Tea and More is facing growing pains due to its rapid expansion over the past decade. The
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Introduction
Jack Reynolds hadn't panicked often since he and two business partners bought Tea and More (TAM) from its founders nearly sixteen years ago. As a supplier of fine teas and assorted specialty foods to upscale restaurants and gourmet shops, TAM had achieved steady growth in market share and profitability since those early days when gross receipts were under $1 million and Jack knew most of the people. of your customers from the very beginning. -basename. Jack had bought his partners along the way, making the decisions easier. He had grown accustomed to calling the shots on even the most insignificant aspects of operations and sales.
But by early 2009, revenue had risen to nearly $25 million. Jack was having incredible days and had earned a reputation within the company as a temperamental "ticking time bomb" isolated in his corner office, where he regularly sent out searing emails and voicemails about his latest discontents. . He couldn't deny that the company ached with growing pains. Jack snapped another pencil in half. Why did he always have to think of the next good idea? TAM employees from top to bottom privately felt the weight of Jack's heavy hand on the tiller. Turnover was starting to be a major problem, as valuable management time was apparently wasted trying to train yet another new hire.
Jack quickly sent an email to his senior staff announcing a kind of summit conference, a weekend retreat where they (or he) would get to the bottom of the problems facing the company: competitors fighting hard for bigger market share. from TAM; maddening delays and mix-ups in production; constant complaints from vendors about too many trips for too little reward; and Jack's other long list of how his suppliers, customers, employees, and the office janitor were letting him down. Every aspect of the business, he told people about him, was "under the microscope" to "make this company work like he used to."
History of tea and more
The company was founded in Los Angeles as Global Tea by three sisters in 1985. They shared a love of fine teas and, before starting the business, spent much of their vacation time searching for unusual teas, specialty blends, and trusted producers around the world. the world. They built an orderly and satisfied retail customer base comprised primarily of restaurants and bakeries in California and eventually other western states.
But the circle was broken in 1992 when a sister died of cancer. His CPA at the time, Jack Reynolds, jumped at the opportunity to buy the business and convinced two of his friends to put up most of the capital as not-so-quiet partners. Jack had an eye for marketing and design. In a matter of months he had transformed the look of his products with imaginative graphics, whimsical quotes, and short, exotic product notes. He was born Tea and More, based in Los Angeles.
After two extraordinarily successful years building TAM into a wholesale operation, Jack was able to buy out his partners and assume sole ownership of TAM as a private company. From time to time, as expansion dictated, Jack brought in a few investors, but never gave them decision-making roles. His senior staff initially consisted of a vice president of sales and marketing and a vice president of operations. That small team grew over time to include an executive vice president ("someone who can communicate with Jack") and six director-level positions for various business functions. Regardless of the size of this senior staff from year to year, Jack maintained complete control over business decisions large and small. "Better check with Jack"
A complicated supply chain
When Jack acquired the company, his main suppliers in China and India were used to sending relatively small shipments "as available." The founding sisters had focused on the art of selling to their retail market, not the reliability, scale, or efficiency of their supply chain. Sometimes, in fact, they enjoyed running out of their most popular teas so that their sales ingenuity could be challenged in selling more available varieties. Jack had quite a different vision and strategy. He almost immediately expanded his sources to include Japan, Sri Lanka, and Taiwan, while retaining his connections in China and India. But the size and reliability of the shipments continued to plague the company into the mid-1990s.
Somewhat reluctantly, Jack disassociated himself from the direct import of his selected teas and signed a profitable contract with a middleman, Earl Morgan Limited (EML), based just outside London. For over a century, EML has served as a global processor of traditional and exotic blended teas, all to the specifications of its resale customers. Jack's company, for all its brand success in US restaurants and gourmet shops, counts for EML when compared to the large supermarket chains in the UK and Europe. Jack's orders for EML blended teas were typically produced in batches twice a year. In more than one heated meeting, EML executives patiently explained to Jack that he couldn't afford to set up and calibrate his equipment for more than two production runs a year. Especially since the shelf life of properly sealed tea was not at stake, Jack had every reason to buy in bulk every couple of years rather than pay a hefty premium for more frequent production runs.
EML was shipped to TAM in container-sized batches, each container containing around 10,000 kilos of tea. Purchase orders for tea types and quantities come from TAM's sole production facility, located just outside of Cleveland, Ohio. The initial decision to have production in the Midwest instead of Los Angeles was primarily motivated by lower operating costs: both wages and facilities were cheaper in the Midwest. Furthermore, the head of production, a tea guru now well along in years, simply refused to move to Los Angeles and for once Jack backed down to preserve the value this key person brings to the many tea products. of TAM.
The production manager oversees the art of ordering the right blends in the right amounts for a somewhat unpredictable market (influenced by the public's changing tea preferences, the rise of competing beverages, and the general economy). If a particular tea source is not available, the production manager must identify a substitute ingredient before setting up one of TAM's production runs with EML in London. But because any product changes must be explained to TAM salespeople and reflected in their advertising, the Production Manager must clear any alterations to the tea formulations with the Vice President of Sales and Marketing, based at the headquarters in The Angels. Such authorization is not pro forma. Samples often need to be shipped to Los Angeles; dozens of communications flow back and forth, sometimes over a period of weeks. other factors
explaining a continued production base in Cleveland includes favorable tax conditions; cheaper, more reliable labor than in the Los Angeles area; and affordable housing for the dozens of employees involved in the production process.
The whole matter of order definition and compilation is made even more challenging by the three month lead time required by EML in London for any production run. EML says it takes two months to procure selected tea from its Asian or Indian source and one month for shipment (by load and truckload) to TAM's production facility in Cleveland. TAM maintains standing orders with EML for its most popular high volume teas; and the arrival of these teas, sealed in large bags, can be predicted twice a year almost daily. Less popular teas, however, arrive less regularly, as they are dependent on being “added” to vacancies in the long queue of EML production. Once unloaded in Cleveland, the tea is packaged in retail containers. At full capacity, the processing plant can package about US$100,000 of tea a day (about 20,000 pounds). The packages are then archived at the production facility until they are shipped to the
retailer. The Cleveland facility typically stores about two months worth of sales as inventory. But that estimate is usually just a guess. Order volume varies by season and even within seasons, whether a cold snap brings more teapots or a hot summer brings more iced tea.
As a general rule, and despite TAM's efforts to educate them, retail customers tend to under-order when they make their main tea purchases two to three times a year. When their tea runs out, or a particularly popular blend sits empty on the shelf, these customers frantically contact sales staff in Los Angeles, who in turn check Cleveland inventory and shipping time to handle emergencies. of customers. Sometimes the correct teas are available in Cleveland and can be shipped quickly, albeit expensive, to the retailer (who absorbs additional shipping costs, usually air freight). However, just as often, Cleveland has to report that the requested type or quantity of tea is not in inventory and will not be available for a matter of months. Customers blame TAM, and TAM blames customer ordering practices.
Customer service
TAM employs three full-time sales representatives, each with responsibility for major accounts within a multi-state region. Smaller accounts are staffed by “contract sales staff,” that is, salespeople who represent a number of product lines for relatively smaller customers, such as individual restaurants and mom-and-pop grocery stores. Relations with these contract sales people have become increasingly difficult over the past year. With rising gasoline costs, vendors complain to TAM that they can barely afford to make even irregular calls to smaller, more distant customers. For his part,
These online sales further infuriate contract sellers, since they receive no commission when an order goes through the online shopping center. For several months, these outside sales people have been lobbying TAM for some kind of commission every time an order comes from their territory, even if it's placed online. TAM has resisted this arrangement, fearing it will further encourage sellers not to make in-person calls to their customers.
In total, these minor sales represent about 15 percent of TAM's business. Jack Reynolds and other company leaders have long suspected that better customer service could substantially increase this percentage. For example, when a small retailer's shelf is empty of TAM teas, all it takes is an in-place competitor with an offering ready to fill that shelf. In such cases, TAM may have lost a customer forever. TAM leaders have tried a carrot approach by offering a 12 percent commission instead of the usual 10 percent commission to outside sellers. They have also tried the stick method, threatening to switch sales providers entirely unless customers start receiving better and more regular service. But outside salespeople seem to be impervious to any of the attempts at motivation. As one salesperson put it: “An additional 2 percent commission doesn't cover my extra time and gas. And if they want to fire us, let them do it. We have many brands to represent besides TAM.”
Payment terms
TAM customers are technically on a "net 30" basis, and the 30 days until payment is due begins when an order is shipped from inventory stored in Cleveland. TAM still uses regular mail for sending invoices, although some customers have been willing to receive invoices by fax. Despite the "net 30" requirement, the average collection period for all customers is 54 days. To date, TAM has not charged interest on balances less than 90 days past due, out of concern for maintaining a good relationship with customers. Customers with poor or missing credit must pay by credit card, on which TAM pays a 4 percent surcharge, or by cash, which is handled primarily by third-party vendors before being delivered (twice a month) to the Los Angeles office. . Handling such cash has been sloppy at best over the years. Some sellers subtract what they estimate is their commission before handing over the remaining cash, a practice TAM leaders have repeatedly tried to stop.
Variety of products
Driven in large part by requests from large restaurant chains, TAM has nearly doubled the types of tea it sells in the past two years. New varieties spark the interest of sales people for a brief period, giving them a new "story" to tell their customers. But in general, the retail and wholesale market has preferred to stick to the five or six traditional varieties of tea that TAM produces. Financially, the effort to expand the company's sales through the creation of new tea flavors, labels, and packaging has turned out to be a "failure" for the company, an expensive experiment that failed. However, TAM leaders have noted that competitors seem to be having good luck with flashy new tea varieties, in particular with those that are marketed during the Christmas season. "What are we doing wrong?" Jack Reynolds has asked out loud many times. “We have a superior product, but our competitors are blowing us away with flashy displays and lots of magazine advertising.” However, he has been reluctant to approve marketing budgets to match those of the competition when it comes to new, untested TAM products.
Price of the product
In TAM's early years, retail customers, restaurant customers, and shoppers at grocery and beverage stores seemed to be unaware of price. In several controlled marketing studies, TAM teas seemed to achieve the same level of demand with a 20 percent price increase or decrease: customers simply wanted quality tea and were willing to pay for it. However, in the last eighteen months, all aspects of TAM's operation, from the cost of materials to labor and shipping, have become significantly more expensive. In response, the company has "pressed the upper envelope" on prices to 25-30 percent above previous levels. Unfortunately, this increase in price has created space for lower-quality tea producers to gain market share by selling to former TAM customers at a greatly reduced price, often as much as half of what TAM charges per unit of product. TAM has emphasized the high quality of its teas in expensive advertising campaigns and direct mail "special offers" aimed at customers new and old. But these expenses have further eroded the profit margin. “We are giving away our tea!” Jack Reynolds has complained. “Let's go back to basics and sell our traditional line of teas to our loyal customer base. Forget the low price market!” Jack's company partners have been reluctant to remind him that his supposed "loyal customer base"
The TAM Summit Conference
At the weekend "summit conference" called by Jack to address these company dilemmas, senior staff first had to endure hours of rants from Jack about what each of them was doing wrong, how the he had been misled by outside vendors, how previous customers had no sense of loyalty to TAM, and other seemingly endless questions. When Jack got tired, he passed out a single sheet containing six questions for senior staff to answer. With a flourish, Jack closed the conference room door shortly after lunch. “And until we have answers,” he proclaimed, “no one is leaving. I don't care if it takes all night.
discussion questions
1. What can we do about lost sales due to poor customer service from an outside "contract"?
sales staff?
a. How can we restore the appeal and power of the TAM brand to major customers?
so they won't be attracted to low-cost, low-quality competitors?
b. How can we minimize 'out-of-stock' and other inventory issues caused by
unpredictable customer order patterns and the continuing difficulty of getting
faster production and delivery from EML in London?
C. How can we reduce the collection time from 54 days to less than 40 days without alienating
the very customer base that TAM is trying to attract and retain?
d. What decisions do we need to make about experimenting with new varieties of tea,
like the “Mint Christmas” tea that went flat last season? Can we afford to continue
such experiments? Can TAM afford to stick to just its basic teas and not compete in
the market for “new and improved” tea so advertised by competitors?
e. What have we not thought of? Where else can you achieve financial benefits and process efficiencies?
Expert Answer:
Question 1a Dealing with Lost Sales Due to Poor Customer Service from Outside Contract Sales Staff Identify and Manage Customer Expectations Set clear expectations with contract sales staff about the ... View the full answer
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