CASE 11 Supply Chain Management at Dream Beauty Company Dream Beauty (DB) Company is a manufacturer of consumer beauty supplies and cosmetics. Based out of Money City. Nevada. The company services its customers across the United States. Recently, a supply chain expert was elected to the board of direetors. With his insight into supply chain operations, heightened attention was turned toward that area. The cost in this area has been increasing, and management became very concerned about the issue. The company annual sales reached $130 million for the first time since inception. Management believed that some of the increase in supply chain costs may be attributed to additional sales, but they were confldent that other factors existed that needed to be addressed. The situation had management's full attention, especially since supply chain costs (and savings for that matter) flow directly to the bottom line. DB supplies its products through three distinct channels: retail stores (direct), convenience stores, and mass merchants. Each channel is considered an independent profit center with full financial responsibilities for ineome statenent and balance sheet. From DB sales, retail accounted for 50 percent, convenienee stores for 30 percent, while mass merchants picked up the remaining sales. Cost of goods sold accounted for 40 percent of sales. All three channels seem to be profltable, and contribute equally to DB, according to the company's cost accountant. The order fulfllment cycle at DB consists of four areas: The total order futillment averages three days. All orders are processed through a central location and delivered from distribution ceaters located across the United States. Usually retail and convenience store orders are shipped unlabeled on standard nonmixed pallets. Mass The total order fulfillment averages three days. All orders are processed through a eentral location and delivered from distribution centers located across the United States. Usually retail and convenience store orders are shipped unlabeled on standard nonmixed pallets. Mass merchants, on the other hand, have placed a lot of pressure on DB and want the company to take an active role in helping them manage their inventory. To accommodate this channel, DB has assumed some of the jobbers' functions in the store and started labeling the orders for mass merchants. To accomplish that, the firm recently purchased a labeling machine that can process labels at a speed of 30 tabels/second. The machine's historieal value was determined to be $10 million. The company usually depreciates similar equipment on a straight-line basis over a period of five years. The firm has a discount policy for all three channels that it services. The net is due in 30 days. While this policy is explicitly Pase 455 stated on all DR's invoices, retail stores are the only ones that pay according to invoice terms. Mass merchants usually pay within is days, while convenience stores usually pay within 45 days. The firm's cost accountant reported that all sales were sold on credit. Cash sales and C.O.D, sales were rare; therefore, they can be ignored for the purpose of this analysis. DB does not engage in any barter transactions. The firm received a total of 3,600 orders. Retail orders amounted to 1,000; convenience stores to 2,500; and mass merchants had 100 orders. Each order has a corresponding delivery that is usually completed within the three-day fulfillment cycle. The firm's practice has been to allocate logisties related costs to its three channels based on their relative percentage of sales volume. The orders were shipped in 2,000 packages, with retail accounting for 800 packages, convenience stores for 1,100 packages, and mass merchants for 100 packages. Packaging cost is estimated to be the same regardless of size. To serviee these orders, the firm has maintained an inventory safety stock so that it can meet the level of service that it promises its customers (the threeday fulfilment cyele). It is estimated that the firm holds an average of 90 days' inventory for retail, 60 days' inventory for convenience stores, and 40 days' inventory for mass merehants. The firm's cost accountant estimated the total carrying eosts of inventory to be approximately 15 percent of total average annual inventory. These costs also include the cost of capital. The firm's customer base in convenience stores includes 13 different stores located in major U.S. eities. Table 1 provides a breakdown of sales per store, as well as the number of orders, and packages for each store. Historically, DB has offered its customers a level of service that is of the highest standards. One of the fulfiltment manaeers has been quoted, "We do not diseriminate between customers, our 3-day futfiltment eycle in my opinion is becoming an industry benchmark, and I like it that way. I do not think that our strategy should change in that regard." The board has some second thoughts about this strateey, and what type of value-add it is generating to the company On your first day, you get accustomed to your surroundines, and you become familiar with the computer system. On your second day, the vice preadent for supply chain (and your hirine manaeer) comes up to you. He proceeds to brief you on a high-level meetine that he just concluded with the top brass at the company. He states that manapement wants to know why supply chain costs seem skewed, as well as a full analysis of the three loeistical channels that the company employn. Management would like you to answer the followine questions. Questions Rare 48 1. Analyze the way that current costs are beine allocated, what potential chanpes can you recommend to make the nstem more effeient and more accurate? 2. What is the profitability level and return on investment by distribution chansel, under both the current and the recommended allocations? 3. What are your recommendations regardine the company policy of offerine all its customers the same service level (threeday fulfilment cycle)? Note: The company's cost of capital for both borrowing and Iending can be estimated at 9 percent Ienore tax effects on all transactions