Case 4-2

Eastern Pharmaceuticals Ltd.

In the afternoon of September 12, Andrew Baines, assistant purchasing manager at Eastern Pharmaceuticals Ltd.

(Eastern), was discussing the purchase of packaging materials and contract filling of tablet samples with a supplier's

representative. When the details of the packaging purchase

order were finalized, Andrew told the sales representative,

John Cao, of Lucas Paper & Box Company (Lucas), that

he would send him the purchase order for the packaging

components and 25 percent of the contract filling. John

replied that Shannon Baily, of the marketing department,

had promised him 100 percent of the contract filling. "This

is the first I've heard of that," snapped Andrew. "It's not

110 Purchasing and Supply Management

marketing's responsibility," he continued, controlling his

temper, "to decide what percentages of contract filling a

particular supplier will get. Purchasing arranges the contract filling with the suppliers that can give the best quality,

delivery, and price."

John Cao, an experienced sales representative, remained

unperturbed. He replied that he had always dealt with both

marketing and purchasing and that sometimes purchasing

was not involved at all in the projects. He said that in this

case where both marketing and purchasing were involved,

he was just keeping purchasing informed of what marketing

wanted. Andrew closed the meeting by politely telling John

that he would have to clear up the situation between the two

departments. He told John that he would let him know how

much of the contract packaging Lucas would be getting.

Andrew Baines, his boss Matt Roberts, and a senior

buyer made up the total purchasing staff at Eastern. One

of Andrew's responsibilities was to handle the purchase

of the marketing department's requirements. He also acted as liaison between the department and the production

planning, manufacturing, and packaging departments. In

recent weeks Andrew was finding the job more and more

frustrating.

EASTERN PHARMACEUTICALS

Located in Seattle, Washington, Eastern carried an extensive line of prescription and nonprescription items that

were mostly manufactured in its own plant. The company

had approximately 15,000 drugstore customers plus hospital and government accounts. Annual sales of close to

$150 million were handled by 50 sales representatives

from coast to coast. Although the nonprescription items,

known as over-the-counter (OTC) products, were promoted directly to the drug stores, most business was generated

by convincing the doctors to prescribe Eastern's products

for their patients. No selling or advertising was directed at

the consumer.

The company's sales strategy was that Eastern sales

representatives would give samples to a doctor after getting a verbal promise to prescribe. These samples would

be used to start the patient on an Eastern product, and

the doctor would write a prescription for the patient to

pick up at the drugstore. With a large number of similar

products on the market, it was a difficult marketing problem to keep Eastern's brand name in the doctor's mind

days or weeks after the sales representative's visit. To

help solve this problem, sales representatives asked the

doctors to sign forms requesting additional samples at

specific intervals.

The sales and marketing department had been recently

reorganized, and the two new people, Shannon Bailey,

sales promotion manager, and John Slaughter, advertising

manager, were understandably anxious to do a good job.

Both had made a lot of progress in working with John Cao,

standardizing the samples to be used for sales promotions

and advertising mailings. Essentially, both samples were

now the same; the only difference was that the advertising

sample was enclosed in an outer mailer to be sent to the

doctor.

THE FILLING CONTRACT

The packaging contract under discussion totaled $88,000.

In the past year, Lucas had sold $80,000 worth of materials annually to Eastern. Lucas's annual sales were

$32 million.

John Cao had designed an attractive new style of sample. Basically, it was a folded card holding strips of tablets

that could be pushed through one at a time, as required by

the patient. This one idea was to be used in the near future

to sample several other tablet products. John had developed the idea for marketing, expecting that he would get

both the printing and contract filling.

Although Eastern did 90 percent of their manufacturing

and packaging, they did not have the equipment to heat

seal the strip into the folded cards. When goods came in

from a contract packager such as Lucas, they were held in

inventory until required by marketing.

THE RELATIONSHIP BETWEEN

MARKETING AND PURCHASING

While Shannon and John had been able to work well together, they were having their difficulties in getting the cooperation of other departments involved. Frequent instances of sample mailings being late or sales representatives

being out of stock continued to plague the success of their

program. Delays had been caused by late ordering of components from outside suppliers, shortages of tablets, and

mailing lists being incorrectly printed. In their attempts to

remedy the situation, Shannon and John had trampled on

a few toes. During attempts to investigate the causes for

these delays, the vice president of operations discovered

that there were usually good reasons offered by the departments involved.

Purchasing, manufacturing, and information systems

pointed out that they could not drop their usual work

"every time marketing wanted something in a rush."

The feeling expressed by the production planner was

typical of most department managers: "It is fine to get

Chapter 4 Supply Processes and Technology 111

out the samples but rather pointless if we are running

out of finished product in the meantime. Some of those

unusual sample cartons slow down production up to

50 percent."

While it was part of Andrew's job to coordinate marketing's sample requirements, he was not making much

progress. His attempts to get each department to cooperate met with the usual arguments that marketing was only

one department and had to wait its turn. Shannon and John

at times grew impatient with Andrew's efforts, and they

started to go directly to each department manager.

Andrew felt that the action taken by Shannon telling the supplier how much contract filling business he

would get was the last straw. With this in mind, he went

to see Matt Roberts to try to get a policy statement on

the matter. Andrew wanted to know where the line was

drawn between purchasing's and marketing's responsibility in matters dealing with company suppliers.

Matt explained that, because the marketing promotion expenditure totaled $34 million or 22 percent of

sales, Eastern, like most other companies in the industry, faced similar purchasing-marketing problems. If

marketing managers were responsible for their budgets,

they had the right to spend $1 each for 10,000 items, or

if they wanted, they could buy 5,000 items for $2 each

and still stay within their budget. It was a marketing

decision whether they were getting better results from

the $1 or $2 item. For these items, purchasing merely

produced a purchase order to confirm the deal already

made by marketing with the supplier. The policy applied to nonproduction items, such as calendars, letter

openers, diet sheets, patient history cards for doctors,

or displays and posters for drugstores. In contrast, production and inventory purchases had last year reached

20 percent of sales revenues.

However, Matt pointed out that final selection of

sources for any purchased items that had to be packaged by the plant had always been the responsibility of

the purchasing department. In this particular case, there

was still a significant inventory of old style samples in

the building, which marketing had not considered when

they promised John Cao 100 percent of the contract filling. Andrew felt that placing all the contract filling right

away would build up the stock of samples unnecessarily. Besides this, he had negotiated a better price from

another reliable supplier, Sheppard Packaging, and felt

that he would give the balance of 75 percent to them.

Marketing, Matt Roberts explained, was only charged

for samples as they were shipped to sales representatives

or sent out to doctors. Therefore, marketing was not too

concerned about inventory levels as long as there were

no shortages. Packaging components and bulk products

held in inventory were not segregated from trade sizes in

the warehouse or in financial reports. Only the finished

samples were given a special account number so that the

marketing budget could be debited as the samples were

sent out.

NEXT STEPS

Matt Roberts suggested that Andrew set up a meeting

the following week with Shannon and John so that each

department could state its case and settle on a process

for managing marketing-related purchases. Andrew

agreed and replied: "I understand that marketing wants

things to happen quickly, but we need to follow sound

purchasing practices. We should listen to their suggestions regarding supplier selectionafter all it is their

budgetbut the final decision should rest with purchasing. We have the responsibility to see that the greatest

possible value is received for every dollar spent. How

do we know prices are reasonable without getting other

quotations?"