WKT Valentine’s Sourcing Strategies

WKT Valentine’s Sourcing Strategies

Jason BloomSrividya Deshpande

Sarah KrusePatrick Salemme

Situation Valentine’s Day flower sales account for approximately 36% of

fresh cut flower sales in the US Demand varies greatly year to year WKT (local supermarket) currently orders last minute to utilize

best demand forecasts but suffers high costs as a result

Current StrategyPostpone orders until

the last minuteExperience high

competition for scarce flower supply

Buy higher priced locally grown flowers

Need a new strategy

Major PlayersGrowers

Foreign and Domestic

WholesalersRetailers

GrowersForeign

2/3rds of US consumption

59% from Columbia18% from Ecuador6% gross marginSold for ~$0.05 per

stem

Domestic1/3rd of US consumptionUS is third largest

producer of fresh cut flowers

94% produced are sold in the US

40-60% gross marginSold for ~$1.75 per

stem

WholesalersDeal with large

consolidated bulk shipments from foreign growers to US

14 day life – cold chain required

Experiencing cost of $0.22 per stem sold

35% of flowers are lost during transit

45% gross marginSell for ~$0.40 per stem

Bullwhip Affect

Customer to Retailer

Retailer to Wholesaler

Wholesaler to Grower

Explain why wholesalers tend to have limited supply for last minute orders of the retail florists.

Retailers - WKT16th largest supermarket

chain in the US230 stores in the NESell roses to consumer at

~$2.00 (online or in store)

Average Valentine’s Day demand for past 10 years 2,285,862 stems High: 3,208,035 Low: 1,429,070

1996 1998 2000 2002 2004 2006 20080

500100015002000250030003500

WKT's Fluctuating Rose Demand

Stem

Dem

and

(in

1000

s)Year

Alternate StrategiesCurrent PolicyWholesale – 2 months in advanceWholesale HybridVertical IntegrationCoopetition – Cooperative Competition

Current PolicyPositives

Maximum demand accuracy

Multiple sources

NegativesFierce competition

between retailersHigher prices due to

local grower purchasesNo discount from

wholesaler

Current PolicyAssumes WKT can only

get 1.5mm roses wholesale at foreign $0.40 price

All other roses must be purchased for $1.75

Gross margin of 60%Standard Deviation of

14%

Wholesaler – 2 months in advance

Positives10% discount on orderGuaranteed supply of

order for Valentine’s DayStrengthens relationship

with supplier

NegativesMinimal demand

responsivenessAccurate forecasting

requiredUnderestimate demand:

high volume last minute from local growers

Overestimate demand: surplus spoiled stock

Compare the last minute ordering strategy and the advance ordering strategy.

Wholesale – 2 months in advance

Assumes all pre-ordered roses purchased at $0.36 (10% discount)

All additional required roses sourced from local growers at $1.75

Gross margin of 80%Standard deviation of

4%

Wholesale HybridPositives

10% discount for large portion of order

Opportunity to guarantee supply but make last adjustments

Maximize demand responsiveness at lower cost

Strengthens relationship with supplier

Negatives20% markup on small

portion of orderAccurate forecasting

required for advanced order optimization

How should WKT combine the last-minute order with the advanced order in the hybrid strategy?

Wholesale HybridAssumes WKT orders

69% of forecast at $0.36 to optimize margin

Additional roses ordered at 60% pre-order and 60% strike price

Gross margin is 75%Standard devation is 5%

Vertical IntegrationPositives

Maximum demand responsiveness

Higher profit marginAbility to profit from

additional stock

NegativesOutside company’s core

competency Infrastructure, grower

contacts, and knowledge of international shipping required

High fixed costs to implement

Vertical IntegrationAssumes WKT

experiences total landed cost of $0.22 per stem acting as wholesaler

All roses purchased for $0.05

Gross margin is 84%Standard deviation is 5%

CoopetitionPositives

Collaboration on securing supply

Potential for higher margins

Higher purchasing power

Information flow from competitors

NegativesAttempting to

collaborate with unwilling competitors

Consensus buying decision disagreement

Information flow to competitors

Summary of findings

Current Strategy

Wholesale Advance

Wholesale Hybrid

Vertical Integration

40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90%

Optimizing Profit Margin for WKT

Profit Margin

Stra

teg

y

Which Strategy works better for WKT? For the Wholesaler? Wholesaler and WKT combined?

Challenges of Vertical Integration Infrastructure – cold chain shipping and storageGrower contacts and importingBrokerage: customs and regulatory expertise

(traceability)Experienced Wholesalers lose 35% of flowers in transit… Can WKT handle this?

Risks of Vertical IntegrationCultural riskHigher costs due to

lower volumeLabor issuesSingle sourceLoss of focus on core

businessUnsatisfactory return Should WKT vertically

integrate with its wholesaler? Does the benefit outweigh the cost?

Recommendation: Wholesale in advanceYields savings of

$1,063,000 over current policy

Is more cost affecting taking into account fluctuating demand

Ordering newsboy quantity resulted in higher profit margin and lower margin variability than the hybrid model!

Questions?