Strategic Cost Management - Derricks Ice Cream Case Study - Assessment Answer

February 22, 2018
Author : Ashley Simons

Solution Code: 1AGHD

Question: Strategic Cost Management

This assignment falls under Strategic Cost Management which was successfully solved by the assignment writing experts at My Assignment Services AU under assignment help through guided sessions service.

Strategic Cost Management Assignment

Assignment Task

  1. Read the attached case study.
  2. Answer the Questions at the end of the Case Study.
  3. Complete the following table for each of the customers.  You should input their information from the case on each of the requirements.  Where there is no information on an area, leave the table blank.
  4. For each of the criteria assign a mark ranging from -5 to +5 based on whether the customer’s criteria is more costly for Derricks or less costly.  For example, Butler Ices requires packaging that is unique to them, this would add costs for Derricks so they would score -5 on that criteria. A further example:  Cahill Cones always pays on time there would score +5 on that criteria. Score 0 where there is no information.
  5. Add the scores for each customer and rank them from best customer (least costly) to worst customer (most costly).  Next to the score record the amount of sales percentage they represent for Derricks.
  6. Place the customers in the relevant square of a BCG matrix.
  7. Comment on your results.  What strategies would you recommend to keep and grow the good customers and what strategies would you recommend to reduce the costs of servicing the high cost customers.

Case Study:

DERRICK'S ICE-CREAM: A CPA CASE STUDY Derrick's Ice-Cream is located in modern suburban premises and manufactures and dis tributes 30 different ice-cream product lines from its base in Fremantle, Western Australia. The products are distributed by Derrick's own fleet of refrigerated trucks to six major wholesale distributors.

Annual sales are currently around the $10m level, distributed among the wholesalers as indicated below. Derrick's control about 35 per cent of its metropolitan market, but this shrinks to less than 10 per cent in outlying areas where there are many small com petitors.

Derrick's will usually hold up to four weeks' of stock in their central cold stores to meet the distribution requirements of their six major customers. The cold stores cost approximately $500 000 p.a. to run, but excess capacity can be hired out to other non-com peting firms. This becomes especially important during the winter months when consumer demand is considerably reduced. Even during the summer months demand is highly temperature sensitive; Derrick's, therefore, bases its sales on a de-seasonalised fore cast, related to increases in disposable real incomes, and hopes that stocks will be ade quate to cope with sequences of extreme high temperatures.

The raw materials: vegetable oil, butter, milk and sugar, are relatively inexpensive. They arrive at Derrick's by tanker and are stored on site. Ice-cream is then manufactured in two major processes: mixing and forming, followed by packaging to meet the specific customer requirements,

The requirements of meeting the, sometimes uniquely specific, requirements of cus tomers have been causing Derrick's management some serious headachesrecently. They recognise the importance of a client-focused approach to marketing and distribution, but are beginning to feel that they are being exploited by some customers who are never satisfied with the level of service provided, however extensive it might be. The satisfaction of customer whims is beginning to cost big money, so Derrick's has determined to con duct a detailed analysis of the customers and their varying requirements. These have beeabbreviated below:

  • Ardron's Wafers are located within one kilometre of Derrick's base and employ standard packaging and bar code reading systems. They insist on only low discounts for volume and maintain large regular orders. Consequently their delivery requests and inventory holding requirements are highly predictable.

Butler Ices are located nearly 50 kilometres north of Derrick's base and require packaging that is unique to them. Despite their remote location they insist on free deliveries and require large discounts for volume orders. Their internal inventory control procedures are not well developed, resulting in not uncommon requests for crisis' deliveries to deal with stock-outs. Cahill's Cones have the reputation of always paying on time and requiring low dis counts and commissions. Their inventory holding procedures are perhaps the best in the business and they have a JIT scheduling system that is entirely compatible with Derrick's own. Deliveries require no special fleet requirements for refrigerat ed vehicles. Donleavys Ices always pay late but demand all available discounts, even when strict ly they are not applicable. They insist on daily deliveries, with the requirement of additional deliveries should demand merit it. They have threatened to take their business elsewhere if all their inventory-holding requirements are not met in full.

  • England Wedges relies on bulk orders that are shipped on an infrequent basis. They require rare visits from Derrick's personnel and are prepared to collate sales credits and make monthly claims.

  • Frankston Chocs is no? noted for the strength of their internal organisation. They

require frequent calls that extend to assistance with administrative operations and help with the merchandising of stock and in-store displays. They initiate separate sales credits for each item of product returned and inevitably generate complex orders whose detail is unclear, so that multiple queries follow almost every transaction. The information above provides the basis for a customer profitability analysis and the means to devise alternative strategies for the manner in which Derrick's might proceed.

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Solution:

Derricks Ice cream Case Study

Strategies recommended to keep and grow the good customers

Reducing Attrition

It is well known that all businesses including Derricks are likely to lose a customer. It is essential for Derricks to build the initial customer relationship with her customers. This relationship needs to be maintained and must not be left unattended. The easiest way for Derricks to grow her business is not to lose their customers by improving on their discount and offering after sales services to customers such as free transportation of goods (Gordon, 2013).

Sell and then again sell

It is important for Derricks make the initial sale. However, the process of sale should not stop at this first phase. The firm should embark on referrals as well as repeat sales and demonstrate that she cares about her customers. The firm then needs to close the sale by striking a business deal with the customer.

Soliciting the “lost sheep”

It is important for Derricks to reactivate customers who specifically are aware of the firm’s product. This is the quickest and easiest way to increase sales and revenue for the firm. Therefore, Derricks need to dedicate enormous resources to attracting new customers and reactivating dormant customers such as Butler.

Frequent communication

The firm can avoid losing customers by always keeping in touch and building relationships with her customers. The customers are likely to respond positively if they feel valued by the firm. This may involve acknowledging the customers and keeping them informed about their credit and offset their post-purchase doubts (Price & Jaffe, 2014).

Offering excellent customer service

Excellence is the core thing for satisfying customers’ needs. It would be important for Derricks to offer excellent customer care services like delivery of goods faster than expected, dedication to customers, sticking to promises, immediate response to customers’ needs, and avoidance of buck-passing.

Courtesy system

The firm should ensure that her staff have good interpersonal skills such as being pleasant and polite to customers; treating the customers with respect and possessing perfect negotiating skills when conducting business with customers. This will make the customers feel important and they will opt to do a repeat business with the firm.

Service or product of integrity

Derricks as a company should avoid shortcuts in their manufacturing or service delivery process so that their products or services are of high quality. This should be consistent to avoid unethical shortcuts in production process. Ultimately the customers will be retained if the firm persist on offering services or products of quality (Paul, 2015).

Taking complaints

Complaints from customers is actually a gift. The firm can use the complaints in improving on their short-comings. When a customer’s grievance is addressed effectively and efficiently, the customer is likely to do a repeat business and therefore retained by the firm.

Strategies recommended to reduce the costs of servicing the high cost customers

Customer Communication Management

This involves what Derricks as a firm say to their clients, the mode of the delivery of the information and how the clients are likely to respond to their clients. It is important for the customers of the firm to get the right information that may influence their choices when conducting business with the firm (Nancy, 2013). Clear communication that leaves no doubt on the customers’ side is imperative. Such information may be important in regards on the timelines of making payments and any penalties associated with late payment. The information needs to be properly packaged so that the customers do not feel some sense of punishment when they default payment. Derricks needs to create, deliver and manage customer communication so as to reduce the high cost of maintaining inventory.

Pricing

Fair pricing results to customer satisfaction that will eventually result into reduced cost of maintaining high costs customers. Price fairness involves placing reasonable, justifiable and acceptable price that will attract the customers to buy in bulk and pay promptly or on time. Many studies have shown that customer satisfaction is highly influenced by the perception of price fairness. For example, if Derricks Company bills the customers with a premium price higher than the competitor, the customers are like likely to respond faster and pay their debts on time (Williams, 2014). This will go a long way in reducing the high cost customers since no customer will delay in making payment.

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