Please read the Coral Drugs case and answer the following questions: 1) What do you like and dislike about Gorman and Ir

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Please read the Coral Drugs case and answer the following
questions:
1) What do you like and dislike about Gorman and
Irizawa’s proposal to Coral?
2) What information is still unknown about both the G
& I offer?
3) What would your recommendation be if in the same
position as Shirley? Why?
Case study here:
Case 10–2 Coral Drugs
Shirley Black glanced at her watch. It was 1 p.m. on January the
25th, and only two hours remained before her meeting about Coral
Dandruff Shampoo with the vice president of purchasing. As
merchandise group coordinator at Coral’s head office in Columbus,
Ohio, Shirley was trying to decide whether to recommend switching
from a large shampoo manufacturer to a small local supplier.
CORAL DRUGS
Coral Drugs was founded in 1962. Since that time, the company had
steadily expanded its chain of retail drug stores throughout the
state. Currently, Coral operated 114 stores and planned to add an
additional 8 to 10 stores over the next five years. Coral’s retail
outlets sold both prescribed and over-the-counter pharmaceutical
products as well as other drugstore items. This private company’s
strategy was focused on the further expansion of its suc- cessful
retail operations. Coral had a strong financial posi- tion and
intended to pursue any opportunity that had po- tential to increase
its bottom line and was related to its retail operations.
CORAL PRIVATE-LABEL PRODUCTS
One such opportunity was the development of Coral private-label
products. Since 1980, the company had ag- gressively developed a
line of products carrying the Coral name. Currently, Coral stocked
over 200 different private- label products. Coral was proud of its
ability to bring a product to its shelves that was comparable in
quality to the national brands, but offered at least a 25 percent
price savings to the consumer. The company was able to sell at a
better price than the national brands because it was buying
directly from the manufacturer and its advertising expen- ditures
were significantly lower. Examples of successful products included
Coral Acetaminophen Tablets and Coral Vitamin Supplements.
Coral private-label products were attractive to the company for
several reasons. First, the margin on these products averaged 40
percent as compared with 25 per- cent on national brands. Also, the
product line was virtu- ally hassle-free. Apart from the initial
supplier approval, the sourcing agreement left the manufacturer
responsible for all aspects of product development and investment.
Consequently, Coral intended to pursue any growth op- portunities
this private labeling offered in the future.
SOURCE SELECTION FOR PRIVATE- LABEL
PRODUCTS
Coral private-label products were purchased from 26 dif- ferent
suppliers. Several sourcing agreements were in contract form, while
others were simply an understand- ing between Coral and the
manufacturer. The process for developing a sourcing agreement began
with an internally generated idea for a potential private-label
product. Once the product idea was approved, Coral announced that
it was accepting bids from manufacturing operations that wanted to
produce the product. Coral carefully analyzed the potential
suppliers to ensure that they were able to pro- vide a consistent
product that was comparable in quality to the leading national
brands and at a price that would provide satisfactory margins. When
the bid was accepted, Coral and the manufacturing company worked
together to develop the final product.
Sourcing agreements left the manufacturer responsi- ble for
almost all aspects of product development. Based on specifications
provided by Coral, these manufactur- ers generated the artwork for
the product, designed the packaging, invested in any necessary
equipment, and performed quality assurance. Once the product
received final approval from Coral, the company simply placed an
order for the product when stock was required. The order was then
delivered FOB to Coral’s central warehouse and shipped from there
to the retail stores. Consequently, this high level of supplier
autonomy made annual reevaluation of the sourcing arrangements
necessary.
SWITCHING THE SOURCING AGREEMENT FOR CORAL DANDRUFF
SHAMPOO
In December, Shirley had reviewed the performance of the company
that produced Coral Dandruff Shampoo— Twinney Inc. After several
requests from Coral to improve delivery terms, Twinney had
indicated that it would not alter the terms originally agreed upon.
Many of Coral’s concerns were directly related to the location of
Twinney’s manufacturing plant 600 miles to the east. Consequently,
in early January, Coral announced that it was accepting bids on the
future production of the product. A product specification document
was sent to manufacturers that were known to have the capability to
produce similar products. Twinney was notified prior to the
announcement and was asked to submit a bid along with the
others.
TWINNEY INCORPORATED
Under the current sourcing agreement, Coral had to order full skids
when purchasing its private-label dandruff sham- poo from Twinney.
Each skid held 4,000 units. Although the shampoo was considered an
excellent product, vol- umes for the regular, fragranced, and
trial-sized products averaged only about 20,000 units each
annually. Shirley knew that the inventory carrying cost at Coral
was around 2 percent a month, and felt that the company had too
much
money tied up in such a low-volume product. Furthermore, the three-
to four-week lead time required when placing an order had been
causing problems. On several occasions, the Coral central warehouse
had been stocked out of the products while waiting for a skid to
arrive.
Shirley could not understand why a large company like Twinney would
be so unwilling to accommodate Coral’s requests for improved
shipping terms. Although there had never been any problems with the
consistency or quality of the shampoo Coral received, Shirley Black
felt that perhaps more beneficial terms could be offered by a
manufacturer located closer to Coral’s warehouse. It seemed like a
perfect opportunity because Twinney’s in- jection mold for the
product had just broken down and the artwork was due for revision
soon. The Twinney sourcing agreement was not in contract form and,
therefore, Shirley Black believed Coral was not legally obligated
to continue purchasing from Twinney.
GORMAN AND IRIZAWA LTD
Out of the many bids received, the most attractive terms were
offered by a young local company, Gorman and Irizawa Ltd. (G &
I). The bidder agreed to similar responsibilities as those in the
existing Twinney agreement, as well as the same pay- ment terms of
2 percent/10, net 30, FOB Coral’s warehouse. G & I also offered
several additional advantages.
The first benefit was the cost of the product. As illus- trated in
Exhibit 1, G & I undercut the price Twinney was offering on all
three products. This cost differential was made even more
attractive by the fact that the prices quoted were for 7-ounce
bottles of regular and fragranced product and 3-ounce trial-sized
bottles. The leading national brand was offered in similar sizes.
The existing agreement with Twinney called for the production of
smaller 6-ounce and 2-ounce bottles. Coral’s retail selling price
was $1.49 for the regular and fragranced shampoo and $0.89 for a
trial- size bottle. Shirley believed this was an excellent opportu-
nity to pass on more value to the consumer.
The second advantage was G & I’s shipping flexibility. Under
the terms of the proposed agreement, the company offered next-day
delivery service with no minimum order quantity. G & I was able
to offer such favorable terms be- cause its manufacturing facility
was located near Coral’s central warehouse.
Shirley believed this was an opportunity to support a small
local company. If Coral agreed to source its dandruff shampoo from
G & I, the account would be one of G & I’s largest. In a
recent tour of the G & I plant, Shirley was im- pressed by the
cleanliness of its manufacturing facilities; however, she could not
help comparing the relatively small- scale operation to Twinney’s
large shampoo factory.
EXHIBIT 1 Coral Drugs Price and Size Comparison for
Coral Dandruff Shampoo
Size: Twinney: Size: Growman &Irazawa:
Regular 6oz. 0.72 7oz. 0.70
Fragrance 6oz. 0.85 7oz. 0.75
Trial 2oz. 0.47 3oz. 0.35