Supply chain

Tea and More is facin" rel="nofollow">ing growin" rel="nofollow">ing pain" rel="nofollow">ins from its rapid expansion over the last decade. The case provides a summary of the challenges faced by the company in" rel="nofollow">in the areas of supply chain" rel="nofollow">in management, marketin" rel="nofollow">ing plans, the creation of economic value and the development of a long-term strategy for profitable growth. Introduction Jack Reynolds hadn’t panicked often sin" rel="nofollow">ince he and two busin" rel="nofollow">iness partners bought Tea and More (TAM) from its founders almost sixteen years ago. As a purveyor of fin" rel="nofollow">ine teas and assorted food specialties to upscale restaurants and gourmet shops, TAM had achieved a steady growth in" rel="nofollow">in market share and profitability sin" rel="nofollow">ince those early days when gross revenues were less than U.S. $1 million and Jack knew most of his customers on a first-name basis. Jack had bought out his partners along the way, makin" rel="nofollow">ing decisions easier. He had grown used to callin" rel="nofollow">ing the shots on even the most in" rel="nofollow">insignificant aspects of operations and sales. But by early 2009, revenues had grown to almost U.S. $25 million. Jack was puttin" rel="nofollow">ing in" rel="nofollow">in killer days and had earned a reputation within" rel="nofollow">in the company as a temperamental “time bomb” isolated in" rel="nofollow">in his corner office, where he regularly dispatched scorchin" rel="nofollow">ing e-mails and voicemails about his latest discontents. There was no denyin" rel="nofollow">ing that the company ached with growin" rel="nofollow">ing pain" rel="nofollow">ins. Jack snapped another pencil in" rel="nofollow">in half. Why did he always have to come up with the next good idea? TAM employees from top to bottom were privately feelin" rel="nofollow">ing the weight of Jack’s heavy hand on the tiller. Turnover was begin" rel="nofollow">innin" rel="nofollow">ing to be a major problem, with valuable management time seemin" rel="nofollow">ingly bein" rel="nofollow">ing wasted on tryin" rel="nofollow">ing to train" rel="nofollow">in yet another new hire. Jack dashed off an e-mail to his senior staff announcin" rel="nofollow">ing a summit conference of sorts— a weekend retreat where they (or he) would get to the bottom of the problems facin" rel="nofollow">ing the company: competitors fightin" rel="nofollow">ing hard for more of TAM’s market share; maddenin" rel="nofollow">ing delays 1. Barry Doyle and Arthur H. Bell, School of Busin" rel="nofollow">iness and Professional Studies, University of San Francisco ([email protected]) and ([email protected]). Copyright © 2009 by Operations and Supply Chain" rel="nofollow">in Management: An International Journal and the authors. This case was prepared solely to provide material for classroom discussion. The authors do not in" rel="nofollow">intend to illustrate either effective or in" rel="nofollow">ineffective handlin" rel="nofollow">ing of a managerial situation. The authors have disguised some names and other identifyin" rel="nofollow">ing in" rel="nofollow">information to protect confidentiality. The views presented here are those of the case authors only. Used with permission. 165 and mixups in" rel="nofollow">in production; constant grousin" rel="nofollow">ing from salespeople about too much travel for too little reward; and Jack’s other laundry list of how his vendors, customers, employees and office janitor were lettin" rel="nofollow">ing him down. Every aspect of the busin" rel="nofollow">iness, he told his people, was “goin" rel="nofollow">ing under the microscope” to “make this company run like it used to.” History of Tea and More The company was founded in" rel="nofollow">in Los Angeles as Global Tea by three sisters in" rel="nofollow">in 1985. They shared a love of fin" rel="nofollow">ine teas and, prior to startin" rel="nofollow">ing busin" rel="nofollow">iness, spent much of their vacation time trackin" rel="nofollow">ing down unusual teas, specialty blends and reliable producers around the world. They built up a tidy and satisfied retail customer base comprised primarily of restaurants and bakeries in" rel="nofollow">in California and eventually throughout other Western states. But the circle was broken in" rel="nofollow">in 1992 when one sister died of cancer. Their CPA at the time, Jack Reynolds, leaped at the opportunity to buy the busin" rel="nofollow">iness and talked two of his buddies in" rel="nofollow">into puttin" rel="nofollow">ing up most of the capital as not-so-silent partners. Jack had an eye for marketin" rel="nofollow">ing and design. Within" rel="nofollow">in a matter of months he had transformed the look of his products with imagin" rel="nofollow">inative graphics, whimsical quotations and brief, exotic product notes. Tea and More was born, headquartered in" rel="nofollow">in Los Angeles. After two extraordin" rel="nofollow">inarily successful years convertin" rel="nofollow">ing TAM to a wholesale operation, Jack was able to buy out his partners and take over sole ownership of TAM as a privately held company. From time to time, as expansion dictated, Jack brought aboard a few in" rel="nofollow">investors, but never gave them decision-makin" rel="nofollow">ing roles. His senior staff consisted at first of a VP of sales and marketin" rel="nofollow">ing and a VP of Operations. That small team grew over time to in" rel="nofollow">include an Executive VP (“someone who can communicate with Jack”) and six director-level positions for various busin" rel="nofollow">iness functions. No matter the size of this senior staff from year to year, Jack main" rel="nofollow">intain" rel="nofollow">ined absolute control over busin" rel="nofollow">iness decisions large and small. “Better check with Jack” became the mantra among in" rel="nofollow">increasin" rel="nofollow">ingly cynical company executives. A Complicated Supply Chain" rel="nofollow">in When Jack acquired the company, his primary vendors in" rel="nofollow">in Chin" rel="nofollow">ina and India were used to sendin" rel="nofollow">ing relatively small shipments on an “as available” basis. The foundin" rel="nofollow">ing sisters had focused on the art of sellin" rel="nofollow">ing to their retail market, not on the reliability, scale or efficiency of their supply chain" rel="nofollow">in. At times, in" rel="nofollow">in fact, they enjoyed runnin" rel="nofollow">ing out of their most popular teas so that their sales in" rel="nofollow">ingenuity could be challenged in" rel="nofollow">in sellin" rel="nofollow">ing more backof-the-shelf varieties. Jack had a quite different vision and strategy. He almost immediately expanded his sources to in" rel="nofollow">include Japan, Sri Lanka and Taiwan, while retain" rel="nofollow">inin" rel="nofollow">ing his connections in" rel="nofollow">in Chin" rel="nofollow">ina and India. But shipment size and reliability contin" rel="nofollow">inued to plague the company throughout the mid-1990s. Somewhat reluctantly, Jack weaned himself from direct import of his selected teas and struck an advantageous contract with a middleman, Earl Morgan Limited (EML), based outside London. EML had for more than a century served as a worldwide processor of main" rel="nofollow">instream and exotic tea blends, all accordin" rel="nofollow">ing to the specifications of their resale clients. Jack’s company, for all its brandin" rel="nofollow">ing success in" rel="nofollow">in U.S. restaurants and gourmet shops, remain" rel="nofollow">ined a “small potatoes” account for EML compared to the large grocery chain" rel="nofollow">ins in" rel="nofollow">in the U.K. and Europe. Jack’s orders for blended teas from EML were typically produced in" rel="nofollow">in batches twice a year. In more than one heated meetin" rel="nofollow">ing, EML executives 166 Part 4 Distribution (Customer) Issues patiently explain" rel="nofollow">ined to Jack that he could not afford their equipment setup and calibration expenses for more than two production runs each year. Especially sin" rel="nofollow">ince the shelflife of properly sealed tea was not at issue, Jack had every reason to purchase in" rel="nofollow">in bulk on a biannual basis rather than payin" rel="nofollow">ing a stiff surcharge for more frequent production runs. EML shipped to TAM in" rel="nofollow">in contain" rel="nofollow">iner-sized lots, with each contain" rel="nofollow">iner holdin" rel="nofollow">ing about 10,000 kilos of tea. Purchase orders for types and amounts of tea come from TAM’s sin" rel="nofollow">ingle production facility, located outside Cleveland, Ohio. The in" rel="nofollow">initial decision to have production in" rel="nofollow">in the center of the country rather than Los Angeles was motivated primarily by lower operatin" rel="nofollow">ing costs—both wages and facilities were cheaper in" rel="nofollow">in the Midwest. Further, the Production Chief, a tea guru now well advanced in" rel="nofollow">in years, simply refused to move to Los Angeles—and, for once, Jack backed down to preserve the value that this key in" rel="nofollow">individual brin" rel="nofollow">ings to TAM’s many tea products. The Production Chief oversees the art of orderin" rel="nofollow">ing the right blends in" rel="nofollow">in the right quantities for a somewhat unpredictable market (in" rel="nofollow">influenced by changin" rel="nofollow">ing public tea preferences, the rise of competin" rel="nofollow">ing beverages and the overall economy). If a particular tea source is unavailable, a substitute in" rel="nofollow">ingredient must be identified by the Production Chief prior to placin" rel="nofollow">ing one of TAM’s production runs with EML in" rel="nofollow">in London. But because any product changes have to be explain" rel="nofollow">ined to TAM’s salespeople and reflected in" rel="nofollow">in its advertisin" rel="nofollow">ing, the Production Chief must clear any alterations to tea formulas with the VP of Sales and Marketin" rel="nofollow">ing, based at headquarters in" rel="nofollow">in Los Angeles. Such clearance isn’t pro forma. Often samples have to be shipped to Los Angeles; dozens of communications flow back and forth, sometimes over a period of weeks. Other factors explain" rel="nofollow">inin" rel="nofollow">ing a contin" rel="nofollow">inued production base in" rel="nofollow">in Cleveland in" rel="nofollow">include favorable tax conditions; cheaper, more reliable labor than in" rel="nofollow">in the Los Angeles area; and affordable housin" rel="nofollow">ing for the dozens of employees in" rel="nofollow">involved in" rel="nofollow">in the production process. The whole matter of order defin" rel="nofollow">inition and compilation is made even more challengin" rel="nofollow">ing by the three-month lead time required by EML in" rel="nofollow">in London for any production run. EML says it needs two months to acquire the selected tea from its Asian or Indian source and one month for shippin" rel="nofollow">ing (via freighter and truck) to TAM’s production facility in" rel="nofollow">in Cleveland. TAM main" rel="nofollow">intain" rel="nofollow">ins standin" rel="nofollow">ing orders with EML for its most popular high-volume teas; and the arrival of these teas, sealed in" rel="nofollow">in large bags, can be predicted twice a year almost to the day. Less popular teas, however, arrive with less regularity, sin" rel="nofollow">ince they depend on bein" rel="nofollow">ing “worked in" rel="nofollow">in” to openin" rel="nofollow">ings in" rel="nofollow">in EML’s long queue of production runs. Once unloaded in" rel="nofollow">in Cleveland, the tea is packaged in" rel="nofollow">into retail contain" rel="nofollow">iners. At full capacity, the processin" rel="nofollow">ing plant can package about U.S. $100,000 of tea per day (about 20,000 lbs). The packages are then shelved in" rel="nofollow">in the production facility until bein" rel="nofollow">ing shipped to the retailer. The Cleveland facility usually warehouses about two months of sales as in" rel="nofollow">inventory. But that estimation is typically just a guess. Order volume varies by season and even within" rel="nofollow">in seasons, if a cold spell brin" rel="nofollow">ings out more teapots or a hot summer more iced tea. As a rule, and in" rel="nofollow">in spite of TAM’s efforts to educate them, retail customers tend to under-order when they place their major tea purchases two or three times a year. When their tea runs out, or a particularly popular blend goes empty on the shelf, these customers frantically contact the Los Angeles sales staff, who in" rel="nofollow">in turn check the in" rel="nofollow">inventory in" rel="nofollow">in Cleveland—and the shippin" rel="nofollow">ing time to meet the customers’ emergencies. Sometimes the right teas are available in" rel="nofollow">in Cleveland and can be transported quickly, if expensively, to the retailer (who absorbs the extra shippin" rel="nofollow">ing charges, usually air freight). Just as often, however, Cleveland has to report back that the requested type or amount of tea isn’t in" rel="nofollow">in in" rel="nofollow">inventory and won’t be available for a matter of months. Customers blame TAM, and TAM blames the customers’ orderin" rel="nofollow">ing practices. Case 22 Readin" rel="nofollow">ing the Tea Leaves at Tea and More: Resolvin" rel="nofollow">ing Complex Supply Chain" rel="nofollow">in Issues 167 Customer Service TAM employs three full-time sales representatives, each with responsibility for major accounts within" rel="nofollow">in a region of several states. Smaller accounts are serviced by “contract sales staff”—i.e., salespeople who represent a number of product lin" rel="nofollow">ines to relatively min" rel="nofollow">inor clients such as in" rel="nofollow">individual restaurants and mom-and-pop grocery stores. Relations with these contract sales personnel have become in" rel="nofollow">increasin" rel="nofollow">ingly rocky over the past year. With the in" rel="nofollow">increase in" rel="nofollow">in gas costs, sales men and women complain" rel="nofollow">in to TAM that they can hardly afford to make even irregular calls on smaller, distant clients. For their part, these clients complain" rel="nofollow">in to TAM that they haven’t seen a sales rep for months and are forced to either abandon the TAM lin" rel="nofollow">ine or order it onlin" rel="nofollow">ine, thus in" rel="nofollow">incurrin" rel="nofollow">ing additional shippin" rel="nofollow">ing expenses. These onlin" rel="nofollow">ine sales further anger the contract salespeople, sin" rel="nofollow">ince they receive no commission when an order goes through the onlin" rel="nofollow">ine purchasin" rel="nofollow">ing center. For several months these outside sales personnel have lobbied TAM for some kin" rel="nofollow">ind of commission whenever an order comes from their territory, even if it comes onlin" rel="nofollow">ine. TAM has resisted this arrangement, fearin" rel="nofollow">ing that it will further encourage salespeople not to make in" rel="nofollow">in-person calls on their clients. In total, these smaller sales account for about 15 percent of TAM’s busin" rel="nofollow">iness. Jack Reynolds and other company leaders have long suspected that better customer service could bump up this percentage substantially. For example, when a small retailer’s shelf is empty of TAM teas, all it takes is a competitor on the spot with a ready deal to fill that shelf. In such cases, TAM may have lost a customer forever. TAM leaders have tried a carrot approach in" rel="nofollow">in offerin" rel="nofollow">ing a 12 percent commission in" rel="nofollow">instead of the usual 10 percent commission to outside salespeople. They have also tried the stick approach, by threatenin" rel="nofollow">ing to change sales vendors entirely unless customers begin" rel="nofollow">in receivin" rel="nofollow">ing better, more regular service. But outside salespeople seem to be impervious to either attempt at motivation. As one salesperson put it, “An extra 2 percent commission doesn’t cover my extra gas and time. And if they want to fire us, let them. We have plenty of brands to represent besides TAM.” Payment Terms TAM’s customers are technically on a “net 30” basis, with the 30 days until payment due begin" rel="nofollow">innin" rel="nofollow">ing when an order is shipped from in" rel="nofollow">inventory stored in" rel="nofollow">in Cleveland. TAM still uses regular mail for sendin" rel="nofollow">ing in" rel="nofollow">invoices, although some customers have been willin" rel="nofollow">ing to receive in" rel="nofollow">invoices by fax. In spite of the “net 30” requirement, the average collection period across all clients is 54 days. To date, TAM has not charged in" rel="nofollow">interest on balances less than 90 days in" rel="nofollow">in arrears, out of a concern for keepin" rel="nofollow">ing good customer relationships. Customers with a poor or missin" rel="nofollow">ing credit history are required to pay by credit card, on which TAM pays a 4 percent surcharge, or in" rel="nofollow">in cash, which is handled primarily by outside salespeople before bein" rel="nofollow">ing turned in" rel="nofollow">in (twice a month) to the Los Angeles office. The handlin" rel="nofollow">ing of such cash has been sloppy at best over the years. Some salespeople subtract what they calculate to be their commission before turnin" rel="nofollow">ing in" rel="nofollow">in the remain" rel="nofollow">inin" rel="nofollow">ing cash, a practice that TAM leaders have tried repeatedly to stop. Product Variety Motivated in" rel="nofollow">in large part by requests from large restaurant chain" rel="nofollow">ins, TAM has nearly doubled the types of teas it sells over the past two years. New varieties pique the in" rel="nofollow">interest 168 Part 4 Distribution (Customer) Issues of the sales staff for a brief period, givin" rel="nofollow">ing them a new “story” to tell their customers. But in" rel="nofollow">in general, the retail and wholesale market has preferred to stick to the five or six traditional tea varieties produced by TAM. Fin" rel="nofollow">inancially, the effort to expand company sales by comin" rel="nofollow">ing up with new tea tastes, labels and packagin" rel="nofollow">ing has proven to be a “bust” for the company—an expensive experiment that failed. Yet TAM leaders have noticed that competitors seem to have good luck with catchy new tea varieties, particularly those targeted for holiday season marketin" rel="nofollow">ing. “What are we doin" rel="nofollow">ing wrong?” Jack Reynolds has asked aloud many times. “We have a superior product, but our competitors are beatin" rel="nofollow">ing our socks off by eye-catchin" rel="nofollow">ing displays and a lot of magazin" rel="nofollow">ine advertisin" rel="nofollow">ing.” Yet he has been reluctant to approve marketin" rel="nofollow">ing budgets to match those of competitors when it comes to untried new TAM products. Product Pricin" rel="nofollow">ing In TAM’s early years, retail customers—patrons of restaurants and shoppers in" rel="nofollow">in grocery stores and beverage shops—seemed oblivious to price. In several controlled marketin" rel="nofollow">ing studies, TAM teas seemed to achieve the same level of demand within" rel="nofollow">in a 20 percent price swin" rel="nofollow">ing up or down—customers simply wanted quality tea and were willin" rel="nofollow">ing to pay for it. In the last eighteen months, however, all aspects of TAM’s operation from materials cost to labor to shippin" rel="nofollow">ing have become significantly more expensive. In response, the company has “pressed the upper envelope” of pricin" rel="nofollow">ing to 25–30 percent above previous levels. This raise in" rel="nofollow">in price has unfortunately created room for lower-quality tea producers to gain" rel="nofollow">in market share by sellin" rel="nofollow">ing to TAM’s former customers at a much reduced price, often as much as half of what TAM charges per product unit. TAM has emphasized the high quality of its teas in" rel="nofollow">in expensive advertisin" rel="nofollow">ing campaigns and direct mail “specials” targeted at new and old customers. But these expenses have further eroded profit margin" rel="nofollow">in. “We’re givin" rel="nofollow">ing our tea away!” Jack Reynolds has complain" rel="nofollow">ined. “Let’s get back to basics and sell our traditional lin" rel="nofollow">ine of teas to our loyal customer base. Forget the low-price market!” Jack’s company associates have been reticent to remin" rel="nofollow">ind him that his so-called “loyal customer base” has been in" rel="nofollow">increasin" rel="nofollow">ingly lured away by competitors with so-so teas but very attractive pricin" rel="nofollow">ing. The TAM Summit Conference At the weekend “summit conference” called by Jack to deal with these company dilemmas, senior staff first had to endure hours of Jack’s rantin" rel="nofollow">ing about what each of them were doin" rel="nofollow">ing wrong, how he has been cheated by outside salespeople, how previous customers had no sense of loyalty to TAM and seemin" rel="nofollow">ingly endless other issues. When Jack tired, he passed out a sin" rel="nofollow">ingle sheet contain" rel="nofollow">inin" rel="nofollow">ing six questions to be addressed by senior staff. With a flourish, Jack locked the door to the meetin" rel="nofollow">ing room shortly after lunch. “And until we have answers,” he proclaimed, “no one is leavin" rel="nofollow">ing. I don’t care if it takes all night.” Discussion Questions 1. What can we do about lost sales due to poor customer service by outside “contract” sales staff? 2. How can we restore the attractiveness and power of the TAM brand for major customers so they aren’t lured away by low-cost, low-quality competitors? Case 22 Readin" rel="nofollow">ing the Tea Leaves at Tea and More: Resolvin" rel="nofollow">ing Complex Supply Chain" rel="nofollow">in Issues 169 3. How can we min" rel="nofollow">inimize “stock outages” and other in" rel="nofollow">inventory problems caused by unpredictable customer orderin" rel="nofollow">ing patterns and the contin" rel="nofollow">inuin" rel="nofollow">ing difficulty of gettin" rel="nofollow">ing faster production and delivery from EML in" rel="nofollow">in London? 4. How can we reduce collection time from 54 days to less than 40 days without alienatin" rel="nofollow">ing the very customer base TAM is tryin" rel="nofollow">ing to attract and retain" rel="nofollow">in? 5. What decisions should we make regardin" rel="nofollow">ing experimentation with new tea varieties, such as the “Christmas Min" rel="nofollow">int” tea that fell flat last season? Can we afford to contin" rel="nofollow">inue such experiments? Can TAM afford to stick only to its basic teas and not compete in" rel="nofollow">in the “new and improved” tea market so heavily advertised by competitors? 6. What haven’t we thought of? Where else can fin" rel="nofollow">inancial advantages and process efficiencies be achieved? 170 Part 4 Distribution (Customer) Issues APPENDIX 1 Summary Fin" rel="nofollow">inancial Statements (‘000 U.S.$) 2006 2007 2008 Revenues 18,065 20,210 22,500 CGS 9,600 10,850 12,300 SG&A 4,560 5,300 6,100 Deprec. 1,050 1,050 1,050 EBIT 2,955 3,010 3,050 Interest 75 75 75 Tax 1,252 1,294 1,310 Net Income 1,628 1,641 1,665 Cash 100 100 100 A/R 2,600 2,950 3,350 Inventory 1,850 2,050 2,400 Current Assets 4,550 5,100 5,850 Net Fixed Assets 2,500 2,550 2,600 Total Assets 7,050 7,650 8,450 Accounts Payable 1,200 1,320 1,490 Other Current Liab. 200 230 250 Notes Payable 900 900 900 Total Liabilities 2,300 2,450 2,640 Owners Equity 4,750 5,200 5,810 Total 7,050 7,650 8,450 Selected Ratios* Ind Avg* Oper. Profit Margin" rel="nofollow">in (%) 16.4 14.9 13.6 14 Net Profit Margin" rel="nofollow">in (%) 9 8.1 7.4 5 Avg. Coll. Period (days) 52.5 53.3 54.3 35 Inventory T/O (CGS/Inv) 5.2 5.3 5.1 8 *Industry Averages are approximate; data from comparable firms is difficult to obtain" rel="nofollow">in with any reliability. Case 22 Readin" rel="nofollow">ing the Tea Leaves at Tea and More: Resolvin" rel="nofollow">ing Complex Supply Chain" rel="nofollow">in Issues 171