CASE: SCM at Dream Beauty

1.

Provide a framework that will illustrate your understanding of this case.

Introduction
Dream Beauty (DB) company located in Money City, Nevada (USA) manufactures beauty
supplies and cosmetics. DB provides high standard services to their customers, although DBs
sales have reached to $130 million (DBs all time high).
Problem Statement
Dream Beauty Company is currently faced with issues of cost in the area of supply chain
which have been increasing within the 3 logistics channels they currently employ and this
has become a concern to the companys management.
DB Supply Chain
To assess the Dream Beautys problem, we need to assess the DB supply chain using our
customized Supply Chain Processing framework.

Supply Chain
Function
Supply Chain
Processing
framework
Inventory
Estimates

Distribution
Channels

Costing
Analysis

Figure 1 Supply Chain Processing framework

Distribution Channels

DB's distribution
channel
Retail stores
(50%)

Convenience
stores
(30%)

Mass merchants
(20%)

Figure 2 DB's Distribution Channel

DB Services three distinct and independent distribution channels: retail stores, convenience
stores and mass merchants. About half of DBs sales is being generated from retail stores while
contribution of sales from convenience stores and mass merchants are thirty percent (30%) and
twenty percent (20%) respectively.
1

DBs Supply Chain Function

The four cost categories of the DBs supply chain are order processing, packaging, labelling and
delivery.
Dream Beauty has a centralized structure for its order processing i.e. orders are being shipped
to the distribution centers for delivery to final customers. Each order has a three-day fulfillment
cycle regardless of order size. Currently, DB received a total of 3600 orders. Packaging costs
are same regardless of the size of the order.

Mass
merchants

Convenienc
e stores

Retail
customers

40 Days

60 days

90 Days

Figure 3 Inventory Period of allocated for distribution channels

Inventory Estimates
DB holds an average 40 days of inventory for mass merchants, 60 days of inventory for
convenience stores and 90 days for retail customers and the estimated total carrying cost of
inventory is 15% of the total average annual inventory.
Costing Analysis
DB maintained 3 distinct cost centers for the 3 distribution channels.
The management of DB attributed the cost of each of the distribution channels aligned to its
respective sales percentage. This highlighted the profits to be positive across the 3 distribution
channels. Another aspect was that the associated supply chain costs were believed to be only
the 4 areas related to order fulfillment cycle- order processing, packaging, labeling and delivery.

2.

Provide a summary of the current costings

Segment
Sales
COGS
Gross Profit
Order
Processing
Packaging
Labeling
Delivery
Total Cost

Net Profit
Net Profit %
Contribution
%

Current Costing Structure - As % of Sales

Convenient
Mass
Retail
Stores
Merchants
$
$
$
65,000,000.00
39,000,000.00
26,000,000.00
$
$
$
26,000,000.00
15,600,000.00
10,400,000.00
$
$
$
39,000,000.00
23,400,000.00
15,600,000.00

Total
$
130,000,000.00
$
52,000,000.00
$
78,000,000.00

$
5,000,000.00
$
4,000,000.00
$
1,000,000.00
$
15,000,000.00
$
25,000,000.00

$
3,000,000.00
$
2,400,000.00
$
600,000.00
$
9,000,000.00
$
15,000,000.00

$
2,000,000.00
$
1,600,000.00
$
400,000.00
$
6,000,000.00
$
10,000,000.00

$
10,000,000.00
$
8,000,000.00
$
2,000,000.00
$
30,000,000.00
$
50,000,000.00

$
14,000,000.00
50.00%

$
8,400,000.00
30.00%

$
5,600,000.00
20.00%

$
28,000,000.00

21.54%

21.54%

21.54%

21.54%

The current costings structure is done as a percentage of sales. The calculations

based on these, show positive net profits of 50%, 30% and 20% for retail,
convenient stores and mass merchants respectively and show equal contribution
margins of 21.54% for the 3 distribution channels.

Segment
Sales
COGS
Gross Profit
Net Profit %
Order
Processing
Packaging

Costing Structure - On Activity Based Costing

Convenient
Mass
Retail
Stores
Merchants
$
$
$
65,000,000.00
39,000,000.00
26,000,000.00
$
$
$
26,000,000.00
15,600,000.00
10,400,000.00
$
$
$
39,000,000.00
23,400,000.00
15,600,000.00
50.00%
30.00%
20.00%
$
2,777,777.78
$
3,200,000.00

$
6,944,444.44
$
4,400,000.00
3

$
277,777.78
$
400,000.00

Total
$
130,000,000.00
$
52,000,000.00
$
78,000,000.00

$
10,000,000.00
$
8,000,000.00

$
$
12,000,000.00
$
17,977,777.78

$
$
16,500,000.00
$
27,844,444.44

$
2,000,000.00
$
1,500,000.00
$
4,177,777.78

$
2,000,000.00
$
30,000,000.00
$
50,000,000.00

Total Cost
Cost %

$
961,643.84
$
480,821.92
$
19,420,243.53
36.97%

$
384,657.53
$
432,739.73
$
28,661,841.70
54.57%

$
170,958.90
$
96,164.38
$
4,444,901.07
8.46%

$
1,517,260.27
$
1,009,726.03
$
52,526,986.30

Net Profit
Net Profit %
Contribution %

$
19,579,756.47
76.86%
30.12%

$
(5,261,841.70)
-20.66%
-13.49%

$
11,155,098.93
43.79%
42.90%

$
25,473,013.70

Labeling
Delivery
Sub-Total
Other Costs
Inventory
Holding Cost
Account
Receivables

19.59%

When considering the costing according to the activities, then retail and mass
merchants show positive net profit of 76.86% and 43.79% while convenient stores
show a loss percentage of -20.66%.
Also, the contribution percentage of convenient stores is negative. Activity Based
Costing also takes into account the inventory holding cost and the account
receivables cost.
3.
Analyse the way these costs are allocated and determine what changes
might make the system more efficient
Right now, order processing, packaging, delivery, and labelling are the segments that make up
the aggregate supply chain network related expenses. Processing of orders records for $10
million, packaging $8 million, labelling $2 million, and delivery $30 million. This brings the
organization's aggregate expense to $50,000,000. Labelling contributes minimal expense in
connection to alternate segments, yet the organization could bring down it further by
centralizing, keeping in mind the end goal to exploit the economies of scale. Also, the
organization ought to decentralize order processing all together to build proficiency and the
speed of delivery.
Dream Beauty Company channels its items to the business sector through direct retail locations,
mass merchants, and convenient stores. These channels are autonomous, each in charge of its
salary explanation and accounting report. Direct retail deals represent 50 percent of offers,
subsequently, contributes the most elevated benefit considering that the three channels are
generally productive. Convenient stores contribute 30 percent of offers, while mass merchants
represent 20% of the aggregate deals. Under the present course of action, the three channels of
dissemination contribute similarly to the organization's productivity. Likewise, expenses are 40%
of the aggregate deals. This is generally high, and, along these lines, is the region of essential
center as far as development of benefits. There is a difference in the designation of expense
4

among the dispersion channels. Case in point, the organization got 3,600 requests altogether. In
connection to the extent of the packaging costs, convenient stores represent the most
noteworthy expense of package delivery among the three dispersion channels. In any case, it
contributes more than twofold the quantity of requests from the retail locations. This, along
these lines, implies that it contributes the most elevated relative benefit than the other delivery
channels. Holding alternate costs consistent, or constructing the level of expenses with respect
to package delivery and requests, the convenient stores will represent above half of the
aggregate deals and benefits. Along these lines, there proposal for cost assignment is that the
convenient stores represent a larger amount of expenses than the past arrangement, in which
retail outlets had the most abnormal amount of costs contrasted with the other two.
The organization offers every one of its customers the same administration level i.e. three-day
fulfilment cycle. This is on account of improving logistics of the store network. It encourages
simple administration of delivery service. What's more, it is a motivational apparatus that
improves effectiveness. The organization utilizes the minimum conceivable fulfilment cycle as
the benchmark for all deliveries. Despite the fact that it may not accord the organization the
advantages of differentiated services, it sets the business benchmark and helps the
organization standpoint and client administration.

4.
Provide recommendations regarding the policy of offering all customers 3-day
fulfilment cycle service level

Dream Beauty's model of Supply chain helps its productivity and their three-day
fulfilment cycle drives its motivation forward as the pioneer in proficient generation and
supply of customer excellence items.
Dream Beauty Company ought to decentralize order processing to improve productivity
in deliveries.
Small orders costs more for DB, for this reason DB should establish a minimum order
quantity. Minimum of 1000 order quantities to be delivered within the three-day delivery
period and for orders below 1000 should consider the carrying cost, order processing
cost and inventory cost.
DB to discontinue its services to Convenience Stores, with the complete eradication of
one distribution channel (Convenience stores) will reduce the cost within the supply
chain, and this will result in a positive effect on DBs profitability.
As an alternative, convenience Store operators must be encouraged to procure DBs
products from Mass Merchants, find alternate delivery, order processing and packaging
methods when serving convenience stores because current methods are not feasible
given the returns on sales. If production/procurement is scaled back, return on assets
are higher even though gross and net profits are lower.
DB should enforce an invoice payment policy means penalizing those customers that do
not adhere to the terms and giving incentives to those customers who clear their
invoices within the specified thirty-day period. Receiving timely payments will enable DB
to further invest in and grow its business.
The income statement and balance sheet should tally their account according to Activity
Based Costing thus considering the function of these units as separate cost centers,
instead of considering the costs in the ratio of sales across the 3 distribution channels.