The Centennial Company manufactured small electrical appliances for the consumer market. Its major product line consisted of several models of electric shavers for both men and women. The shaver division generated over 90 percent of the firm’s annual sales, which ran at approximately $30 million in 2016.
Several years ago, the company introduced a new shaver model that proved to be extremely successful. The model utilized a new Teflon coated microscreen-type rotary head that produced an extremely close shave. During the design stage of the new product, the marketing department had conducted an extensive consumer survey to determine exactly what style and color combinations best suited the market for this innovative new product. The style finally selected was an extremely modish plastic case with a sleek futuristic contour.
From a cost and pricing point of view, the new product fit the company’s basic operating strategy very well. Over the years, Centennial became known as a manufacturer of low-cost, high-quality products. The firm typically priced its products 15 to 20 percent below its major competitors. This pricing policy was made possible, in part, because Centennial was basically a design-and-assembly-type operation that purchased a majority of its parts and components in large volumes from specialty manufacturers and supply houses, about 20% from oversea suppliers. Centennial’s production facilities were highly automated so that its labor cost was relatively low; last year, material costs ran approximately 65 percent of net sales.
From the beginning of 2017 until now, Centennial’s material costs had been increasing at a level significantly higher than the producer price index for finished non-consumer goods. Indirect labor costs and overhead also had also begun to increase. Consequently, the firm’s profit margin and its return on investment had begun to drop off noticeably. Several members of the firm’s top management team thought that Centennial should reconsider its basic pricing policy. The possibility of a 5 to 10 percent price increase was being contemplated. The vice president for sales, however, resisted a price increase because he thought it might erode the low-cost, high- quality image the firm had developed in the marketplace. The result, he thought, could well be a significant loss of economy-minded customers.
Each of the Centennial department managers was asked to consider possible approaches to the resolution of the cost-price squeeze issue and, also, to prepare a brief report on possible cost cutting/productivity improvement measures that could be undertaken in their respective departments. The manager of the supply department was asked in his report to pay particular attention to the matter of material costs and efficient utilization of departmental personnel.
1. As a supply manager, what is your responsibility concerning top management’s knowledge and expectation of the supply management operation?
a. What performance data should management have been receiving?
b. What information is necessary to control material costs?
2. What types of suggestions might the supply manager make in his report that would be worth exploring? Making several reasonable operating assumptions (also assume the current profit margin is 5 percent), quantify the estimated results from a profitability point of view for both Scenario A and Scenario B.
Scenario A:
Assume that the supply management department adds one supply professional at a cost increase of approximately $70,000 per year.
Assume that this supply professional is dedicated to cost reduction activities, and that she can reduce the shaver’s annual material costs by approximately 10 percent.
Assume that sales volume and shaver price remain unchanged, i.e. annual gross revenues = $27M.
Scenario B:
Assume that the shaver’s selling price is increased 5 percent.
Assume that the price increase produces a 2 percent reduction in annual shaver sales volume.
Assume that all other factors remain constant (no additional supply professional).