Page 440 - Operations Strategy

case study 9 • Hagen style 415
Jed Mayer, Hagen Style’s vice president of distribution, was proud of his distribu-
tion centres. ‘It is no exaggeration to say that we run one of the slickest order fulfillment
operations in the world. Years of investment and improvement have gone into perfecting it.
Certainly, industry benchmarking studies show that we are significantly superior to similar
operations. We have lower costs per order, far fewer packing errors, and faster throughput times
from order receipt to dispatch. Our information system, transportation and warehouse people
have together created a great system. Our main problem is that the operation was designed for
high volumes, but the direct marketing business using representatives is, in general, on a slow
but steady decline.’
Jed’s anxiety over future business was shared by all the company’s management.
Direct selling using door-to-door representatives was increasingly regarded as an old-
fashioned market channel. Traditional customers were moving towards using cata-
logues, TV shopping channels, or just buying from supermarkets and discount stores,
most of which now stocked the type of products in which Hagen Style specialised.
Recently, even Hagen Style, bowing to the inevitable, had started selling a limited range
of its products through selected discount stores and was planning to sell through a
catalogue operation. It reckoned that it could maintain, or even improve, its product
margins selling through these channels. The company reckoned that around 35 per
cent of its business would be distributed this way within five years. The problem was,
‘how to distribute their products through these new channels? Should they modify
their existing fulfillment operation or subcontract the business to specialist carriers?
And what would happen to their distribution centres?’
This posed a problem for Jed. ‘Although our system is great at what it does, the downside is
that it would find it difficult to cope with very different types of order. Moving into the catalogue
business will mean dealing with a far greater number of individual customers, each of whom will
place relatively small orders for one or two items. Our IT systems, packing lines, and dispatch
arrangements are not designed to cope with that kind of order. FedEx or UPS would be great at that
kind of delivery, but we couldn’t do it with our existing operations. We would have the opposite
problem delivering to discount stores. There, relatively few customers would place large orders
for a relatively narrow range of products. That is the type of job for a conventional distribution
company, of whom there are many who would just love to provide us with their services. So, basi-
cally, we just can’t service either of the new market channels from our existing operations. We
either invest in new distribution operations, which would be expensive and we don’t have the right
experience, or we subcontract these activities. As far as I am concerned, it would be better to con-
centrate on what we know. For example, I have been talking with Lafage Cosmetics who sell their
products in a very similar way to our traditional business. They have always been envious of our
fulfillment operation and have indicated that they would be willing to subcontract most of their
order fulfillment to us. Also, as our own traditional representative-based business declines, we will
have the capacity to move their volume over to our centres. I am sure we could still get profitable
business by utilising our distribution skills for the substantial number of companies who still need
our kind of service. It’s either that, or give up on distribution entirely and subcontract everything.’

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