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The Clorox Company (from now on Clorox) has been growing continuously the past six years. It increased the amount of stock-keeping units (SKU) during the period from 1998 till 2001 by 50 percent. The product portfolio growth came along with a declining of profit margin. In the year 2000 the profit margin was 9.6 percent. It dropped to 7.9 percent in 2002. In connection to this it was found out that the product portfolio included a number of underperforming products.
The company Clorox was facing different market developments. In the US discounters such as Wal-Mart were gaining market shares. At the same time in Europe this trend levelled out because the market penetration of discounters has reached a high level already.
Main Issues and Problems
The growth strategy of Clorox was the introduction of new products. These inventions were requested by customer behaviour. The end-user market was defined as easy to influence by promotions and specials such as special ingredients (Byrne, 2007). To answer this behaviour the sales and marketing staff asked for more innovations in order to serve the customer request on the one hand and achieve their annual targets on the other. These short-term targets are usually connected with the annual revenue (Grant, 2010) which was increasing in the past years in contrast to profit margins. In fact the profit goals of 30 percent of the SKU's were falling short as well as their sales expectations. The shorter periods until the next innovation was introduced did not grant the sales needed to exceed the expenditure for manufacturing, sourcing, transport and research and development as forecasted.
This development came along with the increasing amount of SKU's to answer demand. Furthermore the supply chain staff had to deal with out-of-stock problems, issues in the inventory mix and a declining customer service. It seems that there is a serious lack of information in the communication system within Clorox. The sales departments are facing problems in customer service which are caused by the shortcomings in supply chain management. These issues on the other hand have their reason in the increasing number of product introductions.
The main objective for Clorox is to answer the question - How is it possible to break this vicious circle of recrimination between sales and supply chain staff? Doing this the increase of profitability and service effectiveness is easier to reach.
Alternative policies and strategies
Due to the described problems, different solution has to be considered. Thus the following paragraph will present three different strategies how to address the issues. Therefore each strategy will be critically discussed as well as the relevance in this particular case.
To overcome the internal information problems without causing more tension it could be a good approach to first consider within the executive team who are the ABC customers and what the ABC products are. This is going to be done by evaluating statistics from the internal IT system. The customers Clorox is doing the most business with are called A customers. According to the Pareto analysis 20 percent of customers stand for 80 percent of revenue (Wild, 2002). As this is only a theory Clorox will most likely discover that its A customers are worth less or even more than exact 80 percent.
While evaluating the data there will be more clients who are divided in two different groups. The theory assumes that the next 30 percent of customers stand for another 15 percent of business. The remaining 5 percent of business are done with 50 percent of the customers. Clorox has to carry out the same analysis for its products. Here it is useful to add a fourth section. D products which may represent less than 3 percent of turnover but count for 40 or even more percent of products.
The ABC analysis is providing the company with data which is already in house. It is easy to evaluate and to present (Wild, 2002). However, when presenting the result of an ABC analysis people tend to ask the question why the company is dealing with D products at all. These 50 percent are typically in the focus for SKU-reductions (Byrne, 2007).
Based on the result of this analysis Clorox is able to get in contact with the A customers to establish a corporate communication system allowing it to improve the forecasting. In a next step a corporate planning, forecasting and replenishment (CPFR) system can be installed (Grant, 2010). This gives Clorox the possibility answering the question if it is selling enough of one SKU to keep it. In connection with the forecasting system the handling along the supply chain can be improved and issues such as out-of-stock can be avoided.
To solute the issues within the Clorox´ supply chain it is possible to outsource parts of the process. Therefore an organization uses an external provider to handle logistic activities which the organization used to do on its own (Hsiao et al., 2010). Hsiao et al. (2010) argue that there are four different level of outsoucing:
1st level: execution activities
2nd level: value-added activities
3rd level: planning level
4th level: strategic planning level
Reasons for outsourcing can be different. In case of Clorox outsourcing can be relevant to address issues in the current supply chain management and to concentrate on the core competencies again (McKinnon, 2010). There seems to be a lack of management expertise when dealing with stock handling and customer service. To improve these problems to different approaches have to be considered: A simple outsourcing of execution activities to handle the warehousing. On the other hand it can be discussed whether an external planning is reasonable. The planning would include a forecasting and replenishment for Clorox product handling.
Outsourcing approaches are also about risks; the risk of losing competencies (Rinsler, 2010). Supply chain risks may appear in case of sudden changes. The handling of production remains with Clorox and with the management of the whole company strategy. Outsourcing the logistics management may rises issues in managing the entire supply chain as on business. Furthermore it has to be taken into account that outsourcing cannot answer the question how to resolve the communication problems within in the Clorox organization. In addition to this there is no approach for the future SKU handling. Thus it is not reasonable to use outsourcing to solve a problem when not solving the reason for issue.
Clorox´ supply chain contains the possibility to install a decoupling point. This point gives the company the chance to postpone the final configuration or packaging to another point within the supply chain. By doing this the amount of SKU´s sellable can remain the same and still inventory can be reduced. However, this principle alone is not able to delay the final specification by a significant time (van Hoek, 2010). The data used for deciding where and when to locate the decoupling point is based on the forecasting system of Clorox. The same system generated some of the current issues.
It is therefore reasonable to improve this data. The connection to customers is essential again. It is wrong to base the data on responsiveness from customers rather than improving contact with them to receive insider information (van Hoek, 2010). Knowing the demand and the forecasts out of the first hand enables the entire supply chain to be improved. As a first implementation step a vendor management inventory (VMI) can be established. The vendor or supplier here needs to manage the stock of its products at customers side itself (Sahin & Robinsion, 2007). Secondly a CPFR can be introduced. Both systems increase the partnering between two (VMI) or more members (CPFR) of a supply chain and decrease the risk of a bullwhip effect.
This approach contains the risk that might be that customers are not willing to share the necessary data (Grant, 2010). Thus a trustful partnership needs to be established. Further problems may occur in terms of handling of price information (van Weele, 2010).
The three different alternative strategies do all offer their approach to improve the current system. Knowing that Clorox already knows that 40 percent of its products generate less than 3 percent of revenue it is reasonable to connect the approach with this data. The ABC analysis is therefore the system to begin with.
Based on the information gained from the two ABC analyses (see Appendix , ) it is possible to evaluate a multi-criteria ABC analysis shown in . By doing this Clorox can discover which are the most important customers and point out with which products generates the most turnover with these clients. The A-A area is the most vital one. It is essential for a company to monitor and control this area (Rutherford, 2010).
Profit Contribution of Customers
Figure : Multi-criteria ABC Analysis
(Source: adapted from Rutherford, 2010)
The A products are the SKUs you never want to be short of. Thus a safety stock system guarantying this has to be established (Talluri et al., 2004). Companies are only able to decrease the costs for this system down to a certain level alone. As two of the presented alternatives result in cooperation with Clorox´ customers. The ABC analysis can here be a cornerstone as it uses existing data and beyond the results are easy to understand and easy to be shown. As being that obvious how to proceed the ABC analysis contain a great chance to break out of internal staff´s vicious circle.
Change is always connected with emotion (Stolzenberg & Heberle, 2009). As there are already tensions between different parts of the staff within Clorox, it would be well advised to act deliberately. The organization needs the intercession from within to avoid giving the costumers an argument not to increase contact right in the beginning. A successful change is well planned. Therefore Clorox is supposed to set up a change plan including the obvious vision to improve customer service and reduce logistics costs (Dittmann & Mello, 2007).
The first step is carrying out the ABC analysis. Evaluating the output in detail it is already possible to receive first results which SKU´s are unnecessary. Byrne (2007) argued that although it might be obvious to cut off the D items this can be wrong. Clorox has to carefully review the result whether there are complementary goods to customers. Other products might be products which were just introduced into the market and need more time to see if an increase of turnover share is likely (see ).Due to the different positions within staff the organization has to set up clear targets. Once a certain period is over product introduction will be ended when they did not reach the target line.
Second step is to increase contact with A customers. Clorox should inform them about its approach to improve SKU handling. To increase the success of the change organizations invite the customers to become a part of it. Doing this Clorox can introduce the idea of VMI as a third step. When talking of VMI the company Wal-Mart has to be named. It introduced a similar system in mid of the 80s (Dittmann & Mello, 2007).
The fourth step is the introduction of CPFR. This system is supporting the target system for innovations. In addition to this it is possible to make use of a decoupling-point for e.g. final packaging. Finally a review of the implication process has to be carried out in continuous periods.
Recommendation's Benefits and Cost Analysis
The presented approach to solve Clorox´ issues which were documented early will have several positive effects on its performance. Sahin and Robinsion (2007) argued that only a VMI can provide savings in inventory between 20 to 30 percent and meanwhile the customer service is increasing. Due to the installed CPFR system, which connects customers and Clorox even more, the manufacturing and sourcing can be carried out more efficiently. In a matter of fact the supply chain staff can prepare themselves on the future more easily and can guarantee avoiding out-of-stock situation. The improved handling of SKU´s creates potential of growth, better profitability and an increasing customer service.
SKU´s being identified as unnecessary can be removed from the product portfolio and reduce inventory and warehousing costs. The smaller product portfolio gives marketing and sales staff the opportunity to concentrate their promotions on the existing SKU´s. These items will be more attractive for customers. Customers who are in a better relationship with their supplier, Clorox, tend to do more business with these suppliers (van Weele, 2010). Clorox is now in the position to gain more profit from its customer relationships and change from growth-driven to customer-driven innovation like the competitor Reckitt Benckiser.
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