait about 45 days for payment.

Christopher (2016) describes the gain from removing an intermediary as real only when its functions can be absorbed more cheaply elsewhere or removed. The analysis below tests that function by function.

Costing

The distributor's margin on the two chains totals about $741,000 a year. Against it, the redesign adds the following costs.

Direct freight. Full-truckload shipments to two distribution centers would cost about $0.34 a bottle, about $168,000 a year. Glass makes olive oil heavy to ship, which is why this is the largest new cost.

Retailer deductions and chargebacks. Chains deduct fees from supplier invoices for late deliveries, labeling errors and promotional allowances. The distributor absorbs these today. At about $0.16 a bottle, they would cost about $79,000 a year.

Financing the longer receivable. Waiting 45 days for the chains instead of 21 for the distributor, on larger invoices, ties up about $385,000 more in receivables. At Alder Quay's 9 percent cost of capital that costs about $35,000 a year, roughly $0.07 a bottle.

Coordinator and electronic ordering. A logistics coordinator and the ordering connection would cost about $96,000 a year.

Food broker. Shelf checks at about $0.14 a bottle would cost about $69,000 a year.

These costs total about $447,000, leaving about $294,000. One further cost must be included. Both chains' buyers have said that if they buy direct, they expect part of the distributor's margin. A concession of $0.40 a bottle, about $198,000 a year, is the figure used here. The net gain is therefore about $97,000 a year, or about 20 cents a bottle.

Of the $741,000 the distributor keeps, about one dollar in eight would reach Alder Quay after the redesign; the rest pays for the work the distributor was doing.

Risk Register

The distributor gives the brand less attention elsewhere. This is the most serious risk. If the distributor's representatives stopped promoting Alder Quay in its other accounts, which buy about 1.4 million bottles a year, a 5 percent volume loss in those accounts would cost about $137,000 in operating profit at $1.95 a bottle, more than the redesign's gain. Likelihood is moderate, because the distributor earns a large margin on Alder Quay in those accounts and would lose it if the brand left. Alder Quay should meet the distributor before the pilot and explain the change as limited to two chains with their own distribution centers.

Service-level fines. Both chains fine suppliers that miss delivery windows or fill rates. Alder Quay has never shipped to a distribution center directly, and early errors are likely. The deduction estimate above assumes some of these.

Ordering errors. A new electronic ordering connection could produce duplicate or missed orders in its first weeks. Testing with each chain before the switch reduces this risk.

Implementation

The redesign would start with Prairie Fresh, the smaller of the two chains, for six months. Alder Quay would proceed to Lakeshore Market only if three conditions held at the end of the pilot: a fill rate of at least 97 percent, deductions at or below $0.18 a bottle, and no measurable loss of volume in the distributor's other accounts. Lee (2004) argues that a supply chain change should be judged by whether it keeps the chain agile and aligned with partners' interests as well as by its cost, and the third condition tests alignment directly. If the pilot passes, Lakeshore Market would follow on the same terms, with its own ordering test and a three-month review.

What Would Make This a Mistake

The redesign would be a mistake if the distributor's goodwill is worth more than $97,000 a year. Alder Quay would have to believe that the distributor will not retaliate, that the chains will accept a concession of about $0.40 rather than more, and that the brand can learn to meet distribution center standards within six months. If any of those beliefs proves wrong in the pilot, the right response is to return Prairie Fresh to the distributor and accept the current chain.

References

Christopher, M. (2016). Logistics and supply chain management (5th ed.). Pearson.

Lee, H. L. (2004). The triple-A supply chain. Harvard Business Review, 82(10), 102-112.

Rosenbloom, B. (2013). Marketing channels: A management view (8th ed.). South-Western Cengage Learning.