Strategic Supply Chain Management: Krebbler-McCray Case Study

Executive Summary

Strategic supply chain management encompasses 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 into 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 must be made, evaluation criteria, possible alternatives, quantitative and non-quantitative analysis, how the best strategy can be implemented, and how the company can determine whether the strategy has been successful.

The main points of this summary are as follows:

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) considerable unnecessary overlap in the distribution system, which should be streamlined; (d) Krebbler's quality does not lead to positive net revenues, whereas McCray's faster delivery and sales record does—but at the cost of a lower quality ranking; and (e) a large five-year contract worth $30 to $36 million that needs to be signed. The contract requires low-cost, ready-to-assemble furniture of the type McCray can produce using its new CAD software, but fulfilling it will mean reducing the footprint of Krebbler's operations.

2. Environmental analysis reveals that margins are being squeezed by the low costs of competition from China, the customer base has shifted from custom design buyers to bulk buyers, and competition in the premium product segment 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) which approach to retain and which 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 must be factored in.

4. The recommendations for the company are as follows: (1) the company must integrate its distribution centers—it is currently operating two centers with overlapping service channels, and one 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; and (3) the company should expand into U.S. markets now that the trade conflict with China has developed, creating an opening to penetrate the market and fill a gap left by China's reduced presence.²

5. The decision to reduce Krebbler operations should be made in order to compete with low-cost competitors; however, the company's reputation for quality should be preserved for custom design consumers. Expansion into the U.S. should be pursued by meeting retailer demand now that high tariffs are being placed on Chinese imports. The large $30 million contract must be signed, and tactical operations must be adjusted to accommodate this new demand.

Issues Identification

The strategy and market position of the company is to offer premium household wooden furniture to consumers in Canada, the U.S., Japan, and China. The vast majority of sales revenue comes from the domestic market (95.5%). Sales in the U.S. account for 2.5% and sales in Japan account for 1% of the company's total revenue.³ Essentially, outside of Canada, the company has made no substantial inroads into foreign markets.

The market for household furniture in Canada is extremely competitive. The founder took the company public five years ago in order to obtain capital for expansion as well as to provide himself with an exit strategy for retirement. Because of the competitive nature of the market, however, the company had been struggling to survive.⁴ By selling the company to McCray, the founder entered retirement. The two businesses, however, never fully integrated and are still operating as two separate entities despite being owned by a single owner.⁵

Operating expenses have increased drastically since the sale of Krebbler's to McCray. Two years prior, expenses stood at 7.23 million CAD, compared to current expenses of 10.94 million CAD. The primary reason for this increase is the lack of integration between the two businesses, which means that Krebbler-McCray is essentially running two supply chains simultaneously. Integrating them could substantially reduce operating expenses and return the company to positive net earnings—currently −3.25 million CAD, compared to a positive 1.187 million CAD prior to the merger.⁶

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. Both businesses use national retail chains to move their products, and overlap exists there as well.⁷ In terms of delivery rate, McCray outperforms Krebbler by 25% and delivers in half the time (three weeks versus six weeks). In terms of quality and customer satisfaction, Krebbler outperforms McCray by 1.5 stars on the Furniture Quality Index (4.5 vs. 3.0). Krebbler's longer lead time correlates with a higher quality ranking; however, its extra care also increases overhead. For example, to construct a dining room hutch, labor at Krebbler costs $408 versus $135 at McCray, and materials cost $540 at Krebbler versus $457.50 at McCray.⁸ Krebbler's quality is ultimately unsustainable: net earnings at Krebbler were negative, while net earnings at McCray were positive.⁹

The challenge posed by 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 without making serious adjustments—specifically at the Krebbler plant, which is only 15 minutes from McCray's distribution center. McCray has noted that Krebbler's plant operations do not align with the demands of the new marketplace, which favors cheap, low-cost furniture rather than high-quality custom design pieces. Krebbler's products can continue to be produced for niche market customers, but where this production occurs remains an open question: either in the Krebbler plant itself, or in the McCray plant, where similar operations are currently underway in a 20% floor space section of the older part of the facility where CAD has not yet been introduced.

Environmental Analysis

An increase in imported low-cost furniture goods, mainly from China, has squeezed the margins of Canadian wooden furniture manufacturers.¹⁰ The customer base has also shifted from small individual 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. This shift places new pressures on the company to adapt its supply chain in order to meet current market demand.

Major competitors for Krebbler in the premium, design-conscious niche market come from Europe—primarily Germany and Italy. 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 given the developing trade conflict between China and the U.S.¹¹

The market demand is increasingly oriented toward bulk products, and the $30 million, five-year contract represents the direction in which the company should be heading. Adjustments to both the strategic and tactical supply chain are therefore required.