Complexity of Operations and the Effect on Cost
In the mid-1990s, a large consumer goods manufacturer moved its customer-based department and specialty stores to mass merchandising in a a variety of retail stores, large and small. The strategic change required it to increase significantly the complexity of its operations-the number of products, prices, discounts, patterns, colors, and sizes. After noticing the firm's expense beginning to rise, the company hired a consultant to study the firm's cost structure. The findings:
- As many as 10 different vendors provided certain purchased items.
- Of the firm's customers after the strategic shift, 98% were responsible for only 7% of total sales volume.
- The wide variety of prices and discounts and promotional programs added complexity to the accounts receivable collection process because of increased disputes over pricing and customer balances.
- Seventy-five percent of the company sales involved products with five or more color combinations.
- Customer demands for fast delivery of new orders had caused a shift in manufacturing to smaller batch sizes and more frequent equipment setups. Thus, total setup-related costs increased.
Required:
What would you advise the company to do?