Fanshawe Drugs

Linda Howard glanced at her watch. It was 1 pm on January the 25^th, and only two hours remained before her meeting about Fanshawe Toothpaste with the vice president of purchasing. As merchandise group coordinator at Fanshawe's head office in London, Ontario, Linda was trying to decide whether to recommend switching from a large toothpaste manufacturer to a small local supplier.

FANSHAWE DRUGS

Fanshawe Drugs was founded in 1972. Since that time, the company had steadily expanded its chain of retail drug stores throughout the province. Currently, Fanshawe operated 114 stores and planned to add an additional 8 to 10 stores over the next five years. Fanshawe's retail outlets sold both prescribed and over-the-counter pharmaceutical products as well as other drugstore items. This private company's strategy was focused on the further expansion of its successful retail operations. Fanshawe had a strong financial position and intended to pursue any opportunity that had potential to increase its bottom line and was related to its retail operations.

FANSHAWE PRIVATE-LABEL PRODUCTS

One such opportunity was the development of Fanshawe private-label products. Since 1980, the company had aggressively developed a line of products carrying the Fanshawe name. Currently, Fanshawe stocked over 200 different private-label products. Fanshawe was proud of its ability to bring a product to its shelves that was comparable in quality to the national brands, but offered at least a 25 percent price savings to the consumer. The company was able to sell at a better price than the national brands because it was buying directly from the manufacturer and its advertising expenditures were significantly lower. Examples of successful products included Fanshawe Acetaminophen Tablets and Fanshawe Vitamin Supplements.

Fanshawe private-label products were attractive to the company for several reasons. First, the margin on these products averaged 40 percent as compared with 25 percent on national brands. Also, the product line was virtually hassle-free. Apart from the initial supplier approval, the sourcing agreement left the manufacturer responsible for all aspects of product development and investment. Consequently, Fanshawe intended to pursue any growth opportunities this private labeling offered in the future.

SOURCE SELECTION FOR PRIVATE-LABEL PRODUCTS

Fanshawe private-label products were purchased from 26 different suppliers. Several sourcing agreements were in contract form, while others were simply an understanding between Fanshawe and the manufacturer.The process for developing a sourcing agreement began with an internally generated idea for a potential private-label product. Once the product idea was approved, Fanshawe announced that it was accepting bids from manufacturing operations that wanted to produce the product. Fanshawe carefully analyzed the potential supplier to ensure that they were able to provide a consistent product that was comparable in quality to the leading national brands and at a price that would provide satisfactory margins. When the bid was accepted, Fanshawe and the manufacturing company worked together to develop the final product.

Sourcing agreements left the manufacturer responsible for almost all aspects of product development.Based on specifications provided by Fanshawe, these manufacturers generated the artwork for the product, designed the packaging, invested in any necessary equipment, and performed quality assurance.Once the product received final approval from Fanshawe, the company simply placed an order for the product when stock was required. The order was then delivered FOB to Fanshawe's central warehouse and shipped from there to the retail stores. Consequently, this high level of supplier autonomy made annual reevaluation of the sourcing arrangements necessary.

SWITCHING THE SOURCING AGREEMENT FOR FANSHAWE TOOTHPASTE

In December, Linda had reviewed the performance of the company that produced Fanshawe Toothpaste - Denomme Inc. After several requests from Fanshawe to improve delivery terms, Denomme had indicated that it would not alter the terms originally agreed upon. Many of Fanshawe's concerns were directly related to the location of Denomme's manufacturing plant 600 miles to the east. Consequently, in early January, Fanshawe announced that it was accepting bids on the future production of the product. A product specification document was sent to manufacturers that were known to have the capability to produce similar products. Denomme was notified prior to the announcement and was asked to submit a bid along with the others.

DENOMME INCORPORATED

Under the current sourcing agreement, Fanshawe had to order full skids when purchasing its private label toothpaste from Denomme. Each skid held 4,000 units. Although the toothpaste was considered an excellent product, volumes for the regular multi-action, regular multi-action plus whitening, and trial-sized products averaged only about 20,000 units each annually. Linda knew that the inventory carrying cost at Fanshawe was around 2 percent a month, and felt that the company had too much money tied up in such a low-volume product. Furthermore, the three to four-week lead time required when placing an order had been causing problems. On several occasions, the Fanshawe central warehouse had been stocked out of the products while waiting for more skids to arrive.

Linda could not understand why a large company like Denomme would be so unwilling to accommodate Fanshawe's request for improved shipping terms. Although there had never been any problems with the consistency or quality of the toothpaste Fanshawe received, Linda Howard felt that perhaps more beneficial terms could be offered by a manufacturer located closer to Fanshawe's warehouse. It seemed like a perfect opportunity because Denomme's injection mold for the product had just broken down and the artwork was due for revision soon. The Denomme sourcing agreement was not in contract form and, therefore, Linda Howard believed Fanshawe was not legally obligated to continue purchasing from Denomme.

RICHARDSON LTD

Out of the many bids received, the most attractive terms were offered by a young local company, Richardson Ltd. The bidder agreed to similar responsibilities as those in the existing Denomme agreement, as well as the same payment terms of 2 percent/10, net 30, FOB Fanshawe's warehouse. Richardson also offered several additional advantages.

The first benefit was the cost of the product. As illustrated in Exhibit 1, Richardson undercut the price Denomme was offering on all three products. This cost differential was made even more attractive by the fact that the prices quoted were for 140 mL tubes of regular and regular plus whitening product and 22 mL trial-sized tubes. The leading national brand was offered in similar sizes. The existing agreement with Denomme called for the production of smaller 130ml and 22ml tubes. Fanshawe's retail selling price was $2.52 for the regular multi action, $4.22 for the regular multi-action plus Whitening and $1.50 a trial sized tube. Linda believed this was an excellent opportunity to pass on more value to the consumer.

The second advantage was Richardson's shipping flexibility. Under the terms of the proposed agreement, the company offered next-day delivery service with no minimum order quantity, Richardson was able to offer such favourable terms because its manufacturing facility was located near Fanshawe's central warehouse.

Fanshawe believed this was an opportunity to support a small local company. If Fanshawe agreed to source its Toothpaste from Richardson, the account would be one of Richardson's largest. In a recent tour of Richardson, Linda was impressed by the cleanliness of its manufacturing facilities; however, she could not help comparing the relatively small scale operation to Denomme's large personal care products factory.

LINDA'S RECOMMENDATION

Linda had discussed the toothpaste sourcing issue with the vice president of purchasing in December and knew he was expecting a recommendation from her at the January 25^th meeting at 3 p.m. She was well aware that Fanshawe Drugs had a reputation for long-term relationships with its private-label product suppliers. She was, therefore, still unsure about which supplier to recommend for Fanshawe Toothpaste.

EXHIBIT 1 Fanshawe Drugs Price and Size Comparison for Fanshawe Toothpaste

	Size	Denomme	Size	Richardson
Regular Multi-Action	130 ml	$1.03	140 ml	$0.98
Regular Multi-Action plus Whitening	130 ml	$2.14	140 ml	$2.04
Trial	18 ml	$0.80	22 ml	$0.70

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