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Issue: The core issue Unifine Richardson (UR) faces is their sole honey supplier, Harrington Honey (HH), will run out of Chinese honey in a little over a month because the Canadian Food Inspection Agency (CFIA) recently found traces of chloramphenicol (a banned antibiotic associated with causing a sometimesfatal blood disorder) and rejected the contaminated honey. Until China finds a way to detect contaminated honey, Unifine Richardson cannot sell any of its current Chinese-Canadian blend. Because of the CFIA’s findings, the global supply of honey will decrease by 20%, thus causing an increase in price. Harrington Honey will not be able to maintain the honey stream. The price of honey, globally, has already been on a steady incline (Exhibit 2) and the shortage will further intensify this trend. Another issue UR is facing is that there is also an uneven relationship between the two companies. Harrington Honey is well aware of this and is using this to its advantage by not offering better choices to UR. Additionally, 80% of UR’s honey operations are tied to one major customer, and this customer has tough standards. As stated earlier, Unifine Richardson has approximately one month of honey inventory left and it has to make a decision based on the available options presented by Harrington Honey.

Analysis: Unifine Richardson buys about one million pounds of honey annually. The world supply of honey has decreased by about 20%. Currently, the company pays $1.08 per pound for the Chinese-Canadian blend honey. Harrington Honey provided UR with three alternative sources of honey: 1. Canadian-Argentinean blend a. Cost: $1.42 million (a 31% cost increase). b. Customers may reject because flavor is significantly different from current honey blend. c. Argentina is world’s third-largest honey supplier. 2. 100% Canadian honey a. Cost: $1.75 million (a 62% cost increase). 3. 100% American honey a. Cost: $1.79 million (a 66% cost increase). b. World’s second-largest honey supplier. These options all pose very significant cost increases for Unifine Richardson. Considering the strict timeframe that UR is under, it will not be possible to establish a new relationship with another supplier; however, UR does have the leverage with HH to negotiate on the prices they are currently being offered. HH suggested UR consider a long-term contract to lock down the price, which suggests UR is a high volume customer that HH does not want to lose.

Recommendation:

Based on the immediate options available, we would not recommend going with the 50/50 honey blend. There is a question about the taste of the Argentinean honey. UR could face expensive recalls; U.S.-imposed dumping fees, loss of reputation and a failure to meet customer expectations. The 100% U.S. honey is also not a viable option because it is the most expensive honey, and there could be additional issues such as unpredictable delivery, transportation delays, shipping costs, etc. The Canadian honey is the best immediately available option, considering the limited timeframe the purchasing manager has to make a decision. Because UR is located in Ontario, perhaps there will be a reduction in fees or transportation costs. Concurrently, Pincombe should also contact his finance partner at UR for analysis on price alternatives it could offer its largest customer, based on the current prices HH quoted them. Based on these findings, finance could recommend Alternative 6 (alternative shown in appendix). Considering that it might take 15 months to eliminate the CFIA issue of chloramphenicol traces in the beehives, UR should contact HH and advise that they will consider continuing business and signing a contract with them if they will negotiate on price. UR should suggest that HH offer a 20% discount on price (based on data provided by the finance department) and they will sign a contract with them. If they cannot come to an acceptable agreement, UR should advise HH that they will continue to purchase from them in the immediate future, but will be looking for alternative suppliers. Additionally, a dual-supply strategy should be considered so that the company can use a hedging tactic to minimize the cost. Unifine Richardson only used one supply source, Harrington Honey. Depending so heavily on one supplier left the company vulnerable to risk. “The best supply chains identify structural shifts, sometimes before they occur, by capturing the latest data, filtering out noise, and tracking key patterns. They then relocate facilities, change sources of supplies, and, if possible, outsource manufacturing” (Lee, 2004). The company needs to look for alternative suppliers that acquire their honey from Mexico. The source location will not have a significant impact in their operations and UR will keep its delivery on time. It is advisable that the UR purchasing manager contact its large customer to explain the current price increase, and understand what their needs are. The honey is primarily used as a dipping sauce for chicken wings. How critical is this dipping sauce to this customer to justify the 60% total increase? If the customer wants to maintain the honey purchases, or decides to cancel, UR needs to know ASAP. This customer represents 80% of their honey sales and it is possible that they might want replace the honey for a substitute product. For this customer, the honey could be a noncritical item, and might be replaced with salad dressings, which UR has the ability to offer. By creating alignment and exchanging “information and knowledge freely with vendors and customers,” (Lee, 2004) UR could possibly avoid huge losses. Provided in the appendix is the information summary that UR should provide to their customer to assist them in making a decision on which honey they would like to use as an alternative. UR should

be upfront with the customer on the negotiation they are trying to obtain from HH and advise that UR will be taking a 15% reduction in profits in order to help absorb some of the cost to keep them as a customer. UR can also advise that its client could perhaps make a percentage increase in its chicken pieces or perhaps charge a nominal fee of say $0.25 for sauce to help offset the cost. By empowering his largest client to make a strategic decision that greatly affects both of them, he will gain respect and perhaps more loyalty. Also, UR will now be able to place an order and contract with HH for the correct products (based on input from his largest client) and not be stuck with perhaps a product that its client does not want and risk losing them. As a long-term objective, UR should work on obtaining a more sustainable supply chain to prevent future disruption in supply and profit declines.

1

The Triple-A Supply Chain. Lee, Hau L. Harvard Business Review. Oct 2004, Vol. 82 Issue 10, p102-112.

APPENDIX:

$

800,000 Assumption that since they are 80% of sales they would purchase 80% of total honey UR gets from its supplier

Alternative 1:

If UR CAN NOT negotiate a price reduction with HH & they DO NOT wish to take a profit decline Original 1.08 $ 15% $ 1.24 $

Cost per lb Mark-up Selling price per lb % cost increase to customer

$

Sales Revenue Product Costs Profit Profit difference

$ $ $

Alternative 2: $

Original 1.08 $ 15% $ 1.24 $ $

Sales Revenue Product Costs Profit Profit difference

$ $ $

Alternative 3:

1,564,000 1,434,400 129,600 0

1,529,600 1,400,000 129,600 0

$ $ $ $

1.79 9.0% 1.96

993,600 $ 864,000 $ 129,600 $ $

15%

50/50 Canadian 1.42 $ 1.75 $ 9.6% 7.8% 1.56 $ 1.89 $ 25% 52%

55%

1,245,600 1,136,000 109,600 (20,000)

1,544,000 1,434,400 109,600 (20,000)

$ $ $ $

1,509,600 1,400,000 109,600 (20,000)

$ $ $ $

USA 1.79 7.6% 1.93

If UR CAN negotiate a price reduction with HH & they DO NOT wish to take a profit decline

10%

discount negotiated with HH

Cost per lb Mark-up Selling price per lb % cost increase to customer Sales Revenue Product Costs Profit Profit difference

HH purchase reduction option Original 50/50 Canadian $ 1.08 $ 1.28 $ 1.58 $ 15% 12.7% 10.3% $ 1.24 $ 1.44 $ 1.74 $ 16% 40% $ $ $

Alternative 4:

993,600 $ 864,000 $ 129,600 $ $

1,152,000 1,022,400 129,600 0

$ $ $ $

1,389,600 1,260,000 129,600 0

$ $ $ $

USA 1.61 10.0% 1.78 43% 1,420,560 1,290,960 129,600 0

If UR CAN negotiate a price reduction with HH & they DO NOT wish to take a profit decline discount negotiated with HH 20,000 Acceptable Profit decline =

Cost per lb Mark-up Selling price per lb % cost increase to customer Sales Revenue Product Costs Profit Profit difference

1,265,600 1,136,000 129,600 -

Acceptable Profit decline =

Cost per lb Mark-up Selling price per lb % cost increase to customer

$

57%

$ $ $ $

USA

If UR CAN NOT negotiate a price reduction with HH & they ARE willing to take a profit decline 20,000

10%

993,600 $ 864,000 $ 129,600 $ $

50/50 Canadian 1.42 $ 1.75 $ 11.4% 9.3% 1.58 $ 1.91 $ 27% 54%

15%

HH purchase reduction option Original 50/50 Canadian $ 1.08 $ 1.28 $ 1.58 $ 15% 10.7% 8.7% $ 1.24 $ 1.42 $ 1.71 $ 14% 38% $ $ $

993,600 $ 864,000 $ 129,600 $ $

1,132,000 1,022,400 109,600 (20,000)

$ $ $ $

1,369,600 1,260,000 109,600 (20,000)

$ $ $ $

USA 1.61 8.5% 1.75 41% 1,400,560 1,290,960 109,600 (20,000)

Alternative 5:

If UR CAN negotiate a price reduction with HH & they DO NOT wish to take a profit decline

20%

discount negotiated with HH

Cost per lb Mark-up Selling price per lb % cost increase to customer Sales Revenue Product Costs Profit Profit difference

$ $ $

Alternative 6: 20% $

993,600 $ 864,000 $ 129,600 $ $

1,024,000 908,800 115,200 (14,400)

$ $ $ $

1,419,718 1,260,000 159,718 30,118

$ $ $ $

USA 1.61 12.7% 1.82 46% 1,454,603 1,290,960 163,643 34,043

If UR CAN negotiate a price reduction with HH & they DO NOT wish to take a profit decline discount negotiated with HH 20,000 Acceptable Profit decline =

Cost per lb Mark-up Selling price per lb % cost increase to customer Sales Revenue Product Costs Profit Profit difference

HH purchase reduction option Original 50/50 Canadian $ 1.08 $ 1.14 $ 1.58 $ 15% 12.7% 12.7% $ 1.24 $ 1.28 $ 1.77 $ 3% 43%

15%

HH purchase reduction option Original 50/50 Canadian $ 1.08 $ 1.14 $ 1.40 $ 15% 12.1% 9.8% $ 1.24 $ 1.27 $ 1.54 $ 2% 24% $ $ $

993,600 $ 864,000 $ 129,600 $ $

1,018,400 908,800 109,600 (20,000)

$ $ $ $

1,229,600 1,120,000 109,600 (20,000)

$ $ $ $

USA 1.43 9.6% 1.57 27% 1,257,120 1,147,520 109,600 (20,000)

SCOR MODEL

Large Customer 80%

FARMERS

Harrington Honey

Unified Richardson

Others

International Brokers In house