Clearwater manufactures a wide range of small household appliances, such as coffee makers, can openers, microwave and toaster ovens, irons and ironing boards. In 50 years of existence, it has prospered and established a well-respected brand name. Business has been good - at least up to now. Recent changes in methods of retailing require Clearwater to alter significantly its way of doing business. Traditionally, Clearwater has supplied retailers such as department stores, hardware stores, and discount stores. They now are suffering declining sales because giant category retailers like Home Depot, Canadian Tire, and Wal-Mart dominate the market. These "power retailers" use sophisticated information and inventory management. Their finely tuned selections and competitive pricing crowd out weaker retailers. The forecast is that category retailers will continue gaining market share.

So powerful have category retailers become that they tell even the largest and most powerful manufacturers what goods to make, in what colours and sizes, and how much to ship and when. In fact, they dictate practically all terms of business with their suppliers. Some category retailers even charge the manufacturers for shipment errors. They constantly squeeze costs; for example, some have operating and selling expenses as low as 15 percent of sales, compared to 28 percent for traditional department stores. The difference is even greater than these 13 percentage points, as the sales prices are about 5 percent lower for the category retailers than for department stores.

In order to survive, Clearwater must supply category stores; to be a supplier, Clearwater must tailor its products to please individual category retailers and meet high standards for on time, defect-free merchandise. However, Clearwater wants to preserve its brand name "Clearwater" instead of merely manufacturing store brands. Supplying category retailers is, for Clearwater, only a coping strategy. It recognizes that it needs to supply the category retailers, but it also recognizes that to survive, Clearwater must have a separate and strong identity.

The management team developed a new strategy. In formulating it, they sought substantial input from all parts of Clearwater. As well, buyers and executives from three of the largest category retailers provided insights about what changes would be required to meet their needs. The result is the following internal statement, endorsed by the board of directors.

Tactics for Coping With Category Retailers

• Protect our brands.If customers ask for our products by name, the category retailers are more likely to stock our products. Consequently, we must advertise, and not merely depend on the category retailers for exposure.
• Customize.Meet customer requirements - whether directed by category retailer or inferred by customer.
• Innovate constantly.Non-distinguishable products are vulnerable because category retailers can readily replace suppliers or contract for the manufacture of their own brands.
• Organize around the category retailer.The organization will reorganize into multi-disciplinary teams, each of which will serve the largest category retailers.
• Invest in technology.The category retailers demand the latest information technology to ensure that the right products arrive on the shelves at the right time.
• Cut the fat.If we do not constantly reduce our costs and pass the savings on to the category retailers, they will find manufacturers that can and do.

You, as the vice-president controller, with the management team, have been fully involved in formulating the strategy by which to become a profitable supplier to category retailers. You are now to develop an information system for planning (i.e., budgeting one to three years into the future) and monitoring the strategy. This information is to be incorporated into the monthly cost of quality report, which you are also to review and make changes to in order to improve its functionality, as necessary.

Cost of Quality Report

• Prevention
• Quality engineering
• Receiving inspection
• Quality training
• Appraisal
• Product inspection
• Internal Failures
• Scrap
• Rework
• External Failures
• Net cost of returned products

The cost of quality report is compiled monthly by the production vice-president and one of the production scheduling engineers, using estimates based on this experience. Separate tracking and budgeting do not occur for these costs. The production vice-president is responsible for quality, but many of her subordinates are in better positions for ensuring it.

Required

Using the case analysis framework as discussed in-class, report your findings to the management committee. Please provide your findings in the form of a memo within the context of your role at Clearwater Small Appliances.