CASE STUDY FORSTER’S MARKET
Forster’s Market is a retailer of specialty food items, including premium coffees, imported crackers and cheeses, and the like. Last year Forster’s sold 14,400 pounds of coffee. Forster’s pays a local supplier $3 per pound and then sells the coffees for $7 a pound. The Roaster Decision While Forster’s makes a handsome profit on the coffee business, owner Robbie Forster thinks he can do better. Speciﬁcally, Robbie is considering investing in a large indus-trial-sized coffee roaster that can roast up to 40,000 pounds per year. By roasting the coffee himself, Robbie will be able to cut his coffee costs to $1.60 a pound. The drawback is that the roaster will be quite expensive; ﬁxed costs (including the lease, power, training, and additional labor) will run about $35,000 a year.
The roaster capacity will also be signiﬁcantly more than the 14,400 pounds that Forster’s needs. However, Robbie thinks he will be able to sell coffee to area restaurants and cof-fee shops for $2.90 a pound. Robbie has outlined three possible demand scenarios: Low demand 18,000 pounds per year Medium demand 25,000 pounds per year High demand 35,000 pounds per year These numbers include the 14,400 pounds sold at For-ster’s Market. In addition, Robbie thinks all three scenarios are equally likely.
- What are the two capacity options that Robbie needs to consider? What are their ﬁxed and variable costs? What is the indifference point for the two options? What are the implications of the indifference point?
- Draw the decision tree for the roaster decision. If Forster’s does not invest in the roaster, does Robbie need to worry about the different demand scenarios outlined above? Why or why not?
- Calculate the expected value for the two capacity options. Keep in mind that, for the roaster option, any demand above 14,400 pounds will generate revenues of only $2.90 a pound. Update the decision tree to show your results.
- What is the worst possible ﬁnancial outcome for Forster’s? The best possible ﬁnancial outcome? What other factors— core competency, strategic ﬂexibility, etc.—should Robbie consider when making this decision?
CASE STUDY PAGODA.COM
Pagoda.com is an Internet service provider (ISP) that caters to individual consumers and small businesses who require a high level of service and are willing to pay a premium for it. Speciﬁ-cally, Pagoda.com offers state-of-the-art e-mail applications and Web-building software, as well as plenty of storage space and fast access via its high-speed servers. The marketing vice president, Jerry Hunter, puts it this way: “There are a lot of companies out there promising the cheapest Internet access. But what do you get for your money? Slow- or no-access, a mailbox full of spam, and an endless stream of system crashes. And I won’t even mention the lack of support if you have a technical question! For a few dol-lars more a month, we give our customers the environment they need to be productive—without having to think about whether or not they can retrieve their e-mail, or whether their Web site has crashed. It’s no surprise, then, that we have the highest cus-tomer satisfaction and retention rates in the industry.” The Online Help Desk One of Pagoda’s services is its online help desk.
The online help
desk works as follows: Customers who are experiencing tech-nical problems, or who simply have questions about their ac-count, enter a one-on-one chat room, where they can interact directly with an expert. Problems are usually resolved within 10 minutes, and customers have listed it as one of the top three reasons they stick with Pagoda.com. Presently, Pagoda has enough capacity to handle up to 900,000 requests per year, al-though management doesn’t expect the number of requests to change much from the current level of 800,000 per year. A ﬁrm located in New Delhi, India, has approached Pagoda about outsourcing the online help desk. The offer is attractive. The New Delhi ﬁrm’s own personnel would handle the help desk function. These personnel all speak English ﬂuently and have col-lege degrees or appropriate technical backgrounds. And because they are located in India, labor costs would be a fraction of what they are in the United States. The savings would be passed on, in part, to Pagoda. And since the help desk chat room exists on the Internet, Pagoda’s customers should be unaware of the switch. Pagoda management has put together the following ﬁg-ures, outlining the yearly costs associated with the current sys-tem and the Indian proposal:
Current Online Help Desk
Personnel costs: 40 full-time-equivalent (FTE) technical experts @ $40,000 per year (salary and benefits); 3 supervisors @ $70,000 each per year (salary and beneﬁts)
Equipment costs: 4 servers @ $2,000 per year 20 PCs @ $1,000 per year
Variable costs: $1.50 per request (ofﬁce supplies, fax paper, etc.)
New Delhi Proposal Fixed cost: $1,500,000 per contract year (to cover administrative and IT costs) Charge: $0.50 per request.
- Calculate the total cost of outsourcing the online help desk versus staying with the current solution. Which op-tion is cheaper?
- What other factors, other than costs, should Pagoda con-sider? How would you weight these factors? Given the above, how might you use a weighted-point evaluation system to evaluate the two options?
- Should Pagoda.com outsource its online help desk? Why or why not? Be sure to consider Table 7.6 and 7.7 when framing your answer.
- A statement of work typically speciﬁes performance mea-surements that the buying firm can use to determine whether the service provider is meeting the terms of the contract. What performance measurements would you recommend be put in place? What should happen if the service provider fails to meet these requirements?
CASE STUDY GREEN REVERSE LOGISTICS IN THE ELECTRONICS INDUSTRY 7
The path to a greener supply chain is often paved with forward-looking ideas focused on environmentally friendly manufac-turing, transportation, and distribution processes. For some companies, however, the key to jump-starting supply chain sustainability can be found in reverse. By embracing reverse logistics strategies—including returns management, product repair and refurbishment, recycling of goods and materials, and proper disposal of materials from unwanted goods—com-panies can move the sustainability while also cutting costs and reaping products with a longer shelf life.
One business sector that is championing these activi-ties—and seeing the bottom-line beneﬁts—is the electronics industry, largely because of skyrocketing growth in high-tech gadgets. Thanks to ever-changing technology, top sellers such as digital cameras, cell phones, video game systems, comput-ers, televisions, and other electronic devices become obsolete in a few short years—leaving electronics manufacturers to deal with mountains of unwanted product.
Recycling For electronics manufacturers, recycling unwanted com-ponents is one key aspect of green reverse logistics. In 2007, Samsung, a global leader in the electronics industry, began its Recycling Direct program—partnering with take-back and recycling companies that do not incinerate, send materials to solid waste landﬁlls, or export toxic waste to developing coun-tries—and has since recycled 14 million pounds of waste from its consumer goods and IT products. The company has estab-lished drop-off locations across all 50 states in more than 200 ﬁxed locations, where consumers can take unwanted electron-ics (both Samsung and non-Samsung brands). “Our goal is to make it convenient for Samsung customers to recycle old TVs, phones, camcorders, printers, notebook computers, and other electronics at no charge,” explains David Steel, senior vice president of marketing for Samsung North America. The company has also teamed up with the U.S. Postal Ser-vice and third-party logistics company Newgistics to operate the Samsung Take Back & Recycling program, which enables consumers to recycle used printer cartridges. Using a prepaid Smart Label, customers can return old printer cartridges to Samsung by simply dropping them in any mailbox. Through this program, Samsung ensures that empty cartridges are safely reprocessed into their major usable component materials (in-cluding plastics, metals, and packaging materials), and then it makes those reprocessed materials available for reuse in new manufacturing for a range of products.
When a consumer returns an electronics product because it is outdated or not functioning properly, they don’t likely give much thought to what happens next. But what happens next is at the heart of business for companies such as ATC Logis-tics and Electronics (ATCLE), which performs asset recovery, repair, and refurbishing services. Brian Morris, director of en-gineering for this Texas-based 3PL, gave a detailed explanation of the process involved in giving a returned product a new life: When we receive returns from customers, we do a test in-spection to find out how many faults the product has. If there is nothing wrong with it, we can repackage it for sale. If it’s a faulty product, we identify the failure and deter-mine what it takes to repair or refurbish that product. The next step is to weigh the economics of the repair: Given the cost of ﬁxing a product, does it make sense to repair it? This goes back to the cost/beneﬁt of conducting the testing and refurbishment processes. There must be an acceptable ratio to be proﬁtable. The range is typically 70 to 80 percent of the product’s original cost. If a product is deemed worth ﬁxing, we put it through our repair and refurbishment operation, and it emerges like new. If the product cannot be repaired, we look at its in-dividual components. If the plastic housing is still in good shape, for instance, the plastic can be reclaimed and used to refurbish another product. Batteries are another key com-ponent. Most batteries are not exposed, so if they still hold a charge properly and are in good shape cosmetically, they are often put through reconditioning. After reconditioning, we use them as replacement batteries or sell them to other refurbishing operations. We also ﬁnd uses for components such as keyboards and USB cables.
Products with components that don’t make the grade are sorted into containers and sent to a recycling house. Recy-clers crush and grind plastic components and send them to an injection mold facility, where that plastic is put back into production for new plastics manufacture. Circuit boards can be crushed and smelted, and the precious metals—such as titanium, copper, and small traces of gold—are removed and sold to another circuit board manufacturer or even a jewelry house. We are working to help manufacturers utilize refurbished and reclaimed parts so they can cut down on purchasing new parts. This helps them reduce costs, and it allows us to keep waste from piling up in landﬁlls.
- Consider the examples of recycling and refurbishing de-scribed in the case. Who are the various stakeholders who benefit from these efforts? How do efforts to build sus-tainable supply chains differ from simple good business practice?
- Would Samsung have put in place the Take Back & Re-cycling program in a business environment that did not emphasize sustainability? Why or why not? What about ATCLE’s refurbishing services?
- In your opinion, will sustainability become another core measure of operations and supply chain performance, in addition to cost, quality, delivery, and quality? Why or why not?