Reference no: EM132303651

Toy City Ltd and the Superior Gym

Toy City Ltd is a retailer of toys located in the Midwest. Corporate headquarters is in Chicago, and its 70 stores are located in Minnesota, Wisconsin, Michigan, Illinois, Indiana, Ohio, Iowa, and Kentucky. One distribution center is located in Columbus (for Ohio, Kentucky, Indiana, and Michigan) and one in Chicago (for Illinois, Iowa, Wisconsin, and Minnesota). Toy City markets a full range of toys, electronic games, computers, and play sets. Emphasis is on a full line of brand-name products together with selected items sold under the Toy City brand. Toy City’s primary competitors include various regional discount chains. The keys to Toy City ‘s success have been a comprehensive product line, aggressive pricing, and self-service. Alicia Hurst is Toy City’s logistics manager. She is responsible for managing both distribution centers, for transportation management, and for inventory control.

Alicia’s primary mission is to make sure all stores are in stock at all times without maintaining excessive levels of inventory. One morning in late January, while Alicia was reviewing the new year’s merchandising plan, she discovered that starting in March, Toy City would begin promoting the Superior Gym Outdoor Exercise Center. Don was particularly interested that the new set would sell for $715. In addition, the uperior Gym is packaged in three boxes weighing a total of 450 pounds. “Holy cow!” thought Alicia. “The largest set we have sold to date retails for $159 and weighs only 125 pounds.” “There must be some mistake,” thought Alicia as she walked down the hall to the office of Olivia Olsen, Toy City’s buyer for play sets. Olivia was new on her job and was unusually stressed because both of her assistant buyers had just resigned to seek employment on the West Coast. As soon as Olivia saw Alicia, she exclaimed, “Alicia, my friend, I have been meaning to talk to you.”

Alicia knew right then that her worst fears were confirmed. The next morning Alicia and Olivia met with Daniel Smith, Alicia’s transportation manager; Alex Toth, general manager for Toy City’s eight Chicago stores; and Zack Rabiega, Alicia’s assistant for distribution services. Because the previous year had been unusually profitable, everyone was in a good mood because this year’s bonus was 50 percent larger than last year’s. Nevertheless, Alex got to the point: “You mean to tell me that we expect somebody to stuff a spouse, three kids, a dog, and 450 pounds of Superior Gym in a small sedan and not have a conniption?” Daniel chimed in, “Besides, we can’t drop ship Superior Gyms from the manufacturer to the consumer’s address because Superior Gym ships only in quantities of 10 or more.” Olivia was now worried. “We can’t back out of the Superior Gym now,” she moaned. “I have already committed Toy City for 400 sets, and the spring–summer play set promotion went to press last week. Besides, I am depending on the Superior Gym to make my gross margin figures.” “What about SUVs?” asked Alex. “They make up half the vehicles in our parking lots. Will the three packages fit inside them?”

By now the scope of the problem had become apparent to everyone at the meeting. At 4 p.m. Alicia summarized the alternatives discussed:

1. Purchase a two-wheeled trailer for each store.

2. Find a local trucking company that can haul the Superior Gym from the Toy City store to the customer.

3. Stock the Superior Gym at the two distribution centers and have the truck that makes delivery runs to the retail stores also make home deliveries.

4. Negotiate with the Superior Gym manufacturer to ship directly to the customer.

5. Charge for delivery if the customer cannot get the Superior Gym home.

When the meeting adjourned, everyone agreed to meet the following Tuesday to discuss the alternatives. On Thursday morning a record-breaking blizzard hit Chicago; everyone went home early. Toy City headquarters was closed on Friday because of the blizzard. By Wednesday, the same group met again.

Alicia started the meeting. “Okay,” Alicia began, “let’s review our options. Zack, what did you find out about buying trailers for each store?” “Well,” Zack began, “the best deal I can find is $1,800 per trailer for 70 trailers, plus $250 per store for an adequate selection of bumper hitches, and an additional $50 per year per store for licensing and insurance. Unfortunately, bumpers on the newest autos cannot accommodate trailer hitches.” “Oh, no,” moaned Olivia, “we only expect to sell 5.7 sets per store. That means $368 per Superior Gym for delivery,” she continued as she punched her calculator, “and $147 in lost gross margin!”

Next, Daniel Smith summarized the second option. “So far we can get delivery within 25 miles of most of our stores for $38.21 per set. Actually,” Daniel continued, “$38.21 is for delivery 25 miles from the store. The rate would be a little less for under 25 miles and about $1.50 per mile beyond 25 miles.” Alex Toth chimed in, “According to our marketing research, 85 percent of our customers drive less than 25 minutes to the store, so a flat fee of $40 for delivery would probably be okay.” Daniel continued, “Most delivery companies we talked to will deliver twice weekly but not daily.”

Zack continued, “The motor carrier that handles shipments from our distribution centers is a consolidator. He said that squeezing an 18-wheeler into some subdivisions wouldn’t make sense. Every time they try, they knock down a couple of mailboxes and leave truck tracks in some homeowner’s lawn.”

Olivia added, “I talked to Superior Gym about shipping direct to the customer’s address, and they said forget it. Whenever they have tried that,” Olivia continued, “the customer gets two of one box and none of another.”

“Well, Olivia,” Alicia interrupted, “can we charge the customer for delivery?” Olivia thought a minute. “Well, we have never done that before, but then we have never sold a 450-pound item before. It sounds like,” Olivia continued, “our choice is to either absorb $40 per set or charge the customer for delivery.” “That means $16,000 for delivery,” she added. “One more thing,” Alicia said. “If we charge for shipping, we must include that in the copy for the spring–summer brochure.” Olivia smiled. “We can make a minor insert in the copy if we decide to charge for delivery. However,” she continued, “any changes will have to be made to the page proofs—and page proofs are due back to the printer next Monday.”

Questions:

1. Discuss the advantages and disadvantages of each alternative.

2. Which alternative would you prefer? Why?

3. Draft a brief statement (catalog copy) to be inserted in the firm’s spring/summer brochure that clearly explains to the potential customers the policy that is recommended in Question 2.

4. In the first meeting, Alex asked about SUVs, but there is no further mention of them. How would you follow up his query?