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This case is important because supply managers must understand the trade-offs of single versus multiple sourcing in the supplier selection process.

Read the following case on Hewitt Distribution Incorporated and then answer the questions that follow.

Hewitt Distribution Incorporated

Blaine Reid, purchasing manager at Hewitt Dental, in Sacramento, California, was reviewing the purchasing strategy for the companys adaptive matching composite (AMC) product line. Hewitt Dental currently used two sources for this product line, but Blaine was considering changing to a single supplier with the expectation that he could secure a cost reduction. Blaine needed to evaluate whether single sourcing represented the best approach for the AMC product line, and if so, which supplier should be selected. It was Monday, January 25, and Blaine was expected to make his recommendation during the commodity review committee meeting at end of the week.

COMPANY BACKGROUND

Founded in 1901, Hewitt Distribution Incorporated (Hewitt) provided products, equipment, and software to the dental and animal health markets in the United States and Canada through its two strategic business units, Hewitt Dental and Hewitt Animal Health. Company revenues in the most recent fiscal year were $4.5 billion. The company had approximately 6,500 employees and operated 11 fulfillment centers9 in the United States and 2 in Canadawith a total of 800,000 square feet. Management attributed the companys success to its strong brand image and broad assortment of products and services.

Hewitt Dental accounted for approximately 45 percent of total company revenues. Product sales represented approximately 60 percent of Hewitt Dental revenues, while sales of equipment, software, and value-added services accounted for the remainder.

The dental supply market was highly fragmented, with customers ranging in size from sole practitioners to large group practices. It was estimated that the number of dentists numbered approximately 200,000 in the United States and 22,000 in Canada.¹ Hewitt Dental offered approximately 80,000 stock keeping units (SKUs) to its customers, including products, equipment, and software. The company had 45 regional sales offices and maintained contact with customers through a combination of personal visits, email, social media, and direct marketing.

THE PURCHASING PROJECT

Hewitt was facing unprecedented challenges as new online distributors disrupted the dental supply and animal health markets. Although the company had made significant investments to expand its e-commerce operations, the effect of new online entrants was slowing growth and eroding margins. During the past four years, company sales had grown by 4 percent, while profit before tax had decreased from $252 million to $86 million. In an effort to stem declining margins, the CEO hired a consulting firm to identify cost reduction opportunities in the companys supply chain, stating: I believe that cost-effective purchasing and efficient distribution is essential to providing customer value. We need to identify opportunities to reduce supply costs, improve supply chain operations and maintain optimal inventory levels to satisfy customer service levels.

The consulting company conducted a review of Hewitts product offerings and supply agreements, identifying opportunities for stock keeping unit (SKU) consolidation and purchase price reductions. A commodity review committee was established to provide support and oversight of the consulting project. Members of the committee included the senior purchasing executives from Hewitt Dental and Hewitt Animal Health, and representatives from sales, finance, operations, and the consulting company. The consultants worked with the individual purchasing managers at Hewitt Dental and Hewitt Animal Health to realize the savings, including actively assisting with supplier negotiations.

THE AMC PRODUCT LINE

Hewitt Dentals AMC product line represented a relatively new and expanding segment, with above-average margins (see Exhibit 1). Historically, dental restorations required the application of a composite material on the patients tooth, which required the dentist to match the color of restored tooth with the patients existing teeth. This step required effort by the dentist during the restorative procedure, sometimes through trial and error, and an investment in inventory of composite materials with different colors. AMC products simplified the restorative procedure by providing a one-shade solution for dental restorative procedures. It used nanoparticles to absorb light waves from the surrounding teeth to provide an exact match with the existing shade, thereby creating a natural appearance.

A 12-year veteran at Hewitt Dental, Blaine had been responsible for the AMC product line since its introduction four years prior. He had two suppliers, Martens Incorporated (Martens) and Samji Dental. The products from each supplier were identical, with the only differences in branding and packaging. Exhibit 1 summarizes sales and costs from the two suppliers for the past four years.

Martens was a global health care company headquartered in Germany. Its products included prescription medicines and products for the human oral health and animal health markets. Martens sales were $53 billion, and the company maintained a strong presence in the North American market, which accounted for approximately 45 percent of revenues. The company focused on product development, manufacturing, and brand management, relying on a network of wholesalers, distributors, and large retail chains for product distribution. Hewitt had a good relationship with Martens that spanned several decades, distributing several of its dental and animal health products. Hewitt sold approximately $50 million of Martens products each year.

The Martens AMC product line was sold at a retail price of $180 for a package of 10 units, with a cost to Hewitt Dental of $125, FOB the Hewitt distribution center. The syringe applicator was sold separately at retail price of $70, which cost Hewitt $35. The applicator could be reused, normally for 20 to 30 treatments. Martens also sold its AMC product line to several of Hewitts competitors.

Samji Dental was a small company, started by a group of three entrepreneurs, each with more than 20 years of experience in the dental supply industry. Kate Samji, president of Samji Dental, and her two partners had financed the research and development for their AMC product line and used a contract manufacturer for supply. It was currently their only product and Kate had committed to an exclusive distribution agreement with Hewitt.

Similar to Martens, the Samji Dental AMC retailed for $180 for a package of 10 units, with a cost of $120, FOB the Hewitt distribution center. The cost of the syringe applicator was $40, which had a retail price of $80.

Whereas Martens relied on its strong brand image and a traditional approach to marketing, Samji Dental used direct sales to promote its product and create brand awareness. Samji Dentals partners divided the U.S. and Canadian markets into three territories, leveraging their individual networks to make personal sales calls to dentists. Kate Samji, a former dentist, was well respected in the industry. She was a frequent speaker at industry conferences, promoting the benefits of their AMC product and extolling the benefits of their exclusive partnership with Hewitt Dental. Hewitt Dentals sales force often called on her assistance to close accounts with new dental offices.

RECOMMENDATION

The AMC product line had been a successful segment for Hewitt Dental, providing above average sales growth and profit margins. Selena Koper, director of marketing at Hewitt Dental, estimated that this category represented a potential total market of $40 to $45 million for Hewitt Dental, although she expected that increased competition would put pressure on the company to reduce its prices as the market matured. From experience, Selena knew that it would take a significant marketing and sales push to educate dentists about the new AMC product line.

The consulting report recommended that Hewitt Dental consolidate its spend for AMC products with one supplier with the objective of negotiating a significant price reduction and commitment for resources to expand sales and marketing efforts for the product. Blaine explained: The consultants estimate that the production cost for our current suppliers is less than one-half of their price and we should expect a 20 to 25 percent piece price reduction. The supplier will be expected to support sales promotions and provide rebates to help us grow the segment. In addition, there are opportunities to develop new complementary products to expand the number of SKUs. Samji Dental has been aggressively supporting sales growth, but they are a small company with limited resources, and we are their only customer. However, AMC is not a core product for Martens, and they may not be interested in renegotiating our agreement. I will be expected to make a recommendation at the commodity review committee on Friday with respect to whether single sourcing is an appropriate strategy for this product line, and if so, I will need to identify the supplier we should select. A recommendation to continue with dual sourcing will need to include a plan for how to manage the suppliers for this segment, including how to achieve growth while reducing costs.

¹ American Dental Association, https://www.ada.org/en/science-research/health-policy-institute/dental-statistics/workforce, accessed January 22, 2021; Canadian Dental Association, https://www.cda-adc.ca, accessed January 22, 2021.

If Blaine Reid decided not to single source, he would need to ________blank.

Multiple Choice

show how dual sourcing reduced supply risks

demonstrate how Hewitt could achieve growth while reducing costs

increase prices to their customers

find a third supplier

issue a request for quotation (RFQ)