Case 4. Alternative Distribution Strategies

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Patrick Long
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1 Case 4 Alternative Distribution Strategies Overview Sugar Sweets, Inc. finds that it must adjust its distribution strategy to increase market coverage and sales volume without threatening the service levels that customers have come to expect. The traditional channels of distribution for SSI products is undergoing significant change, forcing the candy company to reevaluate its current system. Candy and tobacco jobbers were becoming fewer in number. Those distributors that remained dominated wholesale operations that were not serviced by warehouse club stores. In all, the retail customer was in for a loss in product variety and high service levels, both of which were traditionally offered by the now diminishing jobbers. To respond to the changing business environment, SSI has determined that a new approach to marketing its products is necessary. In large part, the new approach consists of an expansion of retail targets to include outlets that enjoy high traffic volumes but rarely offer snack products. The new sales sites include dry cleaners, barber/beauty shops, hardware stores, and drinking establishments. The case questions require the student to analyze the costs and benefits associated with the new distribution strategy. Solutions to Questions 1. From the data in Table 2: Total number of target retailers (320, , ,000) = 820,000 Number of retailers initially contacted (820,000 x.20) = 164,000 Anticipated number of participating retailers: pre-trial period (164,000 x.30) = 49,200 post-trial period (49,200 x.55) = 27,060

The traditional channels of distribution for SSI products is undergoing significant change, forcing the candy company to reevaluate its current system.

2 2. Based on Table 2 data for the average retailer: Daily calculations Expected number of paying customers (100/day x.10) = 10 customers units Projected unit sales per day (10 customers x 1.12 units) = 11.2 Projected sales dollars per day (10 customers x $1.40) = $14.00 Annual calculations Expected number of paying customers (10/day x 260 days) = 2,600 customers Projected units sales per year (11.2 units/day x 260 days) = 2,912 units/year Projected sales dollars per year ($14.00/day x 260 days) = $3,640/ year 3. Based on answers to question 2 and data from Table 3: Number of large packs necessary for average retailer annually: 2,912 units/year 180 units/large pack = (16 orders/year) Number of small packs necessary for average retailer annually: 2,912 units/year 92 units/small pack = (32 orders/year) 4. The following calculations apply for the six-month trial period: Total initial participants (from question 1) = 49,200 The number of large pack retailers (49,200 x.45) = 22,140 The performance breakdown of the 22,140 large pack retailers:

00 Annual calculations Expected number of paying customers (10/day x 260 days) = 2,600 customers Projected units sales per year (11.

3 High performers (22,140 x.40) = 8,856 retailers Medium performers (22,140 x.20) = 4,428 retailers Low performers (22,140 x.40) = 8,856 retailers Total large pack retailers 22,140 retailers On the basis of expected orders per year from question 3, average large pack retailers should place 16 orders per year, or 8 over each six-month period. The first order of the trial period is considered the initial order and the remaining 7 are called. The number of initial orders from large pack retailers: orders High performers (8,856 retailers x 1 order) = 8,856 orders Medium performers (4,428 retailers x 1 order) = 4,428 orders Low performers (8,856 retailers x 1 order) = 8,856 Total number of initial large pack orders 22,140 orders The number of from large pack retailers: High performers (8,856 retailers x 7 ) = 61,992 Medium performers (4,428 retailers x 5 ) = 22,140 Low performers (8,856 retailers x 3 ) = 26,568 Total number of large pack 110,700 The number of small pack retailers (49,200 x.55) = 27,060 The performance breakdown of the 27,060 small pack retailers: High performers (27,060 x.40) = 10,824 retailers Medium performers (27,060 x.20) = 5,412 retailers Low performers (27,060 x.40) = 10,824 retailers Total small pack retailers 27,060 retailers On the basis of expected orders per year from question 3, average small pack retailers should place 32 orders per year, or 16 over each six-month period. The first order of the trial period is considered the initial order and the remaining 15 are called. The number of initial orders from small pack retailers: High performers (10,824 retailers x 1 order) = 10,824 orders Medium performers (5,412 retailers x 1 order) = 5,412 orders Low performers (10,824 retailers x 1 order) = 10,824 orders Total number of initial small pack orders 27,060 orders

each six-month period. The first order of the trial period is considered the initial order and the remaining 7 are called.

4 The number of from small pack retailers: High performers (10,824 retailers x 15 ) = 162,360 Medium performers (5,412 retailers x 10 ) = 54,120 Low performers (10,824 retailers x 7 ) = 75,768 Total number of small pack 292,248 The following calculations apply for the six-month post-trial period: Remaining participants (49,200 original retailers x.55) = 27,060 retailers The remaining large pack retailers (27,060 x.45) = 12,177 retailers The performance breakdown of the 12,177 small pack retailers: High performers (12,177 x.40) = 4,871 retailers Medium performers (12,177 x.20) = 2,435 retailers Low performers (12,177 x.40) = 4,871 retailers Total large pack retailers 12,177 retailers All orders taken in the second six-week period are. The number of from large pack retailers: High performers (4,871 retailers x 8 ) = 38,968 Medium performers (2,435 retailers x 6 ) = 14,610 Low performers (4,871 retailers x 4 ) = 19,484 Total number of large pack 73,484 The remaining small pack retailers (27,060 x.55) = 14,883 retailers The performance breakdown of the 14,883 small pack retailers: High performers (14,883 x.40) = 5,953 retailers Medium performers (14,883 x.20) = 2,977 retailers Low performers (14,883 x.40) = 5,953 retailers Total small pack retailers 14,883 retailers

55) = 27,060 retailers The remaining large pack retailers (27,060 x.45) = 12,177 retailers The performance breakdown of the 12,177 small pack retailers: High performers (12,177 x.

5 All orders taken in the second six-week period are. The number of from small pack retailers: High performers (5,953 retailers x 16 ) = 95,248 Medium performers (2,977 retailers x 11 ) = 32,747 Low performers (5,953 retailers x 8 ) = 47,624 Total number of small pack 175,619 Total first-year orders: Pack type Initial orders Reorders Total Large 22, , ,902 Small 27, , , Based on answers from question 4 and data from Tables 3 and 4: The following calculations apply to a network of three distribution centers: Annual revenues: Revenue from large packs ($205/pack x 205,902 packs) = $42,209,910 Revenue from small packs ($115/pack x 494,297 packs) = $56,916,605 Total annual revenue $99,126,515 Logistics costs: Large packs: $10.11/order x 205,902 orders = $2,081,669 Small packs: $10.11/order x 494,927 orders = $5,003,712 Total logistics costs $7,085,381 Production costs: Large packs: $190/order x 205,902 orders = $39,121,380 Small packs: $98/order x 494,927 orders = $48,502,846 Total production costs $87,624,226

number of small pack 175,619 Total first-year orders: Pack type Initial orders Reorders Total Large 22,140 183,762 205,902 Small 27,060 467,867 494,927 5.

6 Display costs: Large packs: $35/display x 22,140 initial orders = $774,900 Small packs: $18/display x 27,060 initial orders = $487,080 Total display costs $1,261,980 Total costs $95,971,587 Profits $3,154,928 The following calculations apply to a network of four distribution centers: Annual revenues: The total annual revenue will be the same regardless of the network, $99,126,515 Logistics costs: Large packs: $9.86/order x 205,902 orders = $2,030,194 Small packs: $9.86/order x 494,927 orders = $4,879,980 Total logistics costs $6,910,174 Production costs: Large packs: $190/order x 205,902 orders = $39,121,380 Small packs: $98/order x 494,927 orders = $48,502,846 Total production costs $87,624,226 Display costs: Large packs: $35/display x 22,140 initial orders = $774,900 Small packs: $18/display x 27,060 initial orders = $487,080 Total display costs $1,261,980 Total costs $95,796,380 Profits $3,330,135

costs: Large packs: $9.86/order x 205,902 orders = $2,030,194 Small packs: $9.

7 The profit derived from the network with four distribution centers ($3,330,135) is greater than that of the network with three distribution centers ($3,154,928). It is interesting to note that the differentiating cost factor, logistics cost, was actually lower for the network with four distribution centers. Class discussion might explore situations in which utilization of more facility locations results in lower costs. Situations may include favorable negotiations with transportation providers and labor organizations, or preferred government involvement (subsidization or zoning preference).

It is interesting to note that the differentiating cost factor, logistics cost, was actually lower for the network with four distribution centers.

8 There are a host of factors aside from cost/profit that might affect the decision, including: Customer service and responsiveness: The network of four distribution centers would likely provide quicker service response and reduces the number of outlying areas that receive slowest service levels. Sugar Sweets must also consider the potential negative impact on the candy and tobacco jobbers to reassure them that this strategy is not designed to reduce or eliminate their business. Rather, the strategy should have little impact because of the impulse-buying nature of snack food purchases.

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