Shahla Vasquez, marketing manager for Office Supplies, Inc. (OSI), must decide whether she should permit her largest customer to buy some of OSI's commonly used file folders under the customer's brand rather than OSI's own FILEX brand. She is afraid that if she refuses, this customer-Business Center, Inc.-will go to another file folder producer and OSI will lose this business.

 Business Center, Inc., is a major distributor of office supplies and has already managed to put its own brand on more than 45 high-sales-volume office supply products. It distributes these products -as well as the branded products of many manufacturers- through its nationwide distribution network, which includes 150 retail stores. Now Lance Richardson, vice president of marketing for Business Center, is seeking a line of file folders similar in quality to OSI's FILEX brand, which now has over 60 percent of the market.

This is not the first time that Business Center has asked inis is OSI to produce a file folder line for Business Center. On both previous occasions, Shahla turned down the requests and Business Center continued to buy. In fact, Business Center not only continued to buy the file folders but also the rest of OSI's product lines. And total sales continued to grow as Business Center built new stores. Business Center accounts for about 30 percent of Shahla Vasquez's business. And FILEX brand file folders account for about 35 percent of this volume. 

In the past OSI consistently refused such dealer-branding requests as a matter of corporate policy. This policy was set some years ago because of a desire to avoid excessive dependence on any one customer and to sell its own brands so that its success is dependent on the quality of its products rather than just a low price. The policy developed from a concern that if it started making products under other customers' brands, those customers could shop around for a low price and the business would be very fickle, At the time the policy was set, Shahla realized that it might cost OSI some business. But it was felt wise, nevertheless, to be better able to control the firm's future. 

OSI has been in business 28 years and now has a sales volume of $40 million. Its primary products are file folders, file markers and labels, and a variety of indexing systems. OSI offers such a wide range of size, color, and type that no competitor can match it in its part of the market. About 40 percent of OSI's file folder business is in specialized lines such as files for oversized blueprint and engineer drawings; see-through files for medical markets; and greaseproof and waterproof files for marine, oil field, and other hazardous environmental markets. OSI's competitors are mostly small paper converters. But excess capacity in the industry is substantial, and these converters are always hungry for orders and willing to cut prices. Further, the raw materials for the FILEX line of file folders are readily available. 

OSI's distribution system consists of 10 regional stationery suppliers (40 percent of total sales), Business Center, Inc. (30 percent), and more than 40 local stationers who have wholesale and retail operations (30 percent). The 10 regional stationers each have about six branches, while the local stationers each have one wholesale and three or four retail locations. The regional suppliers sell directly to large corporations and to some retailers. In contrast, Business Center's main volume comes from sales to local businesses and walk-in customers at its 150 retail stores.

 Shahla has a real concern about the future of the local stationers' business. Some are seriously discussing the formation of buying groups to obtain volume discounts from vendors and thus compete more effectively with Business Center's 150 retail stores, the large regionals, and the superstore chains, which are spreading rapidly. These chains -for example, Staples, Office World, Office Max, and Office Depot- operate stores of 16,000 to 20,000 square feet (i.e., large stores compared to the usual office supply store) and let customers wheel through high-stacked shelves to supermarket-like checkout counters. These chains stress convenience, wide selection, and much lower prices than the typical office supply retailers. They buy directly from manufacturers, such as OSI, bypassing wholesalers like Business Center. It is likely that the growing pressure from these chains is causing Business Center to renew its proposal to buy a file line with its own name. For example, Staples offers its own dealer brand of files and many other types of products.

 None of Shahla's other accounts is nearly as effective in retailing as Business Center, which has developed a good reputation in every major city in the country. Business Center's profits have been the highest in the industry. Further, its brands are almost as well known as those of some key producers-and its expansion plans are aggressive. And now, these plans are being pressured by the fast-growing superstores, which are already knocking out many local stationers. 

Shahla is sure that OSI's brands are well entrenched in the market, despite the fact that most available money has been devoted to new-product development rather than promotion of existing brands. But Shahla is concerned that if Business Center brands its own file folders, it will sell them at a discount and may even bring the whole market price level down. Across all the lines of file folders, Shahla is averaging a 35 percent gross margin, but the commonly used file folders sought by Business Center are averaging only a 20 percent gross margin. And cutting this margin further does not look very attractive to Shahla.

Shahla is not sure whether Business Center will continue to sell OSI's FILEX brand of folders along with Business Center's own file folders if Business Center is able to finda source of supply. Business Center's history has been to sell its own brand and a major brand side by side, especially if the major brand offers high quality and has strong brand recognition.

 Shahla is having a really hard time deciding about the existing branding policy. OSI has excess capacity and could easily handle the Business Center business. And she fears that if she turns down this business, Business Center will just go elsewhere and its own brand will cut into OSI's existing sales at Business Center stores. Further, what makes Business Center's offer especially attractive is that OSI's variable manufacturing costs would be quite low in relation to any price charged to Business Center- that is, there are substantial economies of scale, so the extra business could be very profitable- if Shahla doesn't consider the possible impact on the FILEX line. This Business Center business will be easy to get, but it will require a major change in policy, which Shahla will have to sell to Ramon Torres, OSI's president. This may not be easy. Ramon is primarily interested in developing new and better products so the company can avoid the "commodity end of the business." 

Evaluate OSI's current strategy in details. Should Shahla Vasquez accept the Business Center's offer? Why? Explain.

Answer rating: 100% (QA)

OSIs current strategy centers primarily around protecting and reinforcing its own brand identity OSI values control over its products rejecting dealerbranding requests to prevent encroaching on their ... View the full answer