WKT Valentine’s Sourcing Strategies

1. WKT Valentine’s Sourcing Strategies Jason Bloom SrividyaDeshpande Sarah Kruse Patrick Salemme

3. 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

4. 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

5. Major Players • Growers • Foreign and Domestic • Wholesalers • Retailers

6. Growers Foreign 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 • 2/3rds of US consumption • 59% from Columbia • 18% from Ecuador • 6% gross margin • Sold for ~$0.05 per stem

7. Wholesalers Explain why wholesalers tend to have limited supply for last minute orders of the retail florists. • 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

8. Retailers - WKT • 16th 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

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

10. Current Policy Positives Negatives Fierce competition between retailers Higher prices due to local grower purchases No discount from wholesaler • Maximum demand accuracy • Multiple sources

11. 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%

12. Wholesaler – 2 months in advance Positives Negatives Minimal demand responsiveness Accurate forecasting required Underestimate demand: high volume last minute from local growers Overestimate demand: surplus spoiled stock • 10% discount on order • Guaranteed supply of order for Valentine’s Day • Strengthens relationship with supplier Compare the last minute ordering strategy and the advance ordering strategy.

13. 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%

14. Wholesale Hybrid Positives Negatives 20% markup on small portion of order Accurate forecasting required for advanced order optimization • 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 How should WKT combine the last-minute order with the advanced order in the hybrid strategy?

15. 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%

16. Vertical Integration Positives Negatives Outside company’s core competency Infrastructure, grower contacts, and knowledge of international shipping required High fixed costs to implement • Maximum demand responsiveness • Higher profit margin • Ability to profit from additional stock

17. 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%

18. Coopetition Positives Negatives Attempting to collaborate with unwilling competitors Consensus buying decision disagreement Information flow to competitors • Collaboration on securing supply • Potential for higher margins • Higher purchasing power • Information flow from competitors

19. Summary of findings Strategy Profit Margin Which Strategy works better for WKT? For the Wholesaler? Wholesaler and WKT combined?

20. 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?

21. 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?

22. 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!

23. Questions?