Specialty Food and Beverage: A Case Study of Small Business Management

Late one afternoon in March 2009, Tim Casey, owner of Specialty Foods and Beverage SF!, p"rveyor of fine teas, sat down and composed a memo to his senior staff SF had had s"perior growth over the last si#teen years$ this growth had ca"sed %growing pains% in the organi&ation str"ct"re and operations of the firm' (n the %early days% Tim made all the ma)or decisions for the company$ reven"es in the very early years were shy of the *+ million mar,, and most of the decisions seemed -"ite straightforward' .ow that reven"es were nearing the *2/ million mar,, Tim was finding that decisions and operational proced"res that wor,ed well in the past were inade-"ate' SF0s line of prod"ct offerings had risen sharply, the s"pply chain had 1ecome m"ch more complicated and relationships with c"stomers more diffic"lt to manage' (n addition, several high -"ality competitors had entered the mar,et in recent years' 2ltho"gh profita1ility was still good, SF co"ld no longer afford to operate inefficiently' The specialty tea mar,et was now crowded with competitors, with all of them attempting to gra1 a portion of SFs hefty mar,et share' Tim had decided3 the senior staff was going to meet in two wee,s for a three day retreat to sort o"t some of the challenges facing SF' 2ll aspects of the company were to 1e e#amined' Specialty Food And Beverage Specialty Foods and Beverage SF! is a privately held small tea company that imports tea and some other tea4related food and 1everage prod"cts! from several s"ppliers a1road and mar,ets these prod"cts to 1oth wholesale and retail c"stomers, primarily in the 5S2' The company was fo"nded in +969 1y Sam 7estgood, Sheila 7estgood, and Bo1 8onas' The idea had 1een hatched some years earlier when they had met with some friends and disc"ssed the lac, of high -"ality tea in the 5nited States' Sensing an "nmet demand, they resolved to develop a tea to meet the needs of cons"mers desiring high -"ality tea' They managed to ac-"ire some %angel% f"nding and soon developed a devoted following of their 1rand' They developed "ni-"e pac,aging, incl"ding a stri,ing set of graphics and slogans, and they were off and r"nning' 2s mar,eters, the fo"nders were e#traordinarily s"ccessf"l' 5nfort"nately, they were less s"ccessf"l as 1"siness operators' They sold the 1"siness to Tim Casey in +992' 5nder Tim0s ownership, more effective 1"siness practices were p"t in place' More effort was spent attracting wholesale 1"siness instead of direct appeals to retail c"stomers' The wholesale mar,et constit"tes a1o"t 6/9 of their 1"siness' The Supply Chain The s"pply chain process for SF 1egins with the so"rcing of raw materials primarily tea! in several 2sian co"ntries:China, (ndia, Taiwan, 8apan, and Sri Lan,a' 2 relatively small portion of the goods are imported directly from these co"ntries 1y SF$ the ma)ority of the goods are imported from Twinhof T;!, located in a s"1"r1 of London' This company processes the teas according to proprietary specifications for SF' SF is a relatively small c"stomer of T;$ as s"ch, SF only prod"ces speciali&ed 1lends in 1atches a1o"t twice a year' More fre-"ent prod"ction r"ns are considered economically infeasi1le 1y SF, as each r"n re-"ires T; to ad)"st the settings on the prod"ction e-"ipment to the proper specifications' There is s"1stantial time and cost associated with this set "p process, effectively limiting the n"m1er of r"ns per year' 2t present, T; only ships to SF in container si&e lots$ each container holds a1o"t +0,000 ,ilos of tea' <"rchase orders are generated from the prod"ction facilities )"st o"tside (ndianapolis, (ndiana' The chief of p"rchasing also f"nctions as the controller of the company$ altho"gh prod"ct p"rchases rarely vary in -"ality, there are times when a partic"lar speciali&ed ingredient for the

tea 1lend is "navaila1le' (n these cases, s"1stit"te ingredients need to 1e identified$ this will occasionally res"lt in prod"ction delays' F"rther, any changes in the prod"ction form"la need to 1e cleared with the head of Sales = Mar,eting' This division is 1ased in Los 2ngeles, however, since California acco"nts for the largest concentration of sales' T; re-"ires a three4month lead time from SF to deliver the orders' This lead time is esta1lished as3 +! two months to ac-"ire>process the tea from the so"rce, and 2! one month transit time to SF' (n the c"rrent arrangement, some of the %favorites% high vol"me tea! are prod"ced and shipped on a reg"lar sched"le' ?ther prod"cts are ordered and shipped on an irreg"lar 1asis' The shipments arrive in (ndianapolis in large sealed 1ags' 5pon arrival at the plant, the tea is pac,aged into retail4si&ed containers, which are then held "ntil shipped to a retailer and, in some cases, directly to the cons"mer!' Typically, a1o"t two months worth of sales are held as inventory' ;owever, this average inventory si&e mas,s several pro1lems associated with inventory management' ?rder vol"me is not only seasonal, 1"t also irreg"lar' 2ltho"gh many of the retailers with which SF does 1"siness order tea on a relatively predicta1le 1asis, some of the large c"stomers order infre-"ently, and these large orders often in e#cess of *200,000 per order! are not wholly predicta1le' The processing plant is a1le to pac, appro#imately *+00,000 worth of tea per day a1o"t 20,000 l1s!'2ltho"gh SF "s"ally has s"fficient -"antities of pac,aged prod"ct availa1le for shipment, they are sometimes ca"ght %short% on large orders' (n some cases, the delay ca"sed 1y the limited processing capacity res"lts in SF needing to air freight orders to these c"stomers' Management of SF feels this to 1e necessary since the potential loss of 1"siness to these large c"stomers wo"ld 1e disastro"s' Customer Orders 2s noted a1ove, large orders from the 1iggest c"stomers! are made directly to head-"arters in (ndianapolis' ;owever, most of the orders are smaller, and are made 1y mem1ers of sales representative organi&ations hired 1y SF' SF is too small a company to have their own nationwide sales force' @egional sales organi&ations are hired to %service% the acco"nts$ the si&e of the acco"nts varies widely' Some are as small as *l, 000>year ann"al sales!' The sales representatives %reps%! receive +09 of the amo"nt sold$ payment is made to the reps "pon receipt of f"nds 1y SF' The vol"me of sales order may 1e descri1ed as moderately predicta1le' Li,e any cons"mer prod"ct, tho"gh, there is a s"1stantial degree of "ncertainty in the order patterns, partic"larly in the pea, order months of 8"ly thro"gh ?cto1er' ?rders are sent 1y fa#, phone and via the firm0s we1site' The firm wo"ld prefer to have all orders sent electronically 1"t many of the sales reps contin"e to "se the phone or fa#' 7hen SF0s sales managers p"sh the reps to "se the we1site, some complain the process is %complicated%' Many of these reps have 1een in the 1"siness for fifteen or more years and are rel"ctant to change their method of doing 1"siness' SF management s"spects many find "sing the phone or fa# simpler and are "nwilling to ma,e the investment in learning the we1 technology' SF feels that some sales are %left on the ta1le% since the sales representative organi&ations are of varying efficiency' 2necdotal evidence s"ggests that some retailers order prod"ct from competitors if the sales representatives do not ma,e timely visits to the store' (n effect, if shelf inventory disappears and no sales representative appears to ta,e an order, the retailer will simply fill the shelf space with other items "s"ally from a competitor!' (n most cases, the retailer has limited loyalty to the SF 1rand' The e#tent of lost sales from lac, of attention is "n,nown, 1"t 1elieved to 1e s"1stantial'

2 f"rther complication to SF order flow and inventory management is the rel"ctance of most retailers to ,eep m"ch inventory in ho"se' This often res"lts in calls from retailers, either directly or thro"gh the sales representatives, to send a shipment %yesterday%' These orders are fre-"ent, and tend to 1e small' They are also irreg"lar in their timing' Payments <ayment terms for SF0s c"stomers are net A0' (n theory, the thirty4day time period starts at the time that an order is shipped from (ndianapolis' Typically, the invoice is mailed or fa#ed to the c"stomer$ a copy of the invoice is also sent with the physical shipment' (n practice, the average collection period averages /2 days' Some smaller companies with wea,er credit histories have different payment re-"irements' Some pay with credit cards$ others m"st pay in cash prior to delivery' These acco"nts represent less than /9 of total reven"es, however' The Gro th Strategy The Mar,eting team, at the re-"est of Casey, 1egan a systematic st"dy of the mar,eting practices of the firm' (n the past year and a half, the n"m1er of tea varieties %stoc, ,eeping "nits%, or SB5s! sold to retailers has nearly do"1led' The company has always introd"ced new 1lends on a periodic 1asis, especially in anticipation of the winter holiday season' Last year, a line of green teas that appealed to a more health conscio"s p"1lic was very s"ccessf"l' ;owever, other new prod"ct la"nches were less s"ccessf"l' 2 new line lin,ed to a s"ccessf"l healthy snac, proved to 1e a %1"st%' 7holesale c"stomers were also concerned a1o"t the n"m1er of SB5s that the company re-"ested them to carry' (n many cases, some of the newer prod"cts were not selling well, and they were collecting d"st on the shelves' This pro1lem is especially ac"te in smaller retail o"tlets that are not well serviced 1y the sales rep gro"ps' This sit"ation is a %lose4lose% for all concerned$ SF is foregoing sales that co"ld 1e generated with a 1etter selling prod"ct, and the retail o"tlet has idle shelf space' (n the longer r"n, the retail o"tlet is li,ely to eliminate some shelf space allocated to SF' 2 second iss"e involved the long4standing policy of selling only to %-"ality% commercial c"stomers' The owner and C< of Sales periodically received re-"ests from %mass% retailers s"ch as Safeway, Target, Costco, and 7almart to carry their prod"ct' 2c-"iring these new c"stomers wo"ld 1oost sales s"1stantially 1"t profit margins wo"ld erode as these large c"stomers wo"ld re-"ire disco"nt pricing' F"rther, SF is concerned that selling thro"gh these o"tlets wo"ld erode the 1rand image' The Management Team The owner of the company met with the management team to disc"ss ways in which the company co"ld operate more efficiently' The team was assigned the tas, of generating a list of pro1lem areas$ Tim Casey, the owner, directed his staff to %p"t all the iss"es on the ta1le%' 2t the end of the three day meeting the following were identified3 +' Lost sales d"e to poor c"stomer servicing' Tho"gh there are a n"m1er of relevant factors, the motivation of e#ternal sales force mem1ers seems to 1e a prominent iss"e' They are not employees of the company, and it is li,ely that many of their small c"stomers are simply not worth the effort' There is also a -"estion as to whether the separation of prod"ction (ndianapolis! and sales and mar,eting Los 2ngeles! is a pro1lem' 2' (nventory inefficiencies$ in partic"lar, the large average levels as well as very high levels )"st prior to the pea, sales months of 8"ly thro"gh ?cto1er' F"rther, there are still occasional %stoc, o"ts% on some orders' This occ"rs primarily when one of the larger c"stomers presents a large order for a partic"lar tea flavor'

A' Collection time3 altho"gh credit terms are a "niform %net A0% for all c"stomers, act"al receipt of payment varies widely' The c"rrent collections systems is primarily %paper 1ased%$ the 2cco"nts @eceiva1le personnel attach a paper copy of the invoice to the act"al shipment, and send a d"plicate copy to the c"stomer via reg"lar mail' The c"stomer then sends the invoice to their 2cco"nts <aya1le department, at which point the %A04day cloc,% starts, from the perspective of the c"stomer' D' The Sales>Mar,eting manager e#pressed her concern that the <"rchaser>Controller wo"ld occasionally p"rchase cheaper ingredients than those listed on the la1els' ;e maintained he did this only when the desired ingredients were "navaila1le or "n"s"ally highly priced d"e to temporary s"pply pro1lems' She maintains that s"ch s"1stit"tions may impair -"ality, and damage the company0s rep"tation' 2s SF is perceived as a seller of a high -"ality prod"ct, she arg"es that the %rep"tational loss% in val"e of the 1rand wo"ld 1e s"1stantial if competitors or, worse, the press! were to discover the s"1stit"tions' <rivately, she is concerned that the Controller><"rchaser has incentives to foc"s primarily on red"cing Cost of Eoods sold, and is not loo,ing at the %1igger pict"re%' /' ;eavy @eliance on T;3 T; s"pplies a1o"t 609 of their finished tea' Several mem1ers of the management team e#pressed concerned a1o"t this reliance' <rices were already rising d"e to e#change rate changes, and 1oth the -"ality control manager and sales manager were -"ietly e#pressing concerns a1o"t the -"ality of shipped prod"ct' F' <rod"ct <ortfolio3 ;ow many prod"cts sho"ld SF sellG 2 relatively small n"m1er of 1lends acco"nted for a ma)ority of sales a version of the %60>20% mle!' Het the owner felt that growth re-"ired an e#pansion of the prod"ct line' !uestions "' 2dvise Specialty Food and Beverage on how to proceed with their strategy' #' (dentify pro1lem areas facing the company and ma,e recommendations on how to address these pro1lem areas' $' 7hat do yo" thin, of SFs strategy of selling only to %high end% retail o"tletsG %' SF has a relatively comple# s"pply chain, starting with growers in tea prod"cing co"ntries' Iisc"ss opport"nities and challenges for the company in managing this chain'