Case 3 Assignment

Specialty Teas INTRODUCTION

Late one afternoon in March 2009, Tim Casey, owner of Specialty Teas (ST), purveyor of fine teas,

sat down and composed a memo to his senior staff. ST had had superior growth over the last

sixteen years; this growth had caused “growing pains” in the organization structure and operations of

the firm. In the “early days” Tim made all the major decisions for the company; revenues in the very

early years were shy of the $1 million mark, and most of the decisions seemed quite straightforward.

Now that revenues were nearing the $25 million mark, Tim was finding that decisions and

operational procedures that worked well in the past were inadequate. ST’s line of product offerings

had risen sharply, the supply chain had become much more complicated and relationships with

customers more difficult to manage. In addition, several high quality competitors had entered the

market in recent years. Although profitability was still good, ST could no longer afford to operate

inefficiently. The specialty tea market was now crowded with competitors, with all of them attempting

to grab a portion of STs hefty market share.

Tim had decided: the senior staff were going to meet in two weeks for a three day retreat to sort out

some of the challenges facing ST. All aspects of the company were to be examined.

SPECIALTY TEAS

Specialty Teas (ST) is a privately held small tea company that imports tea (and some other tea-

related food and beverage products) from several suppliers abroad and markets these products to

both wholesale and retail customers, primarily in the USA. The company was founded in 1989 by

Sam Westgood, Sheila Westgood, and Bob Jonas. The idea had been hatched some years earlier

when they had met with some friends and discussed the lack of high quality tea in the United States.

Sensing an unmet demand, they resolved to develop a tea to meet the needs of consumers desiring

high quality tea. They managed to acquire some “angel” funding and soon developed a devoted

following of their brand. They developed unique packaging, including a striking set of graphics and

slogans, and they were off and running.

As marketers, the founders were extraordinarily successful. Unfortunately, they were less successful

as business operators. They sold the business to Tim Casey in 1992. Under Tim’s ownership, more

effective business practices were put in place. More effort was spent attracting wholesale business

instead of direct appeals to retail customers. The wholesale market constitutes about 85% of their

business.

OPERATIONS

The Supply Chain

Our examination of the supply chain process for ST begins with the sourcing of raw materials

(primarily tea) in several Asian countries – China, India, Taiwan, Japan, and Sri Lanka. A relatively

small portion of the goods are imported directly from these countries by ST; the majority of the goods

are imported from Twinhof (TH), located in a suburb of London. This company processes the teas

according to proprietary specifications for ST. ST is a relatively small customer of TH; as such, ST

only produces specialized blends in batches about twice a year. More frequent production runs are

considered economically infeasible by ST, as each run requires TH to adjust the settings on the

production equipment to the proper specifications. There is substantial time and cost associated with

this set up process, effectively limiting the number of runs per year. At present, TH only ships to ST

in container size lots; each container holds about 10,000 kilos of tea.

Purchase orders are generated from the production facilities just outside Indianapolis, Indiana. The

chief of purchasing also functions as the controller of the company; although product purchases

rarely vary in quality, there are times when a particular specialized ingredient for the tea blend is

unavailable. In these cases, substitute ingredients need to be identified; this will occasionally result

in production delays. Further, any changes in the production formula need to be cleared with the

head of Sales & Marketing. This division is based in Los Angeles, however, since California

accounts for the largest concentration of sales.

TH requires a three-month lead time from ST to deliver the orders. This lead time is established as:

1) two months to acquire/process the tea from the source, and 2) one month transit time to ST. In

the current arrangement, some of the “favorites” (high volume tea) are produced and shipped on a

regular schedule. Other products are ordered and shipped on an irregular basis. The shipments

arrive in Indianapolis in large sealed bags. Upon arrival at the plant, the tea is packaged into retail-

sized containers, which are then held until shipped to a retailer (and, in some cases, directly to the

consumer). Typically, about two months worth of sales are held as inventory. However, this average

inventory size masks several problems associated with inventory management. Order volume is not

only seasonal, but also irregular. Although many of the retailers with which ST does business order

tea on a relatively predictable basis, some of the large customers order infrequently, and these large

orders (often in excess of $200,000 per order) are not wholly predictable.

The processing plant is able to pack approximately $100,000 worth of tea per day (about 20,000

lbs). Although ST usually has sufficient quantities of packaged product available for shipment, they

are sometimes caught “short” on large orders. In some cases, the delay caused by the limited

processing capacity results in ST needing to air freight orders to these customers. Management of

ST feels this to be necessary since the potential loss of business to these large customers would be

disastrous.

Customer Orders

As noted above, large orders (from me biggest customers) are made directly to headquarters in

Indianapolis. However, most of the orders are smaller, and are made by members of sales

representative organizations hired by ST. ST is too small a company to have their own nationwide

sales force. Regional sales organizations are hired to “service” the accounts; the size of the

accounts varies widely. Some are as small as $l,000/year (annual sales). The sales representatives

(“reps”) receive 10% of the amount sold; payment is made to the reps upon receipt of funds by ST.

The volume of sales order may be described as moderately predictable. Like any consumer product,

though, there is a substantial degree of uncertainty in the order patterns, particularly in the peak

order months of July through October.

Orders are sent by fax, phone and via the firm’s website. The firm would prefer to have all orders

sent electronically but many of the sales reps continue to use the phone or fax. When ST’ s sales

managers push the reps to use the website, some complain the process is “complicated”. Many of

these reps have been in the business for fifteen or more years and are reluctant to change their

method of doing business. ST management suspects many find using the phone or fax simpler and

are unwilling to make the investment in learning the web technology.

ST feels that some sales are “left on the table” since the sales representative organizations are of

varying efficiency. Anecdotal evidence suggests that some retailers order product from competitors if

the sales representatives do not make timely visits to the store. In effect, if shelf inventory

disappears and no sales representative appears to take an order, the retailer will simply fill the shelf

space with other items (usually from a competitor). In most cases, the retailer has limited loyalty to

the ST brand. The extent of lost sales from lack of attention is unknown, but believed to be

substantial.

A further complication to ST order flow and inventory management is the reluctance of most retailers

to keep much inventory in house. This often results in calls from retailers, either directly or through

the sales representatives, to send a shipment “yesterday”. These orders are frequent, and tend to be

small. They are also irregular in their timing.

Payments

Payment terms for ST’s customers are net 30. In theory, the thirty-day time period starts at the time

that an order is shipped from Indianapolis. Typically, the invoice is mailed or faxed to the customer; a

copy of the invoice is also sent with the physical shipment. In practice, the average collection period

averages 52 days.

Some smaller companies with weaker credit histories have different payment requirements. Some

pay with credit cards; others must pay in cash prior to delivery. These accounts represent less than

5% of total revenues, however.

The Growth Strategy

The Marketing team, at the request of Casey, began a systematic study of the marketing practices of

the firm. In the past year and a half, the number of tea varieties (“stock keeping units”, or SKUs) sold

to retailers has nearly doubled. The company has always introduced new blends on a periodic basis,

especially in anticipation of the winter holiday season. Last year, a line of green teas that appealed

to a more health conscious public was very successful.

However, other new product launches were less successful. A new line linked to a successful

healthy snack proved to be a “bust”. Wholesale customers were also concerned about the number of

SKUs that the company requested them to carry. In