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 Foreign 2/3rds of US consumption 59% from Columbia 18% from Ecuador 6% gross margin Sold for ~$0.05 per stem Domestic 1/3rd 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 16 th 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 Stem Demand (in 1000s) Year

Alternate Strategies Current Policy Wholesale – 2 months in advance Wholesale Hybrid Vertical Integration Coopetition – Cooperative Competition

Current Policy Positives Maximum demand accuracy Multiple sources Negatives Fierce 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 Positives 10% discount on order Guaranteed supply of order for Valentine’s Day Strengthens relationship with supplier Negatives Minimal 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 Positives 10% discount for large portion of order Opportunity to guarantee supply but make last adjustments Maximize demand responsiveness at lower cost Strengthens relationship with supplier Negatives 20% 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 Positives Maximum demand responsiveness Higher profit margin Ability to profit from additional stock Negatives Outside 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 Positives Collaboration on securing supply Potential for higher margins Higher purchasing power Information flow from competitors Negatives Attempting to collaborate with unwilling competitors Consensus buying decision disagreement Information flow to competitors

Summary of findings Profit Margin Strategy 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 advance Yields 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?