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
Domestic
 2/3rds of US consumption
 1/3rd of US consumption
 59% from Columbia
 US is third largest producer
of fresh cut flowers
 18% from Ecuador
 6% gross margin
 94% produced are sold in
the US
 Sold for ~$0.05 per stem
 40-60% gross margin
 Sold for ~$1.75 per stem
Wholesalers
 Deal with large
consolidated bulk
shipments from foreign
growers to US
Explain why wholesalers tend to
have limited supply for last
minute orders of the retail
florists.
 14 day life – cold chain
required
Bullwhip Affect
 Experiencing cost of $0.22
per stem sold
 35% of flowers are lost
during transit
 45% gross margin
 Sell for ~$0.40 per stem
Customer
to Retailer
Retailer to
Wholesaler
Wholesaler
to Grower
Retailers - WKT
 16th largest supermarket
chain in the US
WKT's Fluctuating Rose
Demand
 230 stores in the NE
Stem Demand (in 1000s)
3500
3000
2500
 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
2000
1500
1000
500
0
1996
1998
2000
2002
Year
2004
2006
2008
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
Compare the last minute
ordering strategy and the
advance ordering strategy.
Negatives
 Minimal demand
responsiveness
 Accurate forecasting
required
 Underestimate demand:
high volume last minute
from local growers
 Overestimate demand:
surplus spoiled stock
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
Negatives
 10% discount for large
portion of order
 20% markup on small
portion of order
 Opportunity to guarantee
supply but make last
adjustments
 Accurate forecasting
required for advanced
order optimization
 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?
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
Negatives
 Maximum demand
responsiveness
 Outside company’s core
competency
 Higher profit margin
 Infrastructure, grower
contacts, and knowledge of
international shipping
required
 Ability to profit from
additional stock
 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
Negatives
 Collaboration on securing
supply
 Attempting to collaborate
with unwilling competitors
 Potential for higher margins
 Consensus buying decision
disagreement
 Higher purchasing power
 Information flow from
competitors
 Information flow to
competitors
Summary of findings
Optimizing Profit Margin for WKT
Strategy
Vertical Integration
Wholesale Hybrid
Wholesale Advance
Current Strategy
40%
50%
60%
70%
Profit Margin
80%
90%
100%
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?