You work as a supply chain manager for Primo Caf Inc. Primo Caf is a small-sized manufacturer of stylish coffee makers. The company has three distinct coffee makers that it produces.

The Bean Boiler is Primo Cafs most basic model. The main materials used in manufacturing the Bean Boiler are aluminum and plastic. There are lots of suppliers for these materials. At present, Primo Cafs total cost for producing a Bean Boiler is $13 per unit and the product is competitively priced at $20 per unit. There are lots of other coffee makers that are very similar to the Bean Boiler on the market. Still, sales of the Bean Boiler are very stable. The company reliably sells 24,625 to 25,375 units of this product per month.

The Family Man is Primo Cafs mid-market offering. Primo Caf manufactures most of the Family Man in-house, but buys the glass pot and the electronics that control the on/off function and the timer. At present, final assembly of the in-house manufactured parts and the purchased sub-components occurs at Primo Cafs facility in Grand Rapids. Total cost for producing the Family Man is currently $32 per unit and each unit is sold for $34.99. The Family Mans sleek, artistic design and range of unique colors helps to distinguish it from a wide selection of similar products offered by competitors. Prices for direct competitors range from $25 to $45. Sales of the Family Man range from 19,400 to 20,600 units per month.

The Caffissimo is Primo Cafs high-end offering. Primo Caf produces the external metal parts of the casing for the Caffissimo in-house, but buys all of the important sub-components from external suppliers. The most important sub-components for the Caffissimo are the gauges that regulate the temperature and pressure of the water as it is forced through the coffee grounds. The proper working of these gauges ensure that the Caffissimo produces a perfect cup of coffee at brewing. The Caffissimos design is a closely held company secret. The machine has won industry awards both in terms of its coffee making process and its external looks. Currently, the Caffissimo costs $375 to produce and sells for $600. Because of the relatively high price and unique design, demand for the Caffissimo is difficult to predict. Over the past year, demand has ranged from 8,500 to 11,500 units per month.

You are the supply chain manager at Primo Caf. Marco, the chief operating officer is your boss. From your previous recommendations, Primo Caf has designed supply chains specifically for each product (Bean Boiler, Family Man, and Caffissimo) based on customer segmentation. Marco struggled with this initially but is getting more comfortable with it after seeing the results.

Primo Caf is developing two new products and expects to launch them into the marketplace in two years. Marco has asked you to be a member of the New Product Development team to design the supply chains and select suppliers for these products. The two products are:

1. Code Name Nirvana: This is a derivative of Caffissimo (some of Caffissimos components will be used, but many new high-tech components are in Nirvana as well). It will complement the current Caffissimo product (therefore will not decrease Caffissimos sales, but possibly increase Caffissimos sales as well) by extending the product line as a very high-end machine. The expected price is between $800 - $900. Sales volume is expected to be lower than Caffissimo, but Marketing is not sure. Some Market research suggests that volumes could exceed Caffissimo. Initial cost estimates are $400 - $415, so a high margin product.
2. Code Name AM: Family Man is doing well in its segment, but Primo Caf leadership believes another entry in the mid-market is necessary. The product idea is to keep as many of the inside parts to be the same as Family Man, but release AM with a different exterior shell in many different colors (plastic pieces that can be added at the end of production). AM will fulfill a market segment not met by other Primo Caf products, with an estimated monthly volume of 14,500 to 15,500 units. Cost is estimated at $30 and price estimated at $34. Similar to Nirvana and Caffissimo, Marketing does not believe that AM will cannibalize Family Mans sales volume (therefore, Family Mans volume is projected to remain the same).

Based on material presented in the class, answer the following questions.

1. How will you use customer segmentation as a method to design the supply chains for these new products? In answering this question, (1) identify the different customer segments served by the products, (2) describe the main value requirements of each customer segment, (3) describe the demand patterns (particularly demand variability) of each customer segment.

2. How might the company design its supply chain to serve the main value requirements of each customer segment. In answering this question, be sure to address the type of relationship Primo would want to build with suppliers for each customer segment.

3. Marco is still struggling with customer segmentation of supply chains. You tell Marco that on the demand side of the business, segmenting customers would improve customer service. And on the supply side of the business, you tell him that strategic sourcing can lower costs. Marcos question is: Why should Primo Caf focus on the profitability of products, rather than simply their costs?