What are the implications of the marketing and manufacturing initiatives for future costs and profits of HPI? Chapter 08- Cost EstimationTo support domestic and export salcs, the company has located a number of plants throughout North America tobest support the geographical spread of its various customers.MANUFACTURING"In the early years," explained Michelle Ray, manufacturing director, "capacity had, by necessity, always chaseddemand. The rapid growth in sales during the past few years and the need to make major decisions concerning new plantlocations and process investments had understandably contributed to this capacity following the demand situation.However, with sales starting to level off this problem of capacity has now corrected itsclf.44Investments in manufacturing had been to support two principal objectives; to increase capacity and to reducecosts. The cost reduction initiatives principally concerned material costs and reduced processing times. "Currentinitiatives" explained Michelle “are continuing these themes. Our capacity uplifts will take the form of equipment similarto our existing machines. Over the years we have deliberately chosen to invest in machines which are similar to existingequipment in order to capitalize on the fact that the process is relatively simple and that products can, with relatively fewexceptions, be processed on any machine in the plant.In order to make best usc of total capacity at all sites, customer orders arc collated at the head office site inCleveland. They are then allocated to plants to take account of current plant loading, available capacity, customer leadtimes, and transport distances between the plant and a customer's required delivery location. As a result, forward loadingon a plant is only two or, at most three days ahead. Plants then schedulc these orders into their production processes inorder to meet customer call-offs and individual equipment loading rules.Once the order details are agreed with a customer, the order is scheduled for the targeted plant. Table 1 providesan actual schedule of orders for the hand soap product at the Lexington, KỲ plant.CONCLUDING REMARKSIn reviewing the proposed marketing initiatives regarding the wholesaler market, Anton Lagarde, commented,"Since sales in our traditional markets are leveling off, the new marketing initiative appears to be an important step ingiving us a fresh impetus to sales volume growth. Wc have now reached a point in our company where we do not have toendure capacity shortage problems. In fact, with the drop in sales last year, the company currently has exccss capacity withwhich to pursSue the wholesaler market. So, our main concern is to improve thc decline in the profit pcrformance that hasoccurred during the past year, and the new marketing initiatives should help to rc thc profit margins and hence to secure thisnecessary, overall improvement.REQUIREDDiscuss briefly HPI's competitive position and strategy.What are the implications of the marketing and manufacturing initiatives for future.costsand profits of HPIUsing the data in Table 1, explain how you would use appropriate methods of analysis such as regrcssion)analysis or correlation analysis to analyze the effect of order size and product varicty on the productivity andcost structure of the Lexington plant. A Read aloucO TG Page viewHospitality Products, Inc. (HPI) is a manufacturer of cosmetic soap products with plants located throughout North Americaand customers worldwide. "There is no doubt that the need to continue to grow sales is an important corporate objectiveand one which we need to always have in mind," remarked Anton Lagarde, managing director. "Not only is this importantin terms of contiinuing to inerease sales revenue overall but it is an essential part of our commitment for next year's budget.Resisting group pressure and allowing ourselves this time to test the market for other new segments has brought some orderinto this phase of our development. The segment penetration achieved so far and the opportunity to build on this mostsuccessful initiative augers well for the future. Thank you, George, for a comprchensive summary of the market result todate" concluded Anton. "It seems as though this initiative is one which will help us meet out short and longer-termobjectives." Anton Laragde's summary concerned a strategy overview provided by George Martin, marketing director ofthe company.8-3 Hospitality Products, Inc.During the past ten years HPI has successfully developed a line of soap products in small packages that it hasmarketed to large hotel chains. The hotels place the small hand soap items and shampoos and conditioners in hotel roomsfor the convenience of their guests. HPI has introduced a product that is attractive to these hotels because of HPI's carefulchoice of fragrances and attractive packaging. These products, with the hotel's name embossed on them, are a strongpositive statement about the quality of the hotel's service.taking a high-end approach to its product, an approach which has scrved it well in recent years.MARKETING STRATEGYHPI has achieved a strong market position in the industry byThe company concentrated its efforts in selling to the top twventy hotel chains in North America. By limiting itsmarketing efforts to a relatively few, very large multi-outlet chains (which have centralized purchasing groups), thecompany achieved low marketing and selling costs but high market penetration. Last year the company reached a marketshare of 65% in the large hotel chain market and, in turn, relatively large customer order sizes.Two market segments are evident in the large hotel chain market. In the first (called the value-added segment)customers buy the company's product primarily because of its advantage in fragrance and attractiveness of the product.Frequently, the hotel operations personnel in this segment are active in making the buying decision. The second segment isreferred to as being price sensitive as the customers purchase these products primarily on the basis of price. For thesecustomers, purchasing managers are the key decision-makers in the buying decision.RECENT COMPETITIONHPI's success in the hotel chain market has attracted an increasing number of competitors into the market. Whilethe company had been very successful in bringing out a series of new product types with innovative packaging, newfragrances and other features (moisturizing lotion content. ..) for the hotels, the competitors have eventually been able todevelop quite similar products. The result has been increased competition with a substantial reduction in HPI's prices(dropping 26% last year), and a major decline in the firms profit margin. The size of the price sensitive segment is growingrapidly while the value-added market segment is shrinking in size. The company faces an increasingly competitive marketsituation characterized by significant excess producer capacity.WHOLESALE MARKET INITIATIVEAs a result of the increased competition in the hotel chain market, George has proposed to begin to a focus on thesmall independent hotels, motels, and B&B's (Bed and Breakfast Inns) that purchase the soap products from largewholesale distributors. The potential sales for this wholesaler segnment is about the same size as the hotel chain market (20billion room-sets per year versus 25 billion room-sets per year). A room-set is a packet of soap, shampoo, andconditioner. While customers usually order the same quantity of soap, shampoo, and conditioner, some buy only one ortwo of these products. Therefore, HFI sells the soap, shampoo, and conditioner separately, in 24-unit cases.The Wholesale segment includes a much larger number of independent customers. At this time less than 15% ofthe soap room-sets sold in the wholesale market are of the quality of HPI's product.The independent hotel's differ from the large hotel chains in that they purchase their hotel soap room-sets fromwholesalers and distributors. Compared to the hotel chains, there are many more independent hotels widely dispersed overa large geographical area. The pilot marketing studies run last year by HPI indicate that the customer order sizes for thewholesaler segment tend to be relatively small, and that the number of different product variations (in terms for example offragrance, packaging, and size) tend to be relatively large in comparison with the large hotel chain market. These studiesalso indicate that prices (ad corresponding profit margins) are much higher than in the price-sensitive segment currentlyserved by the company.Blocher, Stout, Juras, Smith: Cost Management 8/e8-4Copyright 2018 McCrw-Hill Education All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Practical Management Science

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Chapter2: Introduction To Spreadsheet Modeling

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