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WMUCaseCompetition.pptx
Case Competition – BUS 3000
Kellogg Company Overview
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The Case
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Setting: Modern Day Battle Creek, MI
Problem: Sugar Zombies are obliterating all of the sugar
Hero: Jared Laine - Buyer at Kellogg’s, Savior of Breakfast, Father to Tigers and Savior of Costs
Objective: Use the options at your disposal to live up to your titles
Kellogg Company Overview
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Instructions and Grading
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Instructions
Read through the case study as a group
Gain an understanding of the problem and potential solutions
Evaluate all options and compare them to one another
Present your best option to “the board”
Grading
Show your work
Explain WHY you chose the option you did
Present as a group
Grading will be pass/fail but there will be a winner
Kellogg Company Overview
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Timeline
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Groups
Everyone is sitting in their groups today
Presentations
Groups will present their cases December 13th
All group members need to participate in the presentation
Questions
Kellogg Company Overview
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The Case
Sugar Apocalypse
Kellogg Company Overview
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Intro
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Once upon a time there was a place called Brazil. Brazil exports 60% of the world’s Sugar Market, by volume. Kellogg’s, conveniently located in Battle Creek, MI, AKA Cereal City USA, produces 33% of the US’ cereal and buys most of its sugar from SugarTown which is located in Brazil. Unfortunately, in September of this year Brazil experienced the first Sugar Zombie Apocalypse this world has ever seen - effectively wiping out SugarTown’s ability to continue to provide Kellogg’s with a continuous source of supply.
Knowing that losing market share is not an option for the world’s foremost supplier of goodies to the planet, Kellogg’s is forced to make a tough decision on how to prevail over the Sugar Apocalypse.
There are some things that you know up front. First, Kellogg’s takes in about 5 million pounds of sugar every month. Second, this sugar comes at a current price of $1.25 dollars per pound from Sugar Town but they do not provide you with any visibility to how this price is calculated. Third, your current lead time is 4 weeks, meaning it takes 28 days for a truck to arrive at your plant from the day Kellogg’s places an order. As Kellogg’s buyer you also know that SugarTown is a strategic supplier for your category. You’ve been doing business together for over 10 years. They are fiscally responsible, they source from farmers in the local Brazilian area and have an outstanding social responsibility record. Finally, and most importantly, it is unacceptable to allow a plant to shut down. A plant shut down costs Kelloggs hundreds of thousands of dollars a day not to mention the labor force impacts. Shut down due to running out of sugar is not an option.
Kellogg Company Overview
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Intro
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Your mission, Jared Laine, as Kellogg’s sugar buyer is to explore each of the following options and present the one that keeps Kellogg’s in stock and on top of the world’s morning foods market. You will be presenting to Kellogg’s board of directors in six short weeks. Remember, it is not acceptable to simply make this decision without exploring all options. The board will want to know why you made the choice you made and you’ll need to show them why your choice is the correct course of action.
Kellogg Company Overview
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Option 1: Provide SugarTown with capital to source from other regions
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Upon hearing the news that SugarTown’s supply has been overrun by Sugar Zombies you immediately call their CEO, Senor Granule, where he presents you with an idea. Granule says that SugarTown could continue to provide you with an uninterrupted supply of sugar.
They have a small subsidiary facility outside of Brazil that is in need of security to withstand zombie intrusion and would charge $1.45/lb to supply Kellogg’s. However, this location has not been on our approved vendor list. It takes roughly 4 weeks to qualify a new location at a cost of $250,000. With shipments being able to start two weeks after location approval. Additionally, they have found 5 million lbs. of useable sugar untouched by zombies.
They would accomplish this by sourcing sugar from Argentina, heretofore untouched by the apocalypse. In order to ensure supply they would also need to hire a third party to provide them with ample security of the Argentinian fields as well as begin to clear out the zombies currently feasting on their Brazilian sugar fields.
This solution won’t be cheap warns Senor Granule. Contracting an army to provide security and combat the zombies will cost $20 million per year and take 3 years complete their work. In addition to this, sourcing sugar from Argentina so quickly will cost $10 million in up-front investment.
Kellogg Company Overview
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Option 1: Provide SugarTown with capital to source from other regions cont…
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Senor Granule says SugarTown can’t possibly pay for this in today’s environment but says that SugarTown would be open to taking a loan from Kellogg’s. SugarTown is asking for 70 million dollars to stay afloat until the mandatory zombie elimination period of 36 months expires. Payments would be sent in yearly installments over a 20 year period. As a show of partnership, SugarTown would carry an interest rate of .05% per year until the loan is paid. Additionally, SugarTown is offering to reduce our sugar price to $1.20/lb after production restarts for a period no longer than 24 months.
Are Senor Granule’s financial needs outweighed by SugarTown’s ability to send consistent product?
Kellogg Company Overview
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Option 2: Source from a new Company in India
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Kellogg’s second option is to source sugar from SupremeSugar, a new supplier located in India. India is the second largest sugarcane producer in the world, after Brazil. SupremeSugar can provide sugar to Kellogg’s at $1.00/lb. While cost of the sugar itself is much cheaper coming from India, SupremeSugar is completely new to Kellogg’s and you do not have any background information on its financial standing, timeliness and social responsibility. In order to qualify SupremeSugar Kellogg’s would need to complete the following; First, a Social Responsibility Audit that takes 20 days to complete and costs $500,00. Second a Facilities Safety Audit that takes 30 days to complete and costs $750,000. Finally, a Financial Viability Audit which takes 30 days to complete and costs $150,000. These Audits all can all happen simultaneously and can begin as soon as this option is selected, assuming it is chosen. Kellogg’s cannot do business with SupremeSugar if they fail any of these audits.
Kellogg Company Overview
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Option 2: Source from a new Company in India cont…
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Also, the lead time for the Indian sugar is 8 weeks - double that of the Brazilian sugar you were sourcing prior to the apocalypse. SupremeSugar does keep plenty of inventory of on hand in case of supply interruptions but Kellogg’s is required to pay a monthly fee of $50,000 per month to guarantee warehouse space. Kellogg’s does need to keep a sufficient amount of inventory on hand with this 8 week lead time because a stock out will cost the company $16,700 per day. According to industry research SupremeSugar causes an average of 2 supply interruptions per year and each disruption causes companies to be out of product for 1 month on average.
Does the low cost that SupremeSugar provides outweigh the lead time and uncertainty that also comes with sourcing from India?
Kellogg Company Overview
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Option 3: Alternate U.S. based supplier
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Acting as the sugar buyer for Kellogg’s you had run into a very reputable U.S. based supplier in the past called The Sugar Club, owned by Marcus Cuba. You had explored them as an alternative supplier a few years ago but their pricing came in substantially higher than SugarTown’s. After reaching out to The Sugar Club to see if they would be able to provide sugar to Kellogg’s they send you a quote along with potential timelines.
The Sugar Club is able to start sending you product immediately, with no interruption in your current supply. Their lead times are currently only 3 weeks long and their product comes from local farms in the U.S. Their quote came in at $2.00/lb., approximately 40% higher than your current costs. The Sugar Club also requires you to sign an exclusive 3 year contract. Meaning they are your sole supplier for the next 3 years regardless of what happens with the Apocalypse. The Sugar Club is also notorious for it’s tiered pricing structure. In this case:
Tier 1: If Kellogg’s purchases 60 million lbs in a year, there is a 2% reduction in cost
Tier 2: If Kellogg’s purchases 55 million lbs in a year, there is a 1% reduction in cost
Tier 3: If Kelloggs purchases less than 50 million lbs in a year there is a 1% increase in cost
Is having a guaranteed supply of domestic sugar worth the cost of working with Marcus Cuba’s Sugar Club?
Kellogg Company Overview
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Option 4: Source sugar via railcar
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Thomas’ Sugar Co. is a U.S. based company who sources their sugar out of Mexico. You’ve used them in the past and after reaching out to Thomas Jr., owner of Thomas’ Sugar Co., to see if they would be willing to do business with Kellogg’s their sales rep informs you that at this time they have plenty of sugar on hand and ready to ship, however, they are only capable of sending sugar via rail.
This means your lead time would now be 8 weeks for each order and while their pricing is at a competitive $1.15/lb., you now need to hold some safety stock at a local warehouse to protect yourself against the urgent needs you’ll have throughout the year.
After consulting your inventory analysts, they say you’ll need to keep 1 million lbs of sugar on hand at all times in order to accommodate fluctuations in demand. 1 million lbs of sugar equates to 40 railcars. Your storage facility costs you $.02 per pound of product stored, per week. So if you have 100,000 lbs stored for two weeks the total amount owed is $4,000. They also require a 3-year minimum contract in order to sign their own deal with the railroad company.
Kellogg’s is also responsible for paying a duty tax to the Mexican government to ensure compliance with the rules and regulations of U.S. and Mexican border. This means Kellogg’s pays $250 dollars for every railcar that leaves Mexico and $150 for every returning railcar.
Thomas Jr. is awaiting your response so that he can make arrangements with his cross-border railroad company.
Kellogg Company Overview
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