IBM1003 - PROCUREMENT - Final Project Top Value Groceries, is a small but growing grocery chain, operating 10 stores in central Ontario. Top Value was started by two brothers who moved to Canada from Bulgaria in 2008. Their family owned and operated a chain of grocery stores in their homeland and from an early age they had worked in the family business. As new immigrants from an entrepreneurial family they quickly applied their experience and opened their first grocery store in their adopted country in 2009 and over the last decade had expanded operations to 10 stores. From their head office and warehouse in Kitchener Ontario their strategy was to build small scale (approximately 5,000 square feet) grocery stores North of Kitchener to serve customers in smaller rural areas with populations of 5,000 people. Their stores were usually located in small towns, in the centre of a catchment area where their customers would have no more than a 20-minute drive to get their groceries. Although they have an advantage being close to their customers, they still have competitors who operate comparatively small scale stores within driving distance of these small communities that are owned by larger, national grocery conglomerates. Value Mart (owned by Loblaws) and Food Land (owned by Sobeys) are two examples of branded stores, owned by these large chains, that operate in some rural towns which give consumers in these areas shopping choices. The grocery business is a "volume game". This means that profits are made on the total quantity of groceries you sell and your sales depend on having the right products (the products your customers want and need), stocked on the shelves at the right time and at the price customers are willing to pay. Most importantly, these products must "turnover". Products with a rapid turnover, bought by customers regularly make efficient use of expensive shelf space, which translates into steady sales and profits. The grocery customers of today are very "value and price" oriented and can easily compare prices among the grocery chains in a variety of ways. Most customers receive weekly advertising "flyers" in the mail announcing certain products that are discounted. This is especially important in rural areas. Consumers can also shop on-line, looking for discounts from producers and the grocery chains themselves. Moreover, grocery stores operate on very thin margins (around 3%). Consequently, there is limited room for prices that are higher than what a competitor may offer. Of course, being "local" with friendly and helpful employees is important to customers, but even these aspects of "service" are not as important as the prices consumers must pay for their groceries. Boris and Sergi are very astute owners but face several competitive challenges in operating their small chain of grocery stores. Their stores are all located approximately 50 kilometers from their warehouse in Kitchener and each store is about the same distance from the other. Their warehouse is also small by grocery standards, at 20,000 square feet. Each store has a very small stock room in which to receive regular shipments of goods which must be unpacked and moved to the shelves within hours of their delivery. However, as with any small business, especially businesses with the competitive pressures explained above, Top Value faces many challenges that restrict their ability to make a profit. One of their reasonably popular products, available in several of their stores, has become a problem. They have hired your team of purchasing consultants to help them address the issues they face. IBM1003- PROCUREMENT - Final Project -cont'd Christie's Crackers a major snack food brand offers a product line that is a mainstay of most Canadian households. The product is however not considered as an "essential" food item and is usually purchased for occasional consumption. Consequently, the product may be purchased once or twice a month (at most) and often at longer intervals. These products have a six (6) month "shelf life", as stated on the packaging. As one of the major snack foods purchased by consumers, this product must always be available for sale especially around holiday periods when sales of these items increase significantly. The average purchase that Top Value Grocers makes every two months is 80 cases of the Christie branded "Wheat Thins" - now considered a healthier choice in this food segment. This purchase is closely monitored so as not to hold more than 2 months inventory in the Kitchener warehouse. Each case contains 10 boxes of crackers. A box of Wheat Thins sells for $2.49 at a large food chain like Loblaws. Top Value usually offers the same product for $2.65 (regular price) and $2.55 on sale. This difference in pricing is justified given Top Value's operational costs (labour and overhead etc.), proximity to the customer, the cost of shipping and the cost of holding inventory at its warehouse. The direct cost from Christie to the wholesaler from whom Top Value purchases these crackers is $12.80/case. Wholesaler's usually need 30-40% over and above the price they pay a producer of a food product to cover their operating costs and overhead. Taking into consideration the wholesaler's cost and Top Value's current level of purchase, the wholesale price of a case of 10 crackers to True Value is $18.00, including delivery to the warehouse in Kitchener. This pricing still affords the smaller grocery chain some room to cover its own costs and make a profit at their current selling prices. However, the problem that has arisen for Top Value is that Christie's parent company (Nabisco) is "restructuring" and has raised the price of a case of Wheat Thin crackers to the wholesaler by $2.00/case and established a minimum purchase (per order) of 100 cases. Boris and Sergi must now address these issues and ensure that they are still able to put Wheat Thins on the shelves of their grocery chain. While there is a possibility that a price break could be negotiated at 120 cases/order, however this would entail holding more inventory. Your team of purchasing consultants must use all of your purchasing knowledge to analyze Top Value's current company purchasing process for the Wheat Thins product and make recommendations to management to how they could improve the purchasing supply and their buy formula. Questions 1. Cost increase for a case of wheat thins. What can Top Value (TV) do to address this problem? What other possible options could TV management undertake to improve the situation? Must TV accept the cost increase? If yes, could TV change its profit margin and/or selling price and if so what would be a practical recommendation under the circumstances? If no, how should it respond to Nabisco? 2. Minimum order quantity. Consider and recommend other approaches or strategies that Top Value management could take to deal with this issue. Does TV have any room to negotiate on this matter? Could TV negotiate a better arrangement? If so, what other arrangements could be negotiated and how would TV negotiate a change? 3. Impact on warehouse storage and shelf space. Based upon the recommended approach and strategies that your team has made in 1 and 2, what effect will these decisions have on the a)management of space at the warehouse, b)holding costs, c) turnover, d)shipment quantities and e)timing? How will the possible changes required regarding warehousing and shipping affect the management of (costs and turnover) regarding shelf space at the store level? Other recommended actions. What other recommendations should be considered and recommended by your procurement and purchasing team to improve Top Value's position with respect to its competitors