Dream Beauty Company - Why the Supply Chain Costs Seem Skewed - Case Study Example

SUPPLY CHAIN MANAGEMENT by Student’s Name Code+ course name Instructor’s Name Institution of Learning City, State Date Abstract Supply chain management is one of the most important aspects of an organization. Proper knowledge of supply chain theories and practices could determine to some extent the success of an organization. For that reason, the paper analyses the case study of the supply chain attributed to Dream Beauty Company. The main aim of the analysis is to identify some of the flaws in the distribution channels and make a recommendation in order to maximize the profits for the firm. The analysis shows that the company has several branches, which increases its delivery costs. The inventory holding period is also high. In addition, the packaging of orders has got immense problem. The paper has made several recommendations some of which includes introduction of a standard package, instituting a depot at the manufacturing headquarter, and automation of order processing among other measures. Keywords: Supply chain management, distribution channels, branches, standard package Introduction Dream Beauty is a manufacturing firm located in Money City, Nevada and it specializes in the production of beauty supplies and cosmetics products. The company has seen a considerable increase in its sales hitting up to $130M, which has also reflected on its annual costs. The increase in cost has impacted negatively on its profits and the management has suspected that the problem could be lying within its supply chain. Shah (2009, p. 10) describes supply chain as the transformation of raw material and components into finished products and efficient delivery to the clients. On the other hand, the management of supply chain is the design and all the management processes across the boundaries of an organization with the main objective of matching the demand and supply in the most cost effective manner (Hugos, 2011, p. 56). Therefore, the aim of this paper is to analyze the case study of Dream Beauty and make appropriate recommendation in line with the findings. Why the Supply Chain Costs Seem Skewed Dream Beauty has a very simple distribution channel. The manufacture of all the products takes place in the companies’ headquarters. The products are then shipped to its distribution centers across the United States. The company services its orders from these centers to its three distinct clients; retail stores, convenience stores located in 13 different stations, and the mass merchants. These customers contribute 50%, 30%, and 20% of the sales revenue respectively. The supply chain had an order fulfillment cycle cost of $50M, which it incurred in order processing, packaging, labeling, and delivering the products. The retail, convenience stores, and mass merchants placed 1,000, 2,500, and 100 orders that were shipped in 800, 1,100 and 100 packages correspondingly at the same cost. The company has also maintained a fulfillment cycle of 3 days, with inventories of 90 days for retail, 60 days for convenience stores, and 40 days for mass merchants with the total carrying cost of 15% of total average annual inventory. Convenience stores pay within 45 days, while retail and mass merchants pay within the recommended period of 30 days. The main strength of the company is the treatment of its customers without any preferential. All the clients are equal. The company also has its branches all over the county to allow for quick delivery of the products to their clients (Coyle et al. 2012, p. 60). Specifically, Dream Beauty has a total order fulfillment period of three days. However, the transportation of these goods has a considerable cost attached to it. In fact, delivery has the highest chuck of $30M out of the $50M of total supply chain cost. Basically, this is the transportation cost that the company incurs in shipping the products from its manufacturing headquarters to the distribution centers and transporting them again to its clients. This is because all the products have to be produced from a central point before being dispatched to the distribution centers. The company shoulders all the delivery costs to their clients’ destinations. The increase in cost could also be because of the totally fragmented supply chain (Wisner, 2011, p. 45). Beside this factor, the company has a standard packaging cost independent of the size of the orders. In that regard, stores with similar orders will incur different packaging cost. For example, La Belle Femme generates sales revenue of $5,000,000 by placing 200 orders that are disintegrated into 20 packages. However, Wild by Nature contributes only $ 3,000,000 out of the same number of orders of 200 but the packages increased to 100. This means that Dream Beauty will incur up to five times in packaging costs for Wild by Nature orders than that one of La Belle Femme. Therefore, the increased number of stores’ demand for numerous orders in fragmented packages could be one of the reasons causing the inefficiency in the supply chain. This is particularly evident in the supplies of convenience stores that receive numerous small packages. The case excerpt also alleges that the mass merchants have pressurized the company to be labeling their products. It expressly states that while products to retail and convenience stores remain unlabeled, those destined for mass merchants are labeled at there delivery points using a newly purchased labeling machine worth $10M and with a life span of 5 years. The straight line depreciation method means that the company incurs almost $2M per year in the maintenance cost of the labeling machine. This external pressure has worked against the company forcing them to even hire workers stationed at the mass merchant stores to do the labeling (Jacobs, Chase, & Chase, 2010, p. 20). The order processing also takes place in a centralized place before green lighting the distribution channels to effect the deliveries. The total cost for processing of orders was also substantial, $10M. According to Carter and Easton (2011, p.50), the probably reason could have been a clog up on the entire system of ordering. Secondly, the processing of orders could be manual, requiring high level of man power for accuracy and meeting the high deadlines (Wu, & Pagell, 2011, p. 580). Apart from the cost of order processing, the company also incurs costs of holding inventories of up to 90 days for the retail products. The number of days of holding these inventories is vey many and is likely to also affect the quality of these products (Gold, Seuring, & Beske, 2010, p. 236). This cost is estimated to about 15 percent of total average annual inventory. The costs of holding these inventories are considerable very high. Customer Service Policy Dream Beauty has all its clients within the United States. It means that they are not spending much on the delivery of their products to their customers since the target market is within the borders of the country (Jacobs et al., 2011, p. 45). The management of the company is very strict on not compromising the fulfillment cycle of three days. The management is also not willing to despise any of its clients. Each and every client is valuable to Dream Beauty. Putting the above into consideration, it seems that company is incurring double transportation cost (Schroeder, Goldstein, & Rungtusanatham, 2013, p. 120). The reason being that is delivers the products to the distribution centers before taking them to its clients. Therefore, it should institute a functioning depot within it’s headquarter to service the nearby clients. The above action would cut on the transportation of the products to the distribution centers. Since the company has a standard cost for its packages, they should consider increasing the size of its batches. Increase in batch size will ensure that they maximize on the size of the package (Tummala, & Schoenherr, 2011, p. 480). The company can also maximize on its profits by cutting on the inventory holding days. At the present, its has a holding day of 90 days for retail, 60 days for convenience stores, and 40 days for mass merchants. By reducing the holding days, the company will ensure that there is reduction in the warehousing related costs. This can be compensated by increasing the number of its branches within the country. Incase of a breakdown, one distribution center can get supplies from the nearby branch. More so, there should be automation of order processing. Secondly, the company should consider relocating the labeling machine to its premises. These will ensure that it cuts on the costs of maintaining its jobbers at mass merchant stations (Walker, & Jones, 2012, p. 20; Jahns, & Stolle, 2008, p. 97). Justification for the Recommendations The above proposals have been on the basis of the analysis of the company’s supply chain. For one, the automation of order processing will ensure that the number of workers in these stations is significantly reduced. The reduced expenses on processing of orders could be diverted into maintaining the labeling machine. Besides, the automation of order processing is likely to improve on the fulfillment cycle and even reduce it. Similarly, the company may also consider opening up other distribution centers to cater for the increased sales within the region. These branches will ensure that they keep on the 3-day fulfillment cycle for even their new clients. The depot at the manufacturing headquarter will also allow for servicing the nearby clients and save on the cost of transporting the products to the distribution centers (Lambert, 2012, p. 50; Hofmann, Beck, & Fuger, 2012, p. 205). Since the company has a standard cost of packing irrespective of the size, the company should consider increasing its packing size. This will ensure that its clients can make large quantity of orders. Therefore, Dream Beauty shall have transferred some part of the warehousing cost to its clients. Since there would be fast processing of orders the automation, this can easily allow the company to reduce its holding period. However, this will mean that company ensures that it also has stable suppliers of the raw materials. They can ensure this by having reliable suppliers of their raw materials. Increase in the batch size will also allow for the reduction of delivery costs (Schroeder, Goldstein, & Rungtusanatham, 2013, p. 133). Another proposal was the reallocation of the labeling machine to its manufacturing centre. The labeling machine will then label all the products at the manufacturing center. Since the company labels these products, they can impose some small fee towards labeling. The increase in the price would have a positive impact on the sales revenue of the firm. In addition, the company will then be able to cater for the depreciation cost of the machine. The jobbers who were operating the labeling machine at the mass merchant headquarters can now get new assignments. Alternatively, the company can release them off duty, reducing the cost of the manpower (Jahns, & Stolle, 2008, p. 102). Conclusion To sum up, it is evident that Dream Beauty has problems with is supply chain that is costing the firm a lot of money. However, the entire system of supply chain has some room for improvement. For instance, to maintain quick delivery, while at the same time check on the costs, the company needs to have a standard packaging size. The company should also increase number of its branches to compensate for the increased sales that has reflected on its sales revenue. It addition, it can have an automated order processing system. The labeling machine could also be moved to its manufacturing center to allow for labeling of all the products at small fees that could be transferred to its customers by increasing the prices of its products. Although the problems of the supply chain of Dream Beauty have been highlighted, and recommendations made, the implementation should be systematic. The Dream Beauty should incorporate each proposal one at time as it evaluates its effects on cost and revenue inflows of the company. References Carter, C. R., & Easton, P. L. 2011. Sustainable supply chain management: evolution and future directions. International Journal of Physical Distribution & Logistics Management, 41(1): 46-62. Coyle, J., Langley, C., Novack, R., & Gibson, B. 2012. Supply chain management: A logistics perspective. Boston: Cengage Learning. Gold, S., Seuring, S., & Beske, P. 2010. Sustainable supply chain management and inter‐organizational resources: a literature review. Corporate social responsibility and environmental management, 17(4): 230-245. Hofmann, E., Beck, P., & Fuger, E. 2012. 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