Supply Chain Management At Dream Beauty Company

Case 11supply Chain Management At Dream Beauty Companydream Beauty Db

CASE 11 Supply Chain Management at Dream Beauty Company Dream Beauty (DB) Company is a manufacturer of consumer beauty supplies and cosmetics. Based out of Money City, Nevada, the company services its customers across the U.S. Recently, a supply chain expert was elected to the board of directors. With his insight into supply chain operations, heightened attention was turned toward that area. The costs in this area have been increasing, and management became very concerned about the issue.

The company’s annual sales reached $130,000,000 for the first time since inception. Management believed that some of the increase in supply chain costs may be attributed to additional sales, but they were confident that other factors existed that needed to be addressed. The situation had management’s full attention, especially since supply chain costs (and savings for that matter) flow directly to the bottom line. DB supplies its products through three distinct channels: retail stores (direct), convenience stores, and mass merchants. Each channel is considered an independent profit center with full financial responsibilities for income statement and balance sheet.

From DB sales, retail accounted for 50 percent, convenience stores for 30 percent, while mass merchants picked up the remaining sales. Cost of goods sold accounted for 40 percent of sales. All three channels seem to be profitable, and contribute equally to DB, according to the company's cost accountant. The order fulfillment cycle at DB consists of four areas The total order fulfillment averages three days. All orders are processed through a central location, and delivered from distribution centers located across the U.S.

Usually retail and convenience store orders are shipped unlabeled on standard non-mixed pallets. Mass merchants, on the other hand, have placed a lot of pressure on DB and want the company to take an active role in helping them manage their inventory. To accommodate this channel, DB has assumed some of the jobbers’ functions in the store and started labeling the orders for mass merchants. To accomplish that, the company recently purchased a labeling machine that can process labels at a speed of 30 labels/second. The machine's historical value was determined to be $10,000,000.

The company usually depreciates similar equipment on a straight-line basis over a period of five years. The company has a discount policy for all three channels that it services. The net is due in 30 days. While this policy is explicitly stated on all DB's invoices, retail stores are the only ones that pay according to invoice terms. Mass merchants usually pay within 15 days, while convenience stores usually pay within 45 days.

The company's cost accountant reported that all sales were sold on credit. Cash sales and C.O.D. sales were rare; therefore, they can be ignored for the purpose of analysis. DB does not engage in any barter transactions. The company received a total of 3,600 orders. Retail orders amounted to 1,000; convenience stores to 2,500; and mass merchants had 100 orders. Each order has a corresponding delivery that is usually completed within the three-day fulfillment cycle. The company's practice has been to allocate logistics-related costs to its three channels based on their relative percentage of sales volume. The orders were shipped in 2,000 packages, with retail accounting for 800 packages, convenience stores for 1,100 packages, and mass merchants for 100 packages. Packaging cost is estimated to be the same regardless of size. To service these orders, the company has maintained an inventory safety stock so that it can meet the level of service that it promises its customers (the three-day fulfillment cycle).

It is estimated that the company holds an average of 90 days' inventory for retail, 60 days' inventory for convenience stores, and 40 days' inventory for mass merchants. The company's cost accountant estimated the total carrying costs of inventory to be approximately 15 percent of total average annual inventory. These costs also include the cost of capital. The company's customer base in convenience stores includes 13 different stores located in major U.S. cities. Table 1 provides a breakdown of sales per store, as well as the number of orders, and packages for each store.

Table 1 Activity Summary by Account

Historically, DB has offered its customers a level of service that is of the highest standards. One of the fulfillment managers has been quoted, “We do not discriminate between customers; our three-day fulfillment cycle in my opinion is becoming an industry benchmark, and I like it that way. I do not think that our strategy should change in that regard.” The board has some second thoughts about this strategy, and what type of value-added it is generating to the company. On your first day, you get accustomed to your surroundings, and you become familiar with the computer system. On your second day, the vice president for supply chain (and your hiring manager) comes up to you.

He proceeds to brief you on a high-level meeting that he just concluded with the top brass at the company. He states that management wants to know why supply chain costs seem skewed, as well as a full analysis of the three logistical channels that the company employs. Management would like you to answer the following questions:

Questions

1. Analyze the way that current costs are being allocated; what potential changes can you recommend to make the system more efficient and more accurate?
2. What is the profitability level and return on investment by distribution channel, under both the current and the recommended allocations?
3. What are your recommendations regarding the company policy of offering all its customers the same service level (three-day fulfillment cycle)?

Paper For Above instruction

Supply chain management is a critical area for companies like Dream Beauty (DB), especially given increasing costs and rising customer expectations. Analyzing the current cost allocation system reveals potential inefficiencies and inaccuracies that can be addressed to optimize overall performance.

Current Cost Allocation Practices and Recommendations for Improvement

DB allocates logistics-related costs based on sales volume percentages across its three channels: retail, convenience stores, and mass merchants. While simple, this method may not accurately reflect the real resource consumption of each channel. For instance, channels with higher logistical complexity, such as mass merchants requiring labeling and direct inventory management, could be under- or over-costed. Additionally, packaging costs are uniformly allocated despite different packaging requirements, potentially skewing cost accuracy.

To enhance accuracy, DB should consider activity-based costing (ABC). This approach assigns costs based on actual activities consumed, such as order processing, labeling, packaging, and transportation. For example, the labeling machine purchase and its depreciation should be directly linked to orders requiring labeling, primarily for mass merchants. Similarly, transportation costs can be allocated based on weight, volume, and distance rather than merely sales volume. Implementing ABC would enable DB to identify high-cost activities and streamline or outsource them, leading to improved efficiency.

Profitability and Return on Investment by Channel

Under current allocations, all channels are reported as equally profitable, but more precise analysis suggests varied profitability when factoring in more accurate cost allocations. For example, mass merchants impose additional costs due to labeling and inventory management, which may be understated in the current system. Conversely, retail channels with high sales volume and shorter inventory holding periods might appear overly profitable due to the simplistic allocation model.

By applying refined activity-based cost data, DB can calculate more precise profitability metrics. For instance, chargeable activities such as labeling, special packaging, and expedited shipping can be allocated directly to mass merchants. This will likely reduce their apparent profitability but offer a clearer insight into true margins per channel. A higher ROI from retail and convenience channels may be attributable to lower logistical overheads.

Calculating return on investment (ROI) should involve the specific depreciation of equipment like the labeling machine ($10 million straight-line over five years, equating to $2 million annually). The ROI analysis would compare the incremental profits after cost adjustments relative to the investments in equipment and process improvements.

Assessing the Service Level Policy

DB’s commitment to a three-day fulfillment cycle across all channels has established a high standard in the industry. However, maintaining uniform service levels irrespective of channel-specific costs and customer expectations may not be optimal. Mass merchants, for example, pay sooner and may require more tailored logistics solutions, potentially justifying different service levels or flexible delivery windows.

Moreover, uniform service levels can lead to increased inventory costs, especially if shorter cycles are extended or relaxed for certain channels. A differentiated service policy, perhaps offered to high-margin or strategic channels, could lower costs without significantly impacting customer satisfaction. Alternatively, adopting a tiered service approach—such as expedited shipping for high-value clients and standard delivery for others—may offer a balance between cost control and customer service excellence.

Conclusions and Strategic Recommendations

Database’s current cost allocation methods need revisiting to improve accuracy and efficiency. Transitioning to activity-based costing would provide more precise visibility into channel profitability, enabling better strategic decisions. Adjusting service levels to reflect channel-specific needs rather than a uniform approach could reduce costs and enhance customer satisfaction. Overall, a nuanced approach to supply chain management—aligning costs, profitability, and service—will position DB more competitively in a competitive marketplace.

References

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