Snapple case 1. severity The severity of this of this problem is showing in exhibit 1. Where total case sales of the first 5 months of 1992 were 6,8 million the sales of the first 5 months of 1993 were 15,3 million cases. So that’s an increase of 225% in sales. And when you look at figure 1 you can really see the severity of the problem. Because normally the first five months are only 27,91% of the total sales in a year. So normal sales volume would be 24,3 million cases. But if the increase in demand stays at the same level in the second part of 1993 then total predicted sales for all Snapple products will be 54,8 million cases.
This large increase in sales comes from Tea drinks which double and Fruit drinks that triple. And also soda increases 41%. This means for Snapple to overcome their shortages they need to more than double their normal production. 2. The problem The main problem in this case is that Snapple at some point in time became unable to meet demand for their products. The demand for Snapple’s products is highly unpredictable and this leads to several reasons that explain the inability to meet demand. Snapple does not have its own production company; instead, everything is outsourced to independent companies based on fixed production quantity contracts. This leads to a limited production flexibility when demand fluctuates. When the shortage became nationwide due to the increase in demand, Snapple’s product could not be shipped from anywhere and they lacked the ability to meet demand. – In addition, Snapple forecasts demand for a year and base the quantity in the production contracts on this forecast.
However, because demand is so variable, a year is to long a period for making a decent prediction. – Another problem is the centralized product development, purchasing, inventory and shipping activities at headquarters. Because Snapple operates in several different markets – juices, sport drinks, tea, all with different needs in terms of promotion, demand, distribution points, etc. – it is not ideal to centralize all decision-making. Snapple’s market should not be seen as a whole, but as several independent and diverse markets with different needs. – Snapple has a large variety of products on offer.
Even though product differentiation is one of their objectives, it aides in making demand highly unpredictable. 3. Short term solutions In order to frame our solutions, we have defined “short term solutions” by those that can be achieved within 3 months. – A short term, but possibly expensive, solution could be to contract independent companies in or outside the nation (for instance overseas) to supply product during peak demand. – On the short term, an option would be to discontinue the production of many of Snapple’s products that together count for only a marginal part of their revenue stream.
Exhibit 2 indicates that 10 of their most popular products count for over 75% of sales. It also shows that 33 of their least popular products account for 5% of sales. Our suggestion would be, based on the current research data, to cancel production of these 33 products and use that production capacity to produce more of the popular products to meet the increased demand. This is not a large group of products in production quantity, but it does improve the predictability of demand. On the other side the large product variation is indicated to be an important property of the company.
Therefore this might not be a good solution. – In order to make demand more predictable, promotion activities should be in line with inventory levels of the different products. In other words, promotion should be targeted at products that are readily available with little chance of a stock out. 4. Long term solutions Long term solutions are those that we feel cannot be accomplished within a 3 month period. – Outsourcing all production on the basis of fixed contracts has proven to be inflexible and Snapple would be wise to invest in its own production facility.
Part of the outsourced work could then be handled by themselves and it would also allow them to handle peak demands by increasing the utilization and temporarily producing extra output. This solution has been derived from Fisher’s article on functional vs. innovative products. For a product characterized by unpredictable demand, a market-responsive supply chain is recommended (Fisher, M. Harvard Business School Publishing). Such a supply chain is more able to respond to unpredictable demand to minimize stock outs, which has become the problem for Snapple.
Their current supply chain is what Fisher calls “Physically efficient”, and does not match the product. – Because demand is so volatile, a solution could be to adjust yearly forecasts more often, for instance monthly. This would allow Snapple to bring production more in line with demand. However, the question is whether the independent production companies are able to cope with a monthly change in production quantity, in stead of a yearly one. – Decentralization in decision-making should be the long term goal.
Different markets require different approaches and therefore marketing attempts should be tailored to specific market needs. For instance, the allocation of production capacity depends on the demand per market. The use of dedicated business units per market can provide the necessary focus. – A thorough market research could indicate which of the remaining 26 products will continue to be profitable in the long run, and which ones can be discontinued, or which should be returned to the shelves. This could allow Snapple to further adjust their product range and focus on meeting demand for this selection.