Question Two (35 marks):

Question Two (35 marks):

Al Azzan Group, an electrical and building materials company, has 50 retail stores distributed throughout Oman. Currently, the group maintains every item in each store.  The group has been experiencing increased costs of inventory and deteriorating customer service due to fulfillment issues from their retail stores.  The vice president of logistics at Al Azzan Group proposed opening two regional warehouses, and then moving some of the items from the retail stores to these two warehouses.  The two regional warehouses will be assigned an equal number of retail stores each.  In other words, 25 retails outlets will be assigned to each of the two warehouses. His logic was that opening these two regional warehouses would allow Azzan Group better fulfillment for some of the problematic items and would reduce inventory costs.  Delivery charge is expected to increase by OR 0.02 per unit if an item was moved.  At each retail store, it takes three days to place and receive the order from their suppliers. It is expected that if items moved to regional warehouses, the same amount of time will be taken to replenish the stock.  The Group uses an annual inventory holding cost of 20 percent and has a cycle service level of 99 percent.  Consider two items with the following information:

1. Consider the first item; Shovel, what is the annual holding cost of safety inventory across all retail stores? If the item was moved to the two regional warehouses, what would the annual cost of holding safety inventory at the two locations be? What would the annual increase in delivery charge be? Do you recommend this move?

1. Now consider the second item; 3 Gang Switch with Fan Regulator, what is the annual holding cost of safety inventory across all retail stores? If the item was moved to the two regional warehouses, what would the annual cost of holding safety inventory at the two locations be? What would the annual increase in delivery charge be? Do you recommend this move?

Question Three (35 marks):

James Diamond

On its Web site, James Diamond articulated its philosophy as follows: “Offer high-quality diamonds and fine jewelry at outstanding prices. When you visit our Web site, you’ll find extraordinary jewelry, useful guidance, and easy-to-understand jewelry education that’s perfect for your occasion.”  Unlike jewelry retailers who maintained stores in high-priced areas, James Diamond had a single warehouse in the United States where it stocked its entire inventory.

James Diamond allowed customers to “build your own ring.” Starting with the cut they preferred, customers could determine ranges.  James Diamond then displayed all stones in inventory that fit the customer’s desired profile. Customers selected the stone of their choice, followed by the setting they liked best.

The company strategy was not without hurdles because some customers did not care as much about underpricing the competition. Also, it was not entirely clear that customers would be willing to spend thousands of dollars on an item they had not seen or touched. To counter this issue, James Diamond offered a 30-day money back guarantee on items in original condition.

In 2007, the company launched Web sites in Canada and the United Kingdom and opened an office in Dublin with local customer service and fulfillment operations. The Dublin office offered free shipping to several countries in Western Europe. The U.S. facility handled international shipping to some countries in the Asia- Pacific region. International sales had increased from $17 million in 2007 to more than $33 million in 2009 despite poor economic conditions.

In November 2008, James Diamond offered more than 75,000 diamonds on its site. Of these diamonds, more than 30,000 were one carat or larger with prices up to $1.9 million. Almost 43,000 diamonds on the James Diamond Web site were priced higher than $2,500. In 2010, the company CEO Diane Irvine was quoted saying “We’re not positioned as a discounter. We are selling a very high-end product but selling it for much less.”

In 2007, the company had sales of almost $320 million with a net income of more than $22 million. By November 17, 2008, however, its stock had fallen from a high of more than $100 in October 2007 to less than $23. In the third quarter of 2008, the company saw its first decline in sales with its reported sales of $65.4 million being 2.9 percent less than the same quarter in 2007. In an upbeat announcement, the company stated, “James Diamond is well positioned to generate profitability and cash flow even in difficult market conditions. We remain confident in our ability to continue to gain market share and to emerge from this economic downturn in an even stronger competitive position”; however, 2008 turned out to be a challenging year with net sales dropping by just under 10 percent and operating income falling by more than 25 percent. In 2009, however, both sales and income had improved for James Diamond.

April Diamonds 

April Diamonds opened in 1837 as a stationery and fancy goods emporium in New York City. It published its first catalog in 1845. The company enjoyed tremendous success, with its silver designs in particular becoming popular all over the world.  The April Diamonds brand was so strong that it helped set diamond and platinum purity standards used all over the world. After more than a century of tremendous success with its jewelry and other products, the company went public in 1987.

April Diamonds’ high-end products included diamond rings, wedding bands, gemstone jewelry, and gemstone bands with diamonds as the primary gemstone. The company also sold non-gemstone, gold, platinum, and sterling silver jewelry.

By 2010, April Diamonds had 220 stores and boutiques all over the world with about 80 of them in the United States. Of its global outlets, April Diamonds had more than 50 in Japan and almost 45 in the rest of the Asia-Pacific region. Stores ranged from 1,300 to 18,000 square feet with an average of 7,100 square feet. Its flagship store in New York contributed about 10 percent of the company’s sales in 2007. Besides retail outlets, April Diamonds also sold products through a Web site and catalogs. The company, however, did not offer any engagement jewelry through its Web site as of 2010. Its high-end products, including jewelry, were sold primarily through the retail stores. The direct channel focused on what April Diamonds referred to as “D” items, which consisted primarily of non-gemstone, sterling silver jewelry with an average price of $200 in 2007. Category D sales represented about 58 percent of total sales for the direct channel. In contrast, more than half the retail sales came from high-end products such as diamond rings and gemstone jewelry with an average sale price in 2007 higher than $3,000.

April Diamonds maintained its own manufacturing facilities in Rhode Island and New York but also continued to source from third parties. In 2007, the company sourced almost 60 percent of its jewelry from internal manufacturing facilities. April Diamonds had a retail service center in New Jersey that focused on receiving product from all over the world and replenishing its retail stores. The company had a separate customer fulfillment center for processing direct-to-customer orders.

Until 2003, the company did not purchase any rough diamonds, focusing entirely on the purchase of polished stones. Since then, the company established diamond- processing operations in Canada, South Africa, Botswana, Namibia, Belgium, China, and Vietnam. In 2007, approximately 40 percent of the diamonds used by April Diamonds were produced from rough diamonds purchased by the company. Not all rough diamonds could be cut and polished to the quality standards of April Diamonds. Diamonds that failed to meet April Diamonds’ standards were then sold to third parties at market price, sometimes at a loss.

In 2007, 86 percent of April Diamonds’ net sales came from jewelry, with approximately 48 percent of net sales coming from products containing diamonds of various sizes.  Products containing one or more diamonds of one carat or larger accounted for more than 10 percent of net sales in 2007.

The April Diamonds brand’s association with quality, luxury, and exclusivity was an important part of its success. No other diamond and jewelry retailer enjoyed margins anywhere near those enjoyed by April Diamonds. In its annual reports, the company listed the strong brand as a major risk factor because any dilution in its brand image would have a significant negative impact on its margins.

Questions: –

1. How do James Diamond and April Diamonds compare along the following elements of customer service and logistics costs from chapter 4 of designing distribution networks? Justify your answers.
   1. Response time
   2. Product variety
   3. Product availability
   4. Returnability
   5. Inventories
   6. Transportation
   7. Facilities and handling

2. What do you think of the fact that James Diamond carries more than 30,000 stones priced at $2,500 or higher while almost 60 percent of the products sold from the April Diamonds Web site are priced at around $200? Which of the two product categories is better suited to the strengths of the online channel?

3. Draw the distribution networks of the two companies with product and information flows, demand information. According to the shape of the networks and their characteristics from question 1, specify which of the networks from chapter 4 resemble James Diamond and April Diamond networks (e.g. Manufacturer storage with drop shipping).  Please note that each company might have more than one network.