Case Study - Adolph Coors Brewing Company

Explanation for the decline in Coors' performance between 1977 and 1985 and suggest what they might have done differently.

Declining performance of Adolph Coors can be linked to their operations. Comparison of Coors’s performance in year 1975 with that of 1985 clearly indicate a decline in operating revenue despite the fact they increased their capacity. As can be seen by Exhibit A (taken from Exhibit 9 in the case), the operating income as a percentage of sale for Coors went down from 20% (Year 1975) to 9% (Year 1985). Once question arises at this point that if it was industry wide problem and to answer this question we can see the operating performance of Anheuser-Bush. Exhibit A clearly indicates that operating income as a percentage of sales for Anheuser-Bush increased from 10% (1975) to 15% (1985). This clearly indicates that something is going on with Coors operations.

The following reasons should be able to shed some light on the issues faced by Coors that are contributing to decline in Coors’s performance from 1975 – 1985.

1.      In order to achieve smoothness of availability of raw materials Coors has followed backward integration approach. It owns most of its operations that keeps Coors at a disadvantageous position to utilize the economy of scale. For example Coors owns its grain fields, can production facility, manufacturing plant to produce brewing equipments, coal fields (to become self sufficient in energy).

2.       Coors’s production process is quite elaborate (it takes 70 days as compared to 20-30 days for other brewers) that increases Coors’s operating cost by increasing production cost. Coors’s per barrel beer cost is approximately 21% higher than that of Anheuser-Bush and approximately 72% higher than that of Heileman.

3.      Due to the production method of Coors beer it needed refrigerated storage that increase Coors’s production cost significantly. Although, refrigeration cost is offset by pasteurization cost (Coors does not do pasteurization) yet Coors has shorter shelf life that contributes to wastage.

4.      Distribution of Coors beer is done by refrigerated containers (by rail or by road) and to long distances (after national rollout). This should significantly contribute to reduction in operation income.

5.      Coors has increased its marketing expenses to increase its awareness in the state during national rollout. It is not obvious what should be the right amount for advertising as it can be seen from Exhibit B that there is a significant increase in the advertising expenses over the year.

In order to achieve better efficiency Coors could have taken few steps that could have decreased their production cost.

1. Coors should try to utilize economy of scale and should have outsourced some of their processes. This would have allowed them to concentrate on their primary process and could have presented significant savings.

2. Coors should have done a study to check what difference it would make if they use pasteurization method instead of natural (refrigerated method). If the difference in taste (customer preference) permitted the change, it could have resulted in significant savings.

3.  Coors should have embarked on journey of establishing breweries in different regions at the beginning of their expansion plan so that they could have saved significantly on shipping and storage.

Case Study - Revenue Management at Harrah's

1)     Suppose that, at the start of August 15, most of the hotel’s rooms have been booked for the Labor Day weekend and only the rooms in Table 1 remain free. Now consider the list of 6 reservation requests that came in on August 15, as shown in Table 2. Using the clearing prices that were computed in Table 8 in the Case, determine which customers should be offered a room and what prices they will be charged in the following two scenarios:

a)     Suppose that customers will always take a room that is offered to them regardless of the price. How much room and gaming revenue will the accepted guests generate for the hotel?

The first three customers would be offered rooms and would accept. Total room and gaming revenue would be $4,690 [Exhibit 1].

b)     A problem with the analysis in Question 1(a) is that it ignores potential price sensitivity. Suppose that Tiers 1 and 2 customers will pay at most $250 per room per night. Giving this willingness to pay, assume that these customers will be charged a minimum of $250 per night. How much room and gaming revenue will the accepted guests generate for the hotel? What drives the differences in your answers?

The first, third and fifth customers would accept our quoted price. Total room and gaming revenue from these three guests would be $4,405. Caller #6 would be turned away. Callers 2 and 4 would not accept our quoted price because the total price was more than $250 per night [Exhibit 2].

2)     Recall that Harrah’s computes its clearing prices by splitting its forecasts for multiple-day stays (LOS >1) into distinct single-night stays. This calculation does not fully capture the effect of multiple-night stays, however. For example, if you honor a request for LOS = 3, then a room must be blocked for three consecutive nights. How can you modify the clearing price calculation to explicitly account for the effect of multiple-night stays? As in Question 1(b), assume that Tiers 1 and 2 customers will be charged a minimum of $250 per night.

a)     With these assumptions in mind, develop a method to account for multiple-night stays, and apply that method to determine revised clearing prices for the nights of August 31 through September 4. Explain the methodology that you used and report your modified clearing prices.

To calculate the new clearning prices, one will have to account for two factors, the change in the room rate, with the tier 1&2 paying $250 per night and the impact of multiple-day stays.

To achive this objective, we will have to consider a sample of data, based on the tier, their corresponding ADT value and the accepted room rate. The total revenues from a given tier per stay (stay could correspond to multiple nights) would be = {number of nights of stay * (ADT + room rate)}. Then based on this data, we will calculate the total revenue generated from Aug 31 till Sep 4th, by running a liner model against the number of people admitted into the rooms for a given tier and for a given day.

Once, the values are obtained, we could then calculate the revenue generated for a demand of 1 more room on a particular day. The difference between this revenue and the previous revenue obtained (before we increased the demand by 1 more) would give the clearing price for that particular day.

Based on the above method used, we get the below set of the revised clearning price. We have also mentioned the previoud clearning price to show the difference in the clearning price.

Clearing Price	31-Aug	1-Sep	2-Sep	3-Sep	4-Sep
Revised	319	751	881	535	535
Previous	285	285	881	285	69

b)     How do your clearing prices compare to the clearing prices shown in Table 8 of the Case? If they differ, why? If not, why not?

Clearing prices per our sensitivity analysis and Table 8 in the case differ because Table 8 does not consider the length of stay for each tier level [Exhibit 4].

3)     Using the clearing prices you calculated in Question 2, go back and re-solve Question 1(b). Determine which customers will be offered a room and what prices they will be charged. How much room and gaming revenue will these guests generate for the hotel? How does this value compare to the value computed in your original answer to Question 1(b)?

We determined that customers 1, 3 and 5 will accept our quoted price and will book rooms [Exhibit 3] and will generate the same revenue calculated in question 1b. of $4,405. These are also the same customers that accepted room offers in question 1b.

  

Case Study - Southwest Airlines in a Different World (Service Operations)

Why has Southwest been so much more successful than its competitors?

Success of Southwest originates from its simplicity of operations and organizational culture that is clearly evident by its mission statement[1]. The simplicity of Southwest helps it to drive down cost, maximize shareholder value and improve customer experience. Following are the success drivers of Southwest.

Fleet Standardization: Fleet standardization is one of the biggest strength of Southwest that helps it to keep the cost down. By only adapting Boeing 737 in its fleet Southwest saves millions of dollars on maintenance, training, and inventory holding cost. This feature gives Southwest a high degree of flexibility to reconfigure/rearrange planes across routs.

Point-to-Point Transit: Unlike traditional network carriers that operate by hub-and-spoke system (a system where airlines collect passengers from spoke cities bring them to central hub and redistribute to their destinations), Southwest operates via point-to-point transit i.e. nonstop direct flights from one destination to other destination. This helps Southwest minimize lead time and increases plane utilization by avoiding plane waiting at the airport.

Simple in Flight Service: Southwest keeps it in flight services very simple. As most of Southwest flights are very short (90 minutes), there is no class distinction, no assigned seating, no interlinking of bags and no food. This feature help Southwest drive cost down by reducing unloading time and cleaning time, which reduces lead time between two flight (at present approximately 30 min Vs 60 min of industry).

No Frills, No Fees: Southwest keeps all it’s offering very simple and transparent. Unlike other airlines that are reducing their value proposition to customers (by cutting perks) Southwest has maintained its offerings. For example, Southwest tickets are all inclusive and it still allows two free check-in bags.

Capable Management & Happy Work Force: Southwest has capable and strong management. Organizational structure is relatively simple and there is a strong emphasis on Customer, Organization and Employees. Southwest way i.e. Warrior Spirit, Servant’s Heart and Fun-LUVing Attitude is the driving force for everyone in Southwest. This has helped Southwest to reduce cost by keeping very low level of employee turnover (5%).

Fuel Hedging Strategy: Fuel cost is significant portion of airline’s operation cost. Southwest follows a very effective fuel hedging strategy. Till date this strategy has helped Southwest to save approximately $4 billion.

How has the original strategy been altered in recent years? How, if at all, have theses changes affected Southwest’s key success factors?

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Would you recommend that Southwest Airlines acquire the gates and slots available at LaGuardia Airport? Why or why not?

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[1] The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride and Company Spirit.

Case Study - Ritz-Carlton Hotel Company

“Service” can be an elusive concept. What is the essence of the Ritz-Carlton experience? What is the Ritz-Carlton selling?

“We are not is the hotel business. The hotel business is about selling rooms, selling food, selling the bar. We do these things incidentally, but our business is service. We charge for service. Our commitment to our customers is excellence in service. Service is our profession”. It cannot be put in better words than put by Mr. Schulz. Service is not something that can be qualified by one word or a particular act. Ritz-Carlton is there to provide finest service to their customers by providing them superior facilities during their stay so that they (customers) can have life lasting experience.

The service quality provided by Ritz-Carlton stems from their way of treating their customers and employees i.e.  “The Gold Standard”, a combination of three steps of service, The Motto, The Employee Promise, and The Twenty Basics, to promote employee focus on Ritz-Carlton’s core company value. The effect of this philosophy can clearly be seen in R-C’s operational efficiencies (~80% occupancy rate) and only 20% employee turnover (as compared to industry’s 100%).

Expositional service of R-C is clearly due to its exceptional work force. Human psychology clearly dictates that there has to be a balance between offered to and offer by. R-C offers high quality work environment to its employee and in return their employee provide highest quality services to their guests[1].  R-C’s employees have opportunity not only to excel their position but also develop new skills to be able to bare significantly higher responsibility.

How does the Ritz-Carlton create “Ladies and Gentlemen” in only 7 days?

A good alignment of employee’s vision with that of company’s vision is essential for the success of the organization. Recruiting team at R-C makes sure that there is a good value & purpose match between employees and organization. In order to produce high quality service professionals it is essential to remind the employees that they are there for a purpose.

The process of creating “Ladies and Gentlemen” in seven days started way before that when candidates to be interviewed were greeted with utmost hospitality and friendliness. After the recruitment the same continued[2]. Mr. Schulze’s first address[3] was another mile stone that clearly conveyed R-C’s values and culture and his intent that R-C is here to create Ladies and Gentlemen who were there to serve and to be served.

Seven days training to the new employees was a critical task that motivated and trained all the employees to blend in R-C’s values and culture. Various tasks at the training sessions gave employees an opportunity to familiarize themselves with their co-workers as well as R-C’s culture. This period gave them opportunity to train themselves so that they could understand their and their customer’s purpose and how R-C can help them to achieve it.

In what may be a first for the hospitality industry, Brian Collins, hotel owner, has asked James McBride, Ritz-Carlton general manager, to lengthen the amount of time spent training hotel employees before hotel opening. Should McBride lengthen the 7 Day Countdown? Or, is this the time that McBride should consider a total overhaul of the hotel opening process. If yes, what should he change, and how should he go about doing it?

1. We recommend that they should think of implementing additional training if it only takes additional 7 days as it would provide them with an incremental revenue of $620,000. If it takes 21 days to train the  employees then we would recommed not the undertake the process.

2.     The training plan would vary depending on the location of the hotel as lower average daily rates (ADR) would make this process non-fesiable (due to constant training cost).

3.    This plan has to be tested very carfully as implementing this strategy overall without testing may have adverse effects.

4.  We don’t recommend total overhaul of the system as it is a well established standardized working system.

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[1] Vijay Sing’s reason to work for Ritz-Carlton “I came to work for two reasons. One, to achieve excellence. The other, to achieve excellence with friends”.

[2] Incoming employees were treated by the scores of managers with smile and by saying “We are happy you are here”, welcome “I am glad you’ve come”.

[3] “You are not servants. We are not servants. Our profession is service. We are Ladies and Gentlemen, just as the guests are, who we respect as Ladies and Gentlemen. We are Ladies and Gentleman and should be respected as such”.

Pratt & Whitney: From the Deck to Angels Thirty

1. Evaluate Pratt & Whitney’s attempts to re-enter the commercial aviation engine market. What was successful and what would you have done differently? (25%)

2. Do you think Rolls-Royce should accommodate or prevent Pratt & Whitney’s re-entry as a stand-alone firm in the commercial aviation engine market? What about GE? (40%)

3. Given Rolls-Royce’s and GE’s possible actions/reactions to P&Ws new engine, what should P&W do now to provide itself with options for future competitive moves? (35%)

For questions 1 and 2, consider how financial pay-offs have influenced the behavior of these firms in selecting their competitive actions.

Pratt & Whitney:

With the changing dynamic in the aviation industry, Pratt & Whitney is not merely attempting to re-enter the commercial aviation market, it is hoping to completely re-carve its position in order to influence the direction of the industry.  The company’s attempt to renter the market hinges on three main factors: (i) adoption on the 737 and A320 (ii) buy in from Airlines and Leasing companies (iii) long term service contracts.  If success for Pratt & Whitney is measured purely by the number of engine order in 2010, then their 210 orders of PurePower® engine would be considered abysmal.  Players such as Bombardier, Mitsubishi, and Irkut who have committed to adopting the engine do not have the volume to drastically improve Pratt & Whitney’s market share position.  In addition, the lack of support from major plane manufactures (Boeing & Airbus) and commitment to adapt PurePower® by major airlines and leasing companies is hurting P&W. Out of total 3,474 A320 & 7373 orders, it is unclear if they will be using the technology.

However, rather than judging Pratt & Whitney based on the number of engines orders thus far, the technology and its effect on overall industry players must be considered.  The company has been extremely effective in communicating the advantages of the new technology to the key buyers in the industry, Airlines and Leasing companies.  The fact that the engine is fuel efficient, has high emissions standards, and is quieter could potentially present a very lucrative option to airline industry as they try to cope with rising fuel prices and more stringent government regulation.  In the ingenuity of the engine lies Pratt & Whitney’s greatest success, the technology itself.  While there are multiple aspects that make it appealing to airlines from an operational standpoint, the simpler design could allow airlines to reduce maintenance costs in the future.  Considering that many airlines are switching to or replacing their A320 and 737’s, having a more efficient, lower maintenance engine could be a competitive advantage in a volatile industry.  In addition, the timing of the engine launch not only give Pratt a competitive advantage over GE’s Leap-X technology, it begins a debate in the industry regarding the redesign or re-engineering of the Boeing 737 and Airbus A320. 

While Pratt & Whitney has been able to enter the market with what appears to be a great deal of reserved optimism from major airlines and leasing companies, they have taken some risks in the process.  In developing the technology on their own and attempting to go into the market on their own, they have taken the risk of upsetting the norms of the engine industry. Currently, the three main manufacturers have joint alliances that span the entire 20,000 lb to 120,000 lb thrust range.  The PurePower® technology is moving into the realm that has been dominated by the V2500, a joint effort through IAE between Rolls and Pratt.  In addition, they on trying to also take down the Engine Alliances CFM56 engine while trying to maintain their development on the GP7000 with GE.   By not taking the partnership approach and joining forces with GE or Rolls- Royce, Pratt & Whitney has taken a risk in getting the industry to adopt the technology.

GE and Rolls Royce are left in a difficult position as they see Pratt & Whitney trying to re-carve its position in the commercial space.  It appears that Rolls is seeing the partnership that they have with Pratt for the V2500 at risk in the future.  The lawsuit filed in 1999 was either a play to prevent the engine from reaching market or a warning shot to Pratt & Whitney to reconsider their intentions. Either way, Rolls Royce is left in a difficult position.  Their Trent900 engine suffered from a major design flaw that caused the grounding of the Quantas A380 flight. In addition, Engine Alliance (between P&W and GE) has secured the majority of A380 engine order in the near future. With the market shift towards Engine Alliance, Rolls also sees its position on the 787 deteriorating due to GE’s GEnx engine technology.  Due to current advances, Rolls would be left at a competitive disadvantage without the V2500 and with only a major position in the Trent700 and XWB.  The long term maintenance contract for V2500 are also at stake assuming P&W decides to provide services for V2500 engines.  Considering that PurePower® engine was not a joint venture, mass adoption of the PurePower® engine will put Rolls at a very disadvantageous position.  In engine services industry P&W has already set the precedent by undercutting GE on 200 of their CFM-56 engines (with United Airlines), thus it is likely possible that P&W may be able to carve out maintenance contracts that cater both to the V2500 and PW1000G family. 

GE’s Position: At present GE is the market leader in commercial engine market with their CFM engines, with 11,786 engines already in service and approximately 4,070 engines^†[1] on order (Exhibit 4 & Exhibit 20 of the case). GE is not reacting at the launch of PurePower®. Apart being the market leader in the commercial aircraft industry, GE has secured a sound financial standing. GE spent approximately $4.4 billion on their R&D efforts, approximately 23.5% (Exhibit A) of their total GE Aviation’s revenue. Considering GE has secured a significant portion of future supply of CFM-56 (for 2,035 Boeing 737 planes) and has LEAP-X in pipe line (scheduled to complete in 2016) that can potentially compete with PurePower®.

P&W’s Position: 

P&W’s PurePower® can potentially be used in place of CFM-54 (especially in Boeing 737) with reengineered or new planes. Due to its superior fuel savings capabilities (15%) and noise reduction PurePower® can be an obvious choice of airline manufacturers. Apart from above capabilities P&W also has a sound financial position. P&W spends $3.6 billion on their R&D efforts, approximately 29% of their total revenue (Exhibit A). Although there could be some potential advantages of partnership with Rolls, yet it should be carefully evaluated as Rolls does not have best possible financial standing in the industry.

Rolls-Royce’s Position: 

At present Rolls has somewhat struggling position in the industry. It is third player in the industry only 17% shares in terms of revenue (Exhibit D). Also, Rolls has very small R&D budget (Exhibit C). With this over all position of Rolls, P&W should be very careful in making strategic alliance with Rolls-Royce.

While Rolls-Royce initiated a patent lawsuit against Pratt & Whitney, it would appear to be in their best interest to create a partnership and help spur the adoption of the technology.  If Pratt’s technology isn’t adopted, than GE will maintain a competitive position in the marketplace.  However, the projected rising fuel prices (22.5% of total operating expense in 2009) and stricter emission control indicate that if they don’t have the technology, then they need to be aligned with someone who does.

Although financial side does not clearly indicates the alliance possibility, yet joint venture can be justified by some other arguments. For example, once the PurePower® is launched and Pratt’s technology isn’t adopted, than GE will maintain a competitive position in the marketplace.  However, the projected rising fuel prices (22.5% of total operating expense in 2009) and stricter emission control indicate that if they don’t have the technology, they will either develop it or collaborate with someone who has it. Considering Rolls Royce doesn’t have a direct partnership with GE, even if Pratt & Whitney’s PurePower®  engine play fails, GE, is poised to introduce their Leap X engine technology which will only create the same difficulties for them.  Thus, it appears that a partnership is in their best interest to grab a share of not only slim engine profits, but aftermarket maintenance contracts that are extremely valuable. 

For GE, their play on the PurePower technology is completely different.  Since they are already in development of introducing a competing engine in the form of a Leap X, it is in their best interest to prevent the adoption of the PW1000G family.  Considering that they operate a leasing company for aircraft, it is in their best interest to us the Leap X technology and to be the number one choice for both a redesign A320 and 737.  GE has already tried to send Pratt & Whitney a clear signal by entering into their turboprop market that generates $4B in sales annually for P&W.  While GE would like to be the dominant player in the 737 and A320 market, they also understand that there are typically two engines qualified to high volume commercial planes.  If there appears that the PW1000G is adopted, GE will have to ultimately compete with them anyway.  However, the key for GE will be to delay the installation of the P&W engine so that they do not get such a significant first mover advantage in the market.  Considering that they also have a vested stake in the GP7000, it would be in there best interest to maintain that relationship to prevent the engine manufacturers from becoming specialized.

While GE and Rolls Royce will most likely take competitive actions, P & W strategically has the upper hand along the entire commercial aircraft chain.  There appears to be significant divergence in strategy between Boeing and Airbus in terms of their most popular commercial aircraft offerings.  Airbus has indicated that they will be adopting new engine technology on a slightly modified A320 to meet fuel, emissions, and noise requirement.  This is a strategic play by Airbus to win more business for the A320 at a time when Boeing is considering whether to stop production of the 737 and replace it with another aircraft.  Since Boeing has struggled with the completion of the 787, the announcement of a new 737 which could take up to 20 years to get into the market place could shift airlines towards purchasing the A320.   By providing the PurePower® family of engines to Airbus, the two companies are effectively communicating to the industry that they have a cost effective solution now, rather than in an unforeseeable time in the future.  This play puts a considerable amount of pressure on Boeing to meet Airlines demands now, knowing fully well that they could lose a considerable amount of market share if they decide to redesign the 737. 

By forming a partnership with Airbus and getting their engines qualified for the A320, P&W will provide itself with considerable amount of leverage.  That leverage will not only be in the engine technology that they offer, but the service contract for the V2500 that they’ll be replacing.  By becoming the dominant player in that segment, they would carve out a profitable niche and build strong relationships that could help them prove the technology to the industry for decades to come.  In addition, the partnerships that Pratt & Whitney has already formed with Bombardier for the CS class of commercial planes will only enhance its reputation in that segment.  As indicated, Bombardier expects to become a major player in that market if Boeing opts for a redesign.  The leverage of already having the P & W engine technology would only enhance their offering and allow them to steal market share from the big two.  P & W should direct their efforts directly towards Airlines who have this unmet need and are still using older V2500 and CFM56 engines.  Ultimately, the airlines purchasing decisions will influence the direction of the broader industry and with those purchasing decisions will come the lucrative maintenance contracts.

[1] We are assuming only three biggest players in the industry. Revenue in the table 6 is the revenue of the corresponding aviation departments of respective companies.

^†[1] 2,035 Boeing 737 are on order and assumption is that every plane uses two engines.

Education - Sales Force Sizing - Important Factors

Sales Force Size

Size of sales force (SF) is very important for business. Size of sales force smaller than optimal, company will be leaving money on the table and size of SF is larger than optimal company has problems like non-motivated employees and higher cost. SF sizing strategy differs from business to business, for developing business sizing strategy will be entirely different than that of matured business. Thus, business life cycle plays a very important role and dictates the size of SF.

Sizing Strategy for New and Growing Business

Aggressive early investment for growth business enables companies to – (1) capitalize on early stage opportunities, (2) quickly increase sales and profitability, (3) preempt competitors, and develops strong and loyal customer base for sustaining business. Building a sufficiently larger sales force in early stage is a hard decision. If companies are not careful they may leave money on the table. That said, given below are few points that every sales leader needs to keep in mind while deciding the size of their sales force.

1.      Don not undersize when uncertainty is low – If company has a well-established product to launch that has been already tested in some markets, company should go with “Quick Build” strategy. Quick Build strategy will most likely be able to produce higher returns (higher sales) in future. Caution is needed to size the SF in case of financial constraints, high degree of uncertainty in market or product and/or best-selling practices have not been established. It is a very delicate balance where sales leaders have to be very careful regarding hiring too quick or too slowly. Increasing SF size too quick may result in unmet sales quote thus need for reduction of SF and in turn employee morale. Increasing SF size too slow may result in lost opportunity.

2.      Size cautiously when uncertainty is high – lf market response for the product or service is not well established, companies should be cautious while sizing their SF and they should follow “Play it Safe” approach. For the products where selling features and/or process have not been established, early selling process may reveal venues that may need quick adjustment. In these cases SF will require quick adjustment, which is only possible if the size of SF is small as smaller SF is much reactive than the large once. For new and growing companies it is good to be aggressive (and have larger SF) when uncertainty is low and be conservative when uncertainty is high.

Sizing Strategy for Mature Business

For mature business, sizing of SF may not be very important. There may be instances where a particular segment require mild up-sizing as sales leaders may have been little conservative initially while setting up the sales force. For mature business, there may be some instances where SF requires some down-sizing due to pressure on profitable sale, product maturity and competitive market.

1.      Working Smarter is Profitable than Increasing Size – For mature business, smart allocation of SF can yield better results. It is better to focus on the QUALITY of the sales rather than QUANTITY of the sale. Improved allocation of efforts across SF can be done by enhancing sales effectiveness drivers – (1) provide better targeting information to SF, coaching SF for efficient selling, adjusting compensation plan to encourage sale of profitable product line etc.

2.      Down-Size Strategically – Movement of business from maturity to decline demands down-sizing of SF; however, this reduction should be very well thought out. In this scenario direct sales people have to be assigned to take care of most critical, high-valued selling activities with most profitable, retainable, and strategically important customers and product lines. Less valued selling (less strategic product lines) can be performed by other low cost sales resources i.e. inside phone sales, internet sales etc.

Sizing Dynamics

TThere are diminishing returns to sales force effort. Adding 

Increasing sales force size will increase sales (slower rate) and will contribute very sharp decline in gross contribution margin by incurring additional sales force cost.

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Optimal sales force size is the one where sales force cost as % of sales curve intersects sales per salesperson.

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For a business there will be a sales force size that will maximize profits.

Think of Future Changes and Improve Your Supply Chain

A robust and efficient supply chain is foundation to a successful business as it provides a competitive advantage. There are many supply chains that are engineered by best minds in world to capitalize labor-arbitrage opportunities in low-cost regions such as China, India, and Mexico. Uncertainties in today’s world are potential problems for most of the supply chains and these uncertainties put most of the supply chains at a vulnerable position in future. At this point the question arises whether most of global supply chains are able to handle the unfavorable event that can take place due to rapidly changing world. The answer to this question is that many global supply chains are not very well equipped to cope up with the events that may take place in future.

Low-cost manufacturing regions definitely provide immediate advantage to business; however future changes in relative attractiveness of manufacturing regions due to ability to produce larger volume at an economical price may put businesses at risk and leave them dangerously exposed. The factors such as turbulent trade, capital inflows and political/policy changes represent perennial threats to supply chain and most of the times possess even greater threat in developing countries. Although there are factors (rising wealth, emergence of credible suppliers in developing countries) that gives confidence to global firms, yet it will take a significant amount to time for these changes to take effect in completion.

To manage future risks of supply chain companies are adapting two fold strategies. First, companies are “splintering” their supply chain into small, nimble chains where firms are better prepared for higher level of uncertainties. Second, firms are treating their supply chains as hedge by reconfiguring their manufacturing process to withstand a range of future outcomes. The gravity of better managing the supply chain risk can easily be assessed by the statement made by Jin Owens, CEO of Caterpillar “the competitor that is best at managing the supply chain is probably going to be the most successful competitor over time. It is a condition of success.”

Presently most of global supply chains face two fold challenges: (i) uncertain world that has a huge potential to affect the businesses. For example, financial crisis and recessions can dramatically amplify perennial source of supply chain uncertainty – trade and capital inflow. Rising wealth in developing countries is increasing their appetite for more resources (energy, raw material such as steel, iron, and commodities), which is affecting the prices at global level that makes it trickier to configure supply chain assets. Growing worries about environmental regulations will have their own effects on the future of supply chain. Last but not least, growth in developing countries (raising labor cost and depletion of resources) contributes towards the volatility of foreign currency market and in turn has potential to affect future supply chain. (ii) Rising complexity arising due to increasing requirement of the firm’s customers and increasing income level in developing countries that will no longer be manufacturing hubs but also potential customers.

Optimizing the supply chain for all customers and all circumstances is almost impossible and extremely challenging. However, to meet these challenges few forward-looking companies are preparing themselves in two ways. (i) Splintering their supply chain into smaller and more flexible ones (while these supply chains may use the existing channels as the old one, they can be configured to use information more efficiently to cope up with future complexity) and (ii) treat the supply chain as dynamic hedge i.e. make the supply chains more dynamic by consistently looking at future (5 to 10 years ahead) and reconfiguring the supply chain as needed.

By splintering monolithic supply chains into smaller and nimble ones companies can tame the future uncertainties & complexity, save money and better serve their customers. For example assume a company (Comp-A) that has most of its manufacturing in China and is headquartered in North America (with a very small presence) to stay close to its majority of customers. In this situation, increase in volatility of customer demand coupled with product portfolio proliferation (increasing number of SKUs) will put very high strain on Comp-A’s supply chain. This situation may lead to forecasting and service-related problems that may dissatisfy key customers.

This situation is difficult to manage but with some analysis can easily be handled.  To take care of this problem Comp-A should examine its product portfolio along two dimensions: the volatility of demand for each SKU sold and overall volume of SKU produced. After analyzing the situation Comp-A may split its legacy supply chain (one size fits all) into 3 to 4 distinct splinters. For high-volume & relatively stable demand (in most of situations less than 10-20% SKUs that represents majority of revenue) Comp-A can keep manufacturing in China (low cost). High or low volume & high volatile demand should be kept in North America and low-volume & low volatile demand can be divided between North America and Mexico.

By keeping manufacturing of low or high-volume with high volatile demand in North America (USA) Comp-A can serve customers with a very short lead time, which in turn avoid any lost sale. This way Comp-A is no longer required to predict the demand, instead it can manufacture directly to customer order. Other advantage of splintering the supply chain comes from better forecast for high-volume stable demand product as these forecasts will be free of noise generated due to volatile demand products.

Decision on the number of splinter is a tricky one and requires a closer look at the way company uses its supply chain assets to manufacture and distribute its products and strategic goals company has for those products & customers. The requirement seems obvious but it needs some thinking. A good starting point could be analysis of volatility of customer demand for a particular product line against historical production volume then compare it with total cost incurred for different locations. This analysis can provide rough estimate of speed-versus-cost trade-offs and may potentially suggest potential locations of supply chain splinters. The word of caution is that companies must be very careful about these broad analyses and check these against their customer needs.

Other benefit of splintering the supply chain originates from the fact that operational assets can be focused on the tasks they are best equipped to handle. The small size of splinters offers great advantage from flexibility point of view, where senior management may become capable of implementing the improvements that were not possible due to sheer size of traditional supply chain.

Splintered supply chains offers maximum advantage only if they are viewed as a dynamic process. For example, managers will have to assess hypothetical scenarios such as what would happen if crude oil price become $90 instead of $75, what will happen if labor wages in China go up by 20% and so on. The bottom line is that companies should try to design their portfolio of manufacturing and supplier network to minimize the total landed-cost risk under variety of situations. The goal is to identify a robust and stable manufacturing and sourcing point – even if it is not the lowest cost today.

Making these changes are not easy as making any change in a company’s supply chain has its effects throughout the organization because these changes require high level of cooperation and information sharing throughout the organization.

Change is becoming a necessity in today’s uncertain world and to stay ahead in the game companies must learn how to adapt to these changes. Thinking of future and making changes to their supply changes can help companies to survive and maintain their global competitive position because condition for survival is not being strongest, it the adaptability to changes.

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 To learn more about this please refer “Building the supply chain of the future”, McKinsey Quarterly.