Case: Alternative Distribution for SSI
Judith M. Whipple
Sugar Sweets, Inc. (SSI), was considering ways to increase market coverage and sales volume on its candy and snack products. Historically, the majority of SSI products were sold to consumers through various grocery and convenience stores. Vending machines and institutional sales, such as airports, represent the remaining consumer market segments. The selling environment for candy and snack foods was becoming increasingly competitive and traditional channels of distribution were being distorted, especially in the grocery and convenience trade. Grocery and convenience stores were traditionally serviced through distributors known as candy and tobacco jobbers. These distributors purchased SSI products in large quantities and then sold them to retail stores for sale to consumers.
The number of candy and tobacco jobbers was decreasing, which was distorting the traditional distribution channel. Two factors were causing this distortion. First, the wholesaler and distributor industry in general was going through consolidation as large distributors continued to get larger and more profitable, while smaller and less profitable distributors either were bought up or closed.
Second, the popularity of warehouse club stores threatened candy and tobacco jobbers. Small mom-and-pop grocery or convenience stores were able to purchase many products they needed at these warehouse clubs at the same price or less than what the distributors offered. Furthermore, the warehouse clubs provided a one-stop shopping experience so that the grocery stores could purchase a wider range of products at the club store than was sold by any one candy and tobacco distributor.
For example, a club store may offer a narrow selection of the most popular SSI products as well as its competitor's products, while an individual distributor may handle SSI products exclusively. While SSI encouraged grocery and convenience stores to carry its products, regardless of whether these stores purchase products from distributors or club stores, there was a concern about how the products were serviced. Distributors provide a significant benefit in that they carry a broader line of SSI products than most club stores. Also, some candy and tobacco jobbers visit their retail customers regularly to ensure the stores remain stocked with a large variety of fresh product. In this sense, candy and tobacco jobbers provided a marketing service for SSI that is not achieved with club stores.
As such, SSI began looking for an alternative channel system that would not only increase market coverage in light of the new competitive environment but also provide the important marketing service to ensure a large variety of fresh product available for consumers. To accomplish this, SSI questioned the reliance on its traditional marketing channel, as well as the typical outlets through which its products were sold. Andy Joslin, the vice president of integrated logistics, had an idea. Andy began to focus on new retail outlets where SSI products could be sold and how these sales could be uniquely managed via a new channel arrangement. It was determined that direct store delivery of SSI products could be handled by using telemarketing for order processing and small package delivery.
The notion was that any retail outlet that had sufficient counter space and high customer traffic was likely to sell high-impulse snack items such as SSI products. Examples of potential retail outlets that traditionally did not carry snack items included dry cleaners, barbers and beauty shops, hardware stores, and drinking establishments. The concept is summarized in Table 1. The alternative distribution plan offers various benefits. First, it is a unique selling concept in that it provides retailers a way to increase their business through incremental sales of snack products with little risk of cannibalization by other retail outlets due to the impulse nature of the product.
Furthermore, retailers are not required to make a significant capital investment to try the concept and there is little risk to the retailer if the plan fails. SSI will provide countertop units or shelving to display the products for sale and will suggest pricing for maximum sales volume and profit. The alternative distribution concept benefits SSI as well by providing market growth and exposing its products to a wider range of customers. Also, SSI will have direct contact with retailers, providing a great opportunity for testing and tracking new products while ensuring timely delivery.
One potential drawback is that the retailers may feel the incremental revenue received is insufficient, which will dissuade product reordering. Also, retailers may have pilferage problems that would discourage their participation. Finally, the arrangements could threaten candy and tobacco jobbers that rely on similar retail accounts. Resentment from candy and tobacco jobbers could potentially result in decreased service to grocery and convenience stores. From initial interviews with target retailers, SSI became convinced the alternative distribution concept had merit.
The next step was to evaluate whether the idea was a viable business decision in terms of retail interest versus actual participation. An internal operating plan for managing the alternative distribution program would also need to be devised to identify and determine the internal costs and potential profit. Retail Interest. The research summarized in Table 2 illustrates important considerations for retail sales.
Fifteen types of retail stores were targeted for participation, and 30 product lines were considered for distribution. Estimates concerning expected retail participation and sales were a critical part of business viability. To start, SSI estimated it could contact only 20 percent of all target retailers.
The remaining retailers would be approached after a 1-year test period if the alternative distribution program was successful. Two types of display units were designed as well as two reorder packages. An initial order would include two boxes shrink-wrapped together. One box would hold the product and the other would hold the display unit.
Table 3 provides display and product package characteristics. Reorder packs would contain the same product weight and units as shown for the initial order. Operating Procedures. Two logistics networks are under consideration for the new channel. Both networks facilitate direct retail customer contact: no distributors are included in the channel. One network uses three distribution centers while the other uses four. Service for the first network is estimated at 2 to 4 days, with some outlying areas serviced in 5 days. Service through the second network is estimated at 1 to 3 days and to outlying areas in 4 days.
The number of outlying areas is reduced under the second network. Table 4 compares the costs of both networks. The information flow would start with order entry at the telemarketing department. Retail orders would be transmitted to the appropriate distribution center and compiled each night. Orders would be picked and packed, then delivery would be arranged based on the aforementioned service levels. Summary. Before SSI can determine whether the alternative distribution concept should be initiated, it must analyze the information gathered and project the potential sales and profits. Profits must be determined for SSI as well as for the retail customers.
If retailers do not make sufficient incremental profit, it is unlikely they will continue participating in the plan. A team has been assigned to perform the data analysis. Andy Joslin has identified five questions he feels are critical for the team to analyze. These questions are provided below. Questions
1. Determine the total number of retailers in the program initially as well as after the trial period.
2. Determine what the average retailer will sell on a daily basis as well as annually. Provide sales in terms of unit and dollar amounts. (Assume 260 business days per year, with 5 business days each week.)
3. Translate the annual sales for an average retailer into the number of large packs that retailers will order per year. Repeat for the small pack order. (Round if necessary.) Include the initial order in the calculation.
4. SSI would like to determine its potential sales for the first year on the basis of the information in question 3. However, there is some concern that the estimate of average retail sales is too high. SSI assumes only 40 percent of the participating retailers will actually achieve the average sales and reorders (this group is designated as high performers). Twenty percent of the retailers are expected to have medium performance success and will only sell/reorder 75 percent of the average suggested order. Low-performing retailers represent the remaining 40 percent and will achieve half the sales/reorder expected on average. Calculate the orders (separate initial and reorder quantities) for the 6-month trial period if 45 percent of retailers exclusively order/reorder large packs and the remaining retailers exclusively order/reorder small packs. Calculate the second 6 months accounting for the dropout. (Round if necessary.) Assume the "performer" ratios remain the same after the trial period (i.e., 40 percent are average performers, 20 percent sell 75 percent of the average, and 40 percent sell 50 percent of the average.)
5. Assume retailers pay $205 for a large pack (initial or reorder) and $115 for a small pack. On the basis of the first year's sales calculated in question 4, determine the profit to SSI if three distribution centers are used. Repeat for the four-distribution center network. Which network, if either, should be used? What factor(s) aside from cost/profit might influence the network decision?