WKT Valentine’s Sourcing Strategies

Jason Bloom

Srividya Deshpande

Sarah Kruse

Patrick 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 Strategy

Postpone orders until the last minute

Experience high competition for scarce flower supply

Buy higher priced locally grown flowers

Need a new strategy

Major Players

Growers Foreign and Domestic

Wholesalers

Retailers

Growers

Foreign2/3rds of US

consumption

59% from Columbia

18% from Ecuador

6% gross margin

Sold for ~$0.05 per stem

Domestic1/3rd of US consumption

US is third largest producer of fresh cut flowers

94% produced are sold in the US

40-60% gross margin

Sold for ~$1.75 per stem

Wholesalers

Deal 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 margin

Sell 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 - WKT

16th largest supermarket chain in the US

230 stores in the NE

Sell 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

500

1000

1500

2000

2500

3000

3500

WKT's Fluctuating Rose Demand

Ste

m D

em

and (

in

10

00

s)Year

Alternate Strategies

Current Policy

Wholesale – 2 months in advance

Wholesale Hybrid

Vertical Integration

Coopetition – Cooperative Competition

Current Policy

PositivesMaximum demand

accuracy

Multiple sources

NegativesFierce competition

between retailers

Higher prices due to local grower purchases

No discount from wholesaler

Current Policy

Assumes 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 order

Guaranteed supply of order for Valentine’s Day

Strengthens relationship with supplier

NegativesMinimal demand

responsiveness

Accurate forecasting required

Underestimate 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 Hybrid

Positives10% 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 order

Accurate forecasting required for advanced order optimization

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

Wholesale Hybrid

Assumes 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 Integration

PositivesMaximum demand

responsiveness

Higher profit margin

Ability 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 Integration

Assumes 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%

Coopetition

PositivesCollaboration 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

Str

ate

gy

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

Challenges of Vertical Integration

Infrastructure – cold chain shipping and storage

Grower contacts and importing

Brokerage: customs and regulatory expertise (traceability)

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

Risks of Vertical Integration

Cultural risk

Higher costs due to lower volume

Labor issues

Single source

Loss of focus on core business

Unsatisfactory 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?