wkt valentine’s sourcing strategies jason bloom srividya deshpande sarah kruse patrick salemme
TRANSCRIPT
WKT Valentine’s Sourcing Strategies
Jason Bloom
Srividya Deshpande
Sarah Kruse
Patrick Salemme
Situation
Valentine’s Day flower sales account for approximately 36% of fresh cut flower sales in the US
Demand varies greatly year to year
WKT (local supermarket) currently orders last minute to utilize best demand forecasts but suffers high costs as a result
Current Strategy
Postpone orders until the last minute
Experience high competition for scarce flower supply
Buy higher priced locally grown flowers
Need a new strategy
Major Players
Growers Foreign and Domestic
Wholesalers
Retailers
Growers
Foreign2/3rds of US
consumption
59% from Columbia
18% from Ecuador
6% gross margin
Sold for ~$0.05 per stem
Domestic1/3rd of US consumption
US is third largest producer of fresh cut flowers
94% produced are sold in the US
40-60% gross margin
Sold for ~$1.75 per stem
Wholesalers
Deal with large consolidated bulk shipments from foreign growers to US
14 day life – cold chain required
Experiencing cost of $0.22 per stem sold
35% of flowers are lost during transit
45% gross margin
Sell for ~$0.40 per stem
Bullwhip Affect
Customer to Retailer
Retailer to Wholesaler
Wholesaler to Grower
Explain why wholesalers tend to have limited supply for last minute orders of the retail florists.
Retailers - WKT
16th largest supermarket chain in the US
230 stores in the NE
Sell roses to consumer at ~$2.00 (online or in store)
Average Valentine’s Day demand for past 10 years 2,285,862 stems High: 3,208,035 Low: 1,429,070
1996 1998 2000 2002 2004 2006 20080
500
1000
1500
2000
2500
3000
3500
WKT's Fluctuating Rose Demand
Ste
m D
em
and (
in
10
00
s)Year
Alternate Strategies
Current Policy
Wholesale – 2 months in advance
Wholesale Hybrid
Vertical Integration
Coopetition – Cooperative Competition
Current Policy
PositivesMaximum demand
accuracy
Multiple sources
NegativesFierce competition
between retailers
Higher prices due to local grower purchases
No discount from wholesaler
Current Policy
Assumes WKT can only get 1.5mm roses wholesale at foreign $0.40 price
All other roses must be purchased for $1.75
Gross margin of 60%
Standard Deviation of 14%
Wholesaler – 2 months in advance
Positives10% discount on order
Guaranteed supply of order for Valentine’s Day
Strengthens relationship with supplier
NegativesMinimal demand
responsiveness
Accurate forecasting required
Underestimate demand: high volume last minute from local growers
Overestimate demand: surplus spoiled stock
Compare the last minute ordering strategy and the advance ordering strategy.
Wholesale – 2 months in advance
Assumes all pre-ordered roses purchased at $0.36 (10% discount)
All additional required roses sourced from local growers at $1.75
Gross margin of 80%
Standard deviation of 4%
Wholesale Hybrid
Positives10% discount for large
portion of order
Opportunity to guarantee supply but make last adjustments
Maximize demand responsiveness at lower cost
Strengthens relationship with supplier
Negatives20% markup on small
portion of order
Accurate forecasting required for advanced order optimization
How should WKT combine the last-minute order with the advanced order in the hybrid strategy?
Wholesale Hybrid
Assumes WKT orders 69% of forecast at $0.36 to optimize margin
Additional roses ordered at 60% pre-order and 60% strike price
Gross margin is 75%
Standard devation is 5%
Vertical Integration
PositivesMaximum demand
responsiveness
Higher profit margin
Ability to profit from additional stock
NegativesOutside company’s core
competency
Infrastructure, grower contacts, and knowledge of international shipping required
High fixed costs to implement
Vertical Integration
Assumes WKT experiences total landed cost of $0.22 per stem acting as wholesaler
All roses purchased for $0.05
Gross margin is 84%
Standard deviation is 5%
Coopetition
PositivesCollaboration on
securing supply
Potential for higher margins
Higher purchasing power
Information flow from competitors
NegativesAttempting to
collaborate with unwilling competitors
Consensus buying decision disagreement
Information flow to competitors
Summary of findings
Current Strategy
Wholesale Advance
Wholesale Hybrid
Vertical Integration
40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90%
Optimizing Profit Margin for WKT
Profit Margin
Str
ate
gy
Which Strategy works better for WKT? For the Wholesaler? Wholesaler and WKT combined?
Challenges of Vertical Integration
Infrastructure – cold chain shipping and storage
Grower contacts and importing
Brokerage: customs and regulatory expertise (traceability)
Experienced Wholesalers lose 35% of flowers in transit… Can WKT handle this?
Risks of Vertical Integration
Cultural risk
Higher costs due to lower volume
Labor issues
Single source
Loss of focus on core business
Unsatisfactory return Should WKT vertically integrate with its wholesaler? Does the benefit outweigh the cost?
Recommendation: Wholesale in advanceYields savings of
$1,063,000 over current policy
Is more cost affecting taking into account fluctuating demand
Ordering newsboy quantity resulted in higher profit margin and lower margin variability than the hybrid model!
Questions?