Mid Range, Inc., is considering entering the potato chips market with its new product, Tasty Chips, which in taste tests has beaten the competition available in the U.S. The potato chip market is a 4.5million bags-a-year market, which Mid Range thinks it could secure 15% of with reasonable marketing. Each bag would sell direct from Mid Range at $2, to wholesalers for $1.50, and sell retail in the grocery stores for $2.79. Since this is a new market for Mid Range, it has to make both sourcing and channel decisions.

It could source its chips internally, buying a machine to make and bag the chips for $250,000. The machine would last for five years. It would take $0.35 in materials to make the chips, $0.20 in labor and machining costs, and $0.20 in overhead to make the chips. Mid Range could also contract with a large manufacturer of salty snacks. This would cost $0.80 per bag but it would need to purchase in lot sizes of 50,000 bags to get this price. This would represent 1.4 months of supply, which would need to be stored at 25% carrying costs. Since chips have a fairly short shelf life, this would also put the firm at increased risk for returns of 10% of sales due to chips going out of date. A third option would be to rent the machine for making the chips, which would cost the company $60,000 a year, but it could return the machine at any time. It would cost the same to operate as a purchased machine.

Once sourced, Mid Range would need to determine how best to distribute its product. It currently does not have a sales force for salty products, so this would require hiring a product manager for $75,000 per year and a sales force of five people at $50,000 per year plus 10% commission each. Since the company would then have to ship to multiple store warehouses, it would take three picker/packers each at $30,000 per year plus $0.10in shipping per bag due to multiple drop sites of small unit quantities. It would also require a new person in accounts receivable to process all of the paperwork, which would cost $40,000 per year.

If Mid Range decided to use an existing wholesaler, it would only need the product manager but would face the lower price for its product. Shipping would be one drop, however, so it would only cost $0.05 per bag. The company would not need to add anyone to the back office to handle this business.

Finally, Mid Range could use a jobber to distribute its product. Jobbers work for 15% of the total revenue (price to stores) that an item represents. Mid Range would need to break the orders down into small lot sizes to ship to the jobbers. This would take two additional picker/packers in the company warehouse at a cost of $30,000 per year each plus $0.10 in shipping per bag due to the small lot sizes and multiple drop sites. It would also take a new person in accounts receivable to process the invoices at $40,000 per year.

Regardless of the choices made, the company will need to invest $100,000 in marketing to launch the product. This will be an annual charge to keep market share.

REQUIRED:

Given the information provided here, develop the value chain options that face Mid Range. Specifically:

a. First look at the sales aspect of the value chain. Should Mid Range rely solely on a sales force, a wholesale approach, or jobbers? Which would be most efficient (cost less)? Which would be most responsive or flexible? Make sure to include all of the costs, both sales and home office, in your analysis.

b. Calculate the target cost for the manufacturing operation. Use 20% as the target profit.

c. Look at the three options for sourcing the product. Which approach seems to be best for the firm financially (efficiency-based)? Which would be best for responsiveness? Make sure to include carrying costs for outsourced inventory using a calculation of number of days of sales the inventory represents at the 25% carrying cost noted.

d. Should Mid Range enter this market if its target profit is 20%? Why or why not?