Coral Drugs Case Study

Case 10-2: Coral Drugs        March 13, 2019

Team 2:        Hyrum Jerez

Gir Rana

Berlain Tsinchou

Rob Cameron

Anthony Polini

Tom Norton

Coral Drugs Background

• Long established retail Drug Store (pharmacy) founded in 1962
• Operates 114 stores in the state of Ohio
• Expansion plans of 8-10 stores over the next 5 years

• Retail outlets sell pharmaceutical products as well as other drug store items
• Strong financial balance sheet
• Looking to pursue any opportunity to improve/increase profitability

• Sells both national & private label brands (i.e.) Life Brand - Shoppers Drugs
• Private brands have an average margin of 40% vs. 25% margin on national brands

• Coral private brand suppliers manufacture, generate artwork, invest in required equipment and perform quality assurance

Main Issue

Supplier change from existing long-standing Twinney Incorporated (“Twinney”) to potential new supplier Gorman and Irizawa Ltd (G& I) for dandruff shampoo sourcing for its private label shampoo.

Associated Issues

1. Twinney is not willing to alter verbal arrangements as requested by Coral
2. No existing written agreement between Coral and Twinney
3. Twinney manufacturing plant is located 600 miles away

1. Twinney injection mold machine requires capital repairs => potential supply disruption looming.
2. Existing lead times 3-4 weeks for new orders
3. Order restrictions - must order by skid volume => 4,000 units / skid
4. Current retail sales avg. 5,000 units/month => sales & order quantities not aligned
5. Inventory carrying costs (2%/month/24% annualized)
6. Stock-outs have occurred due to lead times as noted above

1. G & I - small start-up, hungry for business and located close to Coral warehouse

Assumptions

• Current contract not written / verbal understanding only.
• Coral to provide 30 day Notice of Termination to Twinney if necessary. Remove any legal ambiguity issues by acting as if a proper written contract existed.
• Current bid by Twinney represents current price used (no +/- adjustment to price)

• Transportation costs for G & I due to proximity to Coral warehouse is insignificant
• 600 mile transportation cost => 10% of annual spend for Twinney order ($4,000 or $0.067/oz avg. over 60,000 units)

Analysis

Qualitative Analysis

TWINNEY INCORPORATED

• Long relationship with Coral Drugs for private label production.

• Unwilling to accommodate Coral Drugs request or alter terms already agreed upon.

• Minimum order requirements = full skid at 4,000 units

• Needs to repair injection mold machine -> capital requirement & timing of back online

• Future supply issues with lead times and production run delays

• Currently produces and ships FOB to Coral Drugs warehouse - (600 miles away)

• Discount payment terms of 2/10 net 30 days

• Lead times 3-4 weeks, results in various Coral inventory levels (overages/stock-outs)

• Product sizes are smaller (6oz and 2oz) than national sizes (7oz and 3oz)

GORMAN AND IRIZAWA LTD

• Young local company; interested in building its business

• Lower bid prices per unit across all 3 products

• Product sizes (7oz and 3oz) compares equally to national brand sizes

• Potential to offer better value to customer = more volume for same price potentially

• Willing to accept terms of existing agreement as well as payment terms of 2/10, net 30 day.

• Same FOB delivery but located close to warehouse (assume 0-5 miles). No lead times => order with next day delivery; no minimum order quantities => very attractive option

• New facility but small footprint compared to Twinney; room for expansion possibly

Decision Criteria Matrix

Quantitative Analysis

Profit Margin & Breakeven Analysis

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