Shop and Save (S&S) is a large grocery chain with 350 supermarkets. Twenty-eight S&S stores are located within the Detroit metropolitan region and serviced by the S&S Detroit Bakery, a large central bakery producing all of the fresh-baked goods (breads, rolls, donuts, cakes, and pies) sold in the 28 individual S&S stores in the Detroit region. Besides selling S&S baked goods, the stores also sell other nationally branded commercial baked goods both in the baked goods section of the store and in the frozen section as well. But all freshly baked items sold in the 28 S&S stores come from the S&S Detroit Bakery. Each store orders all the baked goods from the S&S Detroit Bakery the day before. The S&S Detroit Bakery also is a profit center and sells only to the 28 Detroit S&S stores. Each store pays the bakery 60 percent of the retail selling price. So. for example, if a store manager orders from the bakery a loaf of whole grain bread that has a retail price of $5.00. that store is charged $3.00 (60% $5.00) and the Detroit Bakery records revenues of $3.00.

Each store manager is evaluated and compensated as a profit center and has some decision rights over the particular items stocked in each store. But roughly 85 percent of all SKUs (stock keeping units) carried by each store and the retail price of each SKU are dictated centrally by the S&S Detroit Regional headquarters, which oversees both the 28 stores and the bakery. Each store manager has decision rights over the quantity of the various baked goods ordered from the S&S Detroit Bakery. The retail price of each freshly baked item produced by the S&S Detroit Bakery and sold in the grocery stores is set by the Detroit Regional headquarters, not the individual grocery stores or the S&S Detroit Bakery.

The manager of the Detroit Bakery complains that the reason her central bakery loses money is that the 60 percent rate is too low to cover her costs. The individual grocery store managers complain that the quality and variety of fresh baked goods they receive from the S&S Detroit Bakery are not competitive with high-end private specialty bake shops in the Detroit area.

1. Evaluate the advantages and disadvantages of the S&S policy of each S&S grocery store paying the S&S Detroit Bakery 60 percent of the retail price of the bakery item.
2. Suggest ways that S&S can improve the relationship between its grocery stores and its central bakery.