Supply Chain Management in Canada

Strategic Supply Chain Management: Case Study
I. Executive Summary
Strategic supply chain management consists of strategic, tactical and operational levels, wherein general planning, short-term process decision-making, and day-to-day operations are planned and executed. This case study examines the supply chain issues of Krebbler-McCray Home Products and provides recommendations together with an integration implementation and monitoring plan to address both the long and short term issues presented in the case. The report is organized in the following sections: Issues Identification, Environmental Analysis, Root Cause Analysis, Alternatives and Options, Recommendations, Implementation, and Monitor and Control. It covers the strategy and market position of the company, the supply chain decisions that have to be made, evaluation criteria, possible alternatives, quantitative and non-quantitative analysis, how the best strategy can be implemented, and how the company be know whether the strategy has been successful.
The main points of this summary are the following:
1. The issues identified consist of
a. the company’s revenue coming almost exclusively from Canadian consumers, where competition is fierce;
b. operating expenses increasing as a result of no integration of operations following the merger of Krebbler and McCray;
c. There is considerable unnecessary overlap in the distribution system, which should be streamlined;
d. Krebbler’s quality does not lead to positive net revenues; McCray’s faster delivery and sales record does—but at a cost of a lower quality ranking
e. The big 5-year contract worth $30 to $36 million needs to be signed. It requires low-cost ready to assemble furniture like that which McCray can produce using its new CAD software. It will mean, however, reducing the footprint of Krebbler’s.
2. Environmental analysis reveals that margins are being squeezed by the low costs of competition from China, the customer base has shifted to bulk buyers from custom design buyers, and competition in premium product comes from Germany and Italy.
3. The strategic issues to be addressed are: 1) integration of the two businesses so as to reduce costs; 2) whose approach to retain and whose to drop—Krebbler’s or McCray’s, and 3) how to restructure operations so as to penetrate new markets and improve revenues, while cutting costs. Both financial and quality considerations have to be made.
4. The recommendations for the company are as follows: 1) the company must integrate distribution centers; it is currently operating two centers that have overlapping service channels—one of them can be closed to save costs; 2) the company must reserve the Krebbler approach for custom design clients and use the McCray approach for bulk buyers; 3) the company should expand into U.S. markets now that trade war with China has developed and in the U.S. there will be an opening to penetrate the market and fill a gap left by China’s absence.[footnoteRef:2] [2: Robert Channick, “Fallout from China Trade War,” Chicago Tribune, 2019. https://www.chicagotribune.com/business/ct-biz-china-tariffs-illinois-impact-20190510-story.html]
5. The decision to reduce Krebbler operations should be made so as to compete with low-cost competitors; however, the company’s reputation for quality should be reserved for custom design consumers. Expansion into the U.S. should be made by meeting retailer demand now that high tariffs are being placed against Chinese imports in the U.S. The large $30 million contract must be signed and tactical operations must be made to work to accommodate this new demand.
II. Issue(s) Identification
The strategy and market position of the company is to offer premium household wooden furniture to consumers in Canada, U.S., Japan and China. The vast majority of sales revenue comes from the domestic market (95.5%). 2.5% of sales in the U.S. and 1% of sales in Japan make up the rest of the company’s revenue sources.[footnoteRef:3] Essentially, outside of Canada, the company has made no inroads of any substantial impact in foreign markets. [3: Krebbler Furniture Case Study, Supply Chain Management Association, 12.]
The market for household furniture in Canada is extremely competitive. The founder Michael Krebbler took the company public five years ago so as to obtain capital for expansion as well as to give himself an exit strategy for his retirement. Because of the competitive nature of the market, however, the company has been struggling just to survive.[footnoteRef:4] By selling the company to McCray, Krebbler entered into retirement. However, the two businesses never fully integrated and at present are still operating as two separate businesses though they are owned by one owner.[footnoteRef:5] [4: Krebbler Furniture Case Study, Supply Chain Management Association, 3.] [5: Krebbler Furniture Case Study, Supply Chain Management Association, 8.]
Operating expenses have increased drastically since the sale of Krebbler’s to McCray. Two years prior they 7.23 million CAD compared to current expenses of 10.94 million. The main recent for this increase is the lack of integration between the two businesses, which means that Krebbler-McCray is essentially running two supply chains simultaneously. By integrating the two it could substantially reduce operating expenses and return to a positive net earnings—currently -3.25 million CAD as compared to a positive 1.187 million prior to the companies’ merger.[footnoteRef:6] The difference in income between before and after the merger can be seen in the income statement in the Appendix. [6: Krebbler Furniture Case Study, Supply Chain Management Association, 12.]
There is also considerable overlap in the distribution systems of the two businesses. The McCray Plant and Distribution Center crisscrosses with the Krebbler Plant and Distribution Center, as can be seen in Appendix B. Both businesses use national retail chains to move their products, and there is overlap here as well.[footnoteRef:7] In terms of delivery rate, McCray bests Krebbler by 25% and delivers in half the time (3 weeks vs. 6 weeks). In terms of quality and customer satisfaction, Krebbler bests McCray by 1.5 stars in the Furniture Quality Index (4.5 vs. 3.0). Krebbler’s extra time to delivery correlates with a higher quality ranking. However, its extra care also increases its overhead (for example, to construct a dining room hutch, labor at Krebbler costs $408 vs $135 at McCray; materials cost $540 at Krebbler vs. $457.50 at McCray).[footnoteRef:8] Krebbler’s quality is not sustainable, however: net earnings at Krebbler were negative compared to net earnings positive at McCray.[footnoteRef:9] [7: Krebbler Furniture Case Study, Supply Chain Management Association, 17.] [8: Krebbler Furniture Case Study, Supply Chain Management Association, 18.] [9: Krebbler Furniture Case Study, Supply Chain Management Association, 19.]
The issue with the large $30 million contract is that the company is already operating at capacity. It does not have the space to take on a contract of this size unless it makes some serious adjustments. That means making adjustments at the Krebbler plant, which is only 15 minutes from McCray’s distribution center. McCray has already noted that the Krebbler plant operations do not align with the demands of the new marketplace, which wants cheap, low-cost furniture—not high-quality custom design furniture. Krebbler’s products can continue to be produced for niche market customers—but where is the question. They may either continue production in the Krebbler plant, or in the McCray plant where similar operations are currently underway in 20% floor space section of the old part of the plant where CAD has not been introduced.
III. Environmental Analysis
An increase in imported low-cost furniture goods, mainly from China, has squeezed the margins of Canadian wooden furniture manufacturers.[footnoteRef:10]
The customer base has also shifted from small consumers to large bulk buyers, which means the type of product in demand is not the same as it was when the company was founded, and this puts new pressures on the company to adapt its supply chain just to meet current market demand. [10: Krebbler Furniture Case Study, Supply Chain Management Association, 3.]
Major competitors for Krebbler in the premium, design-conscious niche market hail from Europe—Germany and Italy primarily. However, there is considerable demand among bulk buyers for low-cost products that are currently being provided by China but that will need to be sourced from elsewhere what with the trade war between China and the U.S. getting underway.[footnoteRef:11] [11: Robert Channick, “Fallout from China Trade War,” Chicago Tribune, 2019. https://www.chicagotribune.com/business/ct-biz-china-tariffs-illinois-impact-20190510-story.html]
The market demand is for bulk products, and the $30 million contract for five years is what the company should be aiming for. This is the new market. Adjustments therefore are required to the strategic and tactical supply chain.
IV. Root Cause Analysis
The real decision to be made is that of how the company is going to integrate. Operational costs are too high and are impacting the bottom line. The company’s operation expenses can be reduced through a more integrated supply chain management strategic and tactical approach.
The criteria to use for evaluating the decision should be both financial and quality-related. Krebbler’s is known for having a higher quality rating than McCray’s but McCray’s produces a net positive revenue, which Krebbler’s does not. The quantitative analysis that can be done is to examine the operational costs, the difference in revenues, and the cash flow of Krebbler’s, which is negatively impacted mainly from fashion furniture stores whose sales are unpredictable and have caused the company to be saddled with higher than necessary debts.[footnoteRef:12] Krebbler’s business model is a drag on the company’s overall bottom line. There is simply not the demand for high quality products like there is for low-cost, ready to assemble products that retailers are buying in bulk from McCray’s. Krebbler’s brand is important from a quality perspective and should be retained, but the majority of business will come from McCray’s ability to provide low-cost products. [12: Krebbler Furniture Case Study, Supply Chain Management Association, 7.]
IV. Alternatives and/or Options
The company could continue to operate its businesses independently of one another as it is currently doing. However, this is not cost-effective and shows little strategic consideration. The other alternative is this: McCray could sell Krebbler’s since the businesses have not been integrated in any way, shape or form. This would make a sale easier—however, attracting a buyer of Krebbler’s may be difficult considering the company’s debts and lack of net positive revenue. A third option is that McCray could, on the other hand, integrate Krebbler’s business fully into the company, close the Krebbler plant, and use the old 20% floor space portion of its east coast plant[footnoteRef:13] to assemble custom design orders like those for which Krebbler’s is known. This option makes the most sense considering McCray’s original intention when buying Krebbler’s, which was to use the brand to expand into the U.S. market. Considering the environment in which the U.S. market is now in, what with Chinese imports set to dry up and a big gap left to be filled, the company could fill that gap rather quickly and easily, especially since the U.S.-Canada trade deal has already been settled. [13: Krebbler Furniture Case Study, Supply Chain Management Association, 9.]
To assess the value of these options, both financial and quality-related criteria should again be used. First, there is the consideration of cost that has to be made. Operating the two businesses independently of one another is not cost-efficient. The strategy of expanding into the U.S. market makes sense considering the current geopolitical climate. The quality criteria also makes sense as it is the Krebbler reputation for quality products that is especially helpful for achieving that expansion into the American market. Retaining the Krebbler brand but reducing the cost of operations by closing the Krebbler plant and moving production into the old part of the east coast McCray plant will help to achieve this much needed cost reduction.
V. List and Prioritize Recommendation(s)
The top priority of the company is both strategic—i.e., expand into the U.S.—and tactical—i.e., adopt best-practices according to industry standards and what leading innovators in the field are doing. McCray’s is ready to do both. The following recommendations are therefore made in order of importance:
1. Integrate Krebbler’s quality custom production into McCray’s by moving all custom operations into the east coast plant where 20% of floor space is currently being used for this purpose. Direct COGS have increased by 1.5% over 2 years ago.[footnoteRef:14] Inventory turns are down nearly 2%. Raw materials are up in inventory by 3% and work in progress is up by 2%. However, finished goods are up only by 1%.[footnoteRef:15] The Krebbler plant could be used for McCray’s low-cost CAD productions, and the 20% of the McCray plant, which would total to 50,000 sq. ft (half of the current Krebbler plant, currently described as bloated and inefficiently using its space) could be allocated for Krebbler custom design productions. The 100,000 sq ft of the Krebbler plant should be used for expanding McCray’s operations. It is conveniently located to McCray’s Central DC and thus would reduce operational costs substantially. [14: Krebbler Furniture Case Study, Supply Chain Management Association, 13.] [15: Krebbler Furniture Case Study, Supply Chain Management Association, 13.]
a. Pros: This frees up the entire Krebbler plant that is within 15 minutes of the McCray distribution center. The Krebbler plant can be retrofitted with the CAD, which would require an initial investment, but that investment would be made up with the $30 million contract that can be acquired. It also meets the tactical need to incorporate best practices into the production.
b. Cons: This would cause a reduction of staff in the Krebbler side of operations. McCray promised Krebbler he would take care of the staff—however, it is not McCray’s responsibility to support a business model that is outdated.
2. Use the Krebbler brand and American inroads to expand the business in the U.S. This would increase the company’s visibility in a market that is now coming under stress from high tariffs being placed on Chinese produced goods. The Canadian company could use the Kepler DC East to ship to the U.S., as the McCray DC and Plant in the East is already capable of shipping to the current market. This will work until such time as a better supply network alternative is located in the U.S. Opening a warehouse or plant in the U.S. could present itself as a favorable option, especially if the trade war with China looks like it will last. The key here will be to gain enough market share that is currently up for grabs because of the tariff situation that Chinese producers are facing.
a. Pros: This allows for a better optimization of current resources and for a better allocation of operational capital. Currently, both McCray and Krebbler DCs are operating in the East and only one is required. This would reduce COGS and boost WPI.
b. Cons: Maintaining two DCs in the East will still produce overhead drag. Currently, the cost per sq. ft of warehouse space at Krebbler East is $35. This compares unfavorably to McCray’s, which is only $25.
3. Close Krebbler East DC. This should be an eventual strategy that will help to reduce overhang. At $35 per sq. ft. and 60,000 sq. ft, the company is looking at a cost of $2.1 million per year. This could be eliminated outright, as the main purpose of Krebbler’s premium productions is to supply independent stores and national chains, the latter of which can be supplied by McCray and the former of which is merely generating a loss of revenue.
a. Pros: This would reduce the continuation of debt taken on by producing custom products for an industry that has uncertain demand for such products. The strategy here is to establish an efficient inventory and product management system.
b. Cons: This would reduce the Krebbler staff even more, which would go against the promise made to McCray to look after the staff. However, if Krebbler himself could not do this (but rather concocted his own exit strategy so as to wash his hands of the staff) it is not reasonable to expect that McCray should pull off the impossible. The reality is that the market has changed and the Krebbler plant and DC serve little purpose if they are not facilitating the business model of McCray.
4. Close Krebbler West DC and use McCray Central 2 to supply the market on in the West.
a. Pros: This provides the company with the ability to offload excess inventory at the McCray DC and increase space to cover the new contract worth $30 million over the next 5 years. The Krebbler West DC closure will also save over $2 million in annual costs and further enhance the company’s bottom line.
b. Cons: This will further lead to the decimation of Krebbler staff and could possibly lead to a crisis in morale, which could negatively impact productivity and performance. However, considering that the Krebbler’s custom designs are only a niche market at this point, any decline in cost in productivity is a negligible risk
5. Eliminate all Krebbler DC’s and plants and continue to use the brand to enhance the quality reputation of the company in the niche markets where demand still exists and to shore up the reputation of the company overall among consumers buying in bulk and to further give the company a reputation of being a provider of quality goods at a low-cost rate.
a. Pros: This fully eliminates any company bloat and cuts upwards of $6 million annually from operational costs, which firmly puts the company in the black and will allow for a positive cash flow for a consistent number of years. It will put demand on the supply chain management team to develop increased tactical designs for shipping and to establish strong logistical relationships so that products are moving consistently and at a rate proportional to the production of goods so that DCs are not oversupplied.
b. Cons: It will essentially eliminate the Krebbler staff unless they are willing to transfer to any new facility opened in the U.S. for logistical purposes. The problem here is that the staff will likely need re-training in order to update them on the best practices for achieving tactical goals.
VI. Implementation
The implementation of the top recommendations could be achieved by designating the 20% east plant space of McCray’s plant for all custom designed orders and using the Krebbler plant to increase output for the purposes of fulfilling the $30 million contract. The plant would need to be retrofitted with CAD to maintain best practices and this would require an elimination of or retraining of staff to meet the market demands. This could be implemented over the course of a year so that the company is ready to meet the needs of the new customer client. Further closures and expansions would depend upon how well the company is able to make inroads into the U.S. market, which from a strategic standpoint should not be difficult because of the tariff situation between the U.S. and China.
The implementation of these decisions should be made in a transparent manner so that no staff or stakeholders are shocked or surprised. The process should be explained to all in a manner that uses both transformative leadership and transformational leadership skills so as to ensure that the vision of the company is reasonably and logically explained and that all stakeholders are treated fairly and appropriately. Without this kind of leadership, the company may face serious resistance from stakeholders that could undermine the momentum and competitive advantage the company currently holds thanks to the quality factor that the Krebbler brand brings to the company’s reputation in the market.
VII. Monitor and Control
Monitoring and controlling the situation should be commenced using Six Sigma, which allows for the company to focus on ensuring quality, improving employee morale, and eliminating unnecessary costs from the production of goods for the market. Six Sigma shows where cuts can be made to improve the bottom line, and controlling for any issues will depend upon making internal reviews and audits quarterly. Reducing operational costs will depend not just upon eliminating any operational bloat but also upon enhancing employee morale and maintaining efficient productions and performance. With CAD, productivity can be programmed, but with custom design products employee morale will still be a major factor in determining performance, and here is where Six Sigma can be of maximum utility for the company, as it measures both morale and performance to allow for better management decisions to be made.
Bibliography
Channick, Robert. “Fallout from China Trade War,” Chicago Tribune, 2019.
https://www.chicagotribune.com/business/ct-biz-china-tariffs-illinois-impact-20190510-story.html
Krebbler Furniture Case Study, Supply Chain Management Association. Digital File
Appendix
A. Krebbler-McCray Income Statement
Appendix B. Krebbler-McCray Distribution System