Should FLAVORx discontinue their one-ounce

flavor bottle and just offer the four-ounce

bottle? An in-depth analysis.

FLAVORx/
Fillmaster
Cost-Benefit
Analysis
SPEX670 – American
University

Keith Nelson
Cost Benefit Analysis – Final Report SPEX670 - Nelson

Executive Summary

FLAVORx has been providing pharmacies with many options of flavorings for liquid medications

since 1998. With heavy market share in the industry and an eight-year expiration on the flavors,

FLAVORx recently introduced a 120 mL (four-ounce) in addition to 30 mL (one-ounce) traditional

bottle. There has been talk about eliminating the 30 mL bottle and selling solely the 120 mL. This

report analyzes the positive and negative effects, as well as the projections if that switch were to

happen.

Keeping the one-ounce bottle had surely had its benefits. For one, customers we have had for

fifteen or more years are used to things like the pricing, size and storage of the one-ounce bottles.

What was an issue was the cost of the production of two different size of bottles holding the same

flavors that do not expire for almost a decade. FLAVORx has excellent margins when it comes to

production costs of both the 30 mL and 120 mL bottle, but with the same product going into

different bottles, why not discontinue the product with the worse margins?

This report suggests that FLAVORx discontinue their one-ounce product line for a variety of

reasons. Lowering production costs while raising average order value ($) was a driving force in this

decision. And although there would be less frequent orders being placed by independent

pharmacies, our wholesale partners would not be able to change the frequency or quantity in which

they order to make sure their distribution centers are fully stocked. With independent pharmacies

being a small percentage of FLAVORx annual flavor sales, it is worth the risk of less frequent orders

to make the wholesale partners order the same amount of the more expensive product.

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

1. Introduction

This report examines a proposal by the FLAVORx/Fillmaster sales team to the executive board and

investors of the company on certain changes to their product line. FLAVORx is a private company

based in Columbia, Maryland that supplies sugar-free, non-allergenic medicine flavorings and

flavoring systems to pharmacies. The company sells bottles of concentrated flavors for pediatric

liquid medications that come in a variety of flavors such as watermelon, bubblegum, grape, cherry,

strawberry, etc. The flavorings are intended to improve the palatability of their host medications by

suppressing bitterness, adding sweetness, and/or enhancing the flavor profile. The flavoring of

liquid medicines using these products has been shown to improve pediatric drug compliance.

FLAVORx was founded in 1998 and is now found in forty thousand pharmacies in North America.

They sell their product directly to chain drug stores, independent pharmacies, veterinarians (to be

used on certain pet medications), and wholesale pharmaceutical distributors such as McKesson,

Cardinal Health and Amerisource Bergen. In 2009, the chief executive officer of FLAVORx, Stuart

Amos, bought what would become their sister company, Fillmaster Systems. Fillmaster Systems is a

company that made water dispensers for pharmacies which the pharmacist or technician would use

to dispense water to mix the liquid medication prescriptions. Over the past decade, the acquisition

of Fillmaster Systems has taken some concentration off the flavor bottle side of the business, which

has led to a decline in flavor sales. FLAVORx sold only one-ounce bottles of flavor until 2015, when

they introduced the four-ounce flavor bottle. That decision was a mutual decision between the

members of the board and the current executive FLAVORx/Fillmaster team.

What this report is showing is the cost benefit analysis of the effects on FLAVORx/Fillmaster

Systems if they were to eliminate the one-ounce flavor bottle product line and only have the four-

ounce bottles available for all customers. Ultimately, it will be up to the decision of the executive

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

board as well as the board of directors to decide whether to eliminate one of the two product lines,

but this report will go in depth to see if just offering the larger bottle size would increase or decrease

overall sales for the month, quarter, and year.

1. Methodology

The first thing that needed to be done before the analysis could begin was to define what the

company’s options were. They included: 1) keep both the one- and four-ounce flavor bottles for

their customers to purchase; or 2) discontinue the 30 mL (one-ounce) bottle and only produce and

bottle the 120 mL (four-ounce) size.

2.1 Impact Assessment Analysis

An impact assessment was used to identify both the negative (costs) and positives (benefits) that

the discontinuation would have for FLAVORx’s different types of customers. The impact that a

change like this would have with chain drug stores like Walgreens or Rite Aid who have over thirteen

thousand locations combined is significantly different the effect on smaller, family owned,

independent drug stores. Looking at the percentage of business from wholesalers versus chain drug

stores versus independent pharmacies could have a major impact on the final decision.

2.2 Valuation and Evaluation Analysis

Using past data and projections of each possible future scenario, detailed predictions of future sales

(or possibly lack thereof) were made to help evaluate the options. While some of the evaluation

dealt with tangible product and real costs involved, assigning value to things like labor savings and

time lost between reorders would largely impact the final suggestion from the sales team.

2.3 Sensitivity Analysis

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

One thing that the sales team knows very well is that FLAVORx is run like a family business in that

each customer is cared for based on their specific needs and very little is standardized across a scale

larger than one entity. With many customers paying different prices for things like annual service

fees and different customer service plans (for the Filmaster Systems equipment), the price of the

flavor bottles stays relatively the same. With that being said, there are definitely certain customers

who do things such as place more reorders than other customers or purchase the other service

offerings that FLAVORx/Fillmaster Systems offer, that carry more weight and will definitely be an

influence on the final decision.

2. Analysis

3.1 Pros and Cons List

Pros

 Lowering overall production costs

 Increasing margins on each flavor bottle sold

 Eliminating packaging for smaller bottle sizes

 Eight-year expiration on all flavor bottles

 Higher average order in terms of dollars invoiced

Cons

 Possible customer pushback on unwarranted discontinuation

 Longer time periods between reorders

 Fillmaster Systems equipment meant for one-ounce bottles will have to be retrofitted to

hold bigger bottles

3.2 The Stakeholders Mind Map

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

There are two major categories of stakeholders that will be affected by this decision: internal and

external sources. The internal sources that will be affected include members of the FLAVORx executive

team such as the chief executive officer, Stuart Amos, the chief financial officer, Colin Denney, and chief

revenue officer, Chris Cielewich. Other internal sources include the Fillmaster team: director of

operations, Mike Fox; director of FillPure (water quality service), Michael Galliher; and head of both the

FLAVORx and Fillmaster production team, Lucas Daugherty. FLAVORx is also funded by a group of eight

investors that all invested in the company years ago and, so far, have seen a large return on their

investment.

The external sources that will be affected by this decision fall into three categories: customer,

wholesaler, or manufacturers. The FLAVORx customers will need to know if the smaller bottle size will

no longer be available for budgetary reasons, while the wholesalers would have to do a lot of internal

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

work like voiding item and product numbers, making sure all distribution centers are stocked with 120

mL product and no 30 mL bottles. And since FLAVORx uses a third-party manufacturer to produce its

flavors, changing or getting rid of a product could have a major influence on how quickly or cost

effectively the product can be produced.

3.3 Assessment of Bias

When it comes to potential biases in this cost benefit analysis evaluation, there are a couple of things

that should be mentioned. The first bias would be the confirmation bias because I work for the

company I am performing the CBA on and obviously want them to be successful.  Working for the

company can lead to confirmation bias by fogging my or my coworker's judgment when it comes to

possible negatives in my analysis.  While I want my company to be as successful as possible, being as

objective and factual as possible is the best way to get the most accurate information we can use to

make the correct final decision(s).  I believe that I can be objective when it comes to this bias by thinking

about how it would only hurt the company in the long run. The second bias that I think could influence

my CBA would be the sunk cost bias.  The CBA I am performing is about a transition that is already in

progress and would be difficult to reverse. my company has already poured many resources and a lot of

money into making the transition between the product lines.  Unfortunately, my CBA results may be

disregarded, regardless of what they show since the stakeholders have already approved the transition. 

This would make it almost impossible to avoid the sunk cost bias, although will be able to show if the

right decision was made. From the perspective of our board chairman, switching from 1oz product to

only 4oz product is an immediate win in the short term, due to the prices being approximately 4 times as

much per bottle.  From the buyer’s perspective, it is almost the opposite with them now having to

budget for more expensive (although more volume of) product and look at their purchases more

closely.  Perspective also changes when we think about my operations team and possibly having to

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

change manufacturers or wholesalers due to different bottle sizes, materials used, and other production

variables.

3.4 Risk Assessment

There were a couple risks that went into this assessment and had influence on the proposal being made

to the board. The pharmaceutical product that my company sells is used milliliters at a time and one 1oz

bottle could last up to three months.  When making the decision whether to eliminate the one-ounce

bottle and stick with only a four-ounce bottle, we knew that would result in less bottles sold. This could

lead to a couple of things.  One impact that was identified was that of our costs may up from our third-

party manufacturer. With mass production of product, the general rule is: the more product produced,

the cheaper it will be. With getting rid of a product line, although the same flavors will be used, there

will be a significant drop in bottles produced and therefore, a possible raise in production costs. 

Another risk we ran was on how our customers would react to the change.  Luckily, FLAVORx has almost

90% market share in the medication flavoring business, being available in over forty-five thousand

pharmacies nationwide. Although the company expected a negative reaction initially, their reputation in

the pharmaceutical world alleviated any concerns.

One of the biggest opportunities that may ultimately lead to making the four-ounce bottle the

only option was our relationships with the wholesalers.  Wholesalers buy our product in bulk from our

warehouse to store in their distribution centers for weeks or up to months.  What we identified was

that, regardless of bottle size or price, the wholesalers needed to stock a certain amount of our product

in their distribution centers. They do not think and act like the independent pharmacies or even the

brick and mortar chain stores. Wholesalers like McKesson and Cardinal Health make their business by

stocking a distributing other company’s products, regardless of cost (if they can sell it for more). So,

when making the final decision on whether to discontinue, wholesalers was a huge determining factor.

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 Cost Benefit Analysis – Final Report SPEX670 - Nelson

3.4 Data

3.4.1 Wholesaler Data and Projections

CARDINAL McKesson

  Q2 2019 (proj) Q2 2018 % Change   Q2 2019 (proj) Q2 2018 % Change

 $      CVS/TARGET $    80,863.00  $    27,884.00 190%

Chain $      6,412.00 1,555.50 312%
Wal-Mart $  116,799.00  $    65,045.00 80%
 $   
Rite Aid $    72,262.00  $    42,861.00 69%
CVS $  208,437.05 27,580.70 656%
Independents $    41,325.00  $    24,612.00 68%
 $     
Indep/HOSP $    18,362.20 4,670.10 293% Other $    40,278.00  $    26,096.00 54%
 $          GRAND  $ 
KMART $          517.99 127.50 306% TOTAL $  351,527.00 186,498.00 88%
 $     
Kroger $    18,846.73 5,516.75 242%

GRAND  $    3.4.2 Production Margins Data

TOTAL $  252,575.97 39,450.55 540%
Cost of Cost Margins
Bottle Cost of Flavor Bottle Wholesal Wholesal Margin
Size Only Only e Cost Retail e s Retail
30 mL $ 0.60 $ 0.30 $ 11.30 $ 12.95 92.0% 93.1%
120 mL $ 2.40 $ 0.40 $ 44.95 $ 49.95 93.8% 94.4%

30 mL Wholesaler Direct 120 mL (projected) Wholesaler Direct

average order in bottles 150 2 average order in bottles 150 2
average order size ($) $ 1,695.00 $ 25.90 average order size ($) $ 6,742.50 $ 99.90
average internal cost ($) $ 135.00 $ 1.80 average internal cost ($) $ 420.00 $ 5.60
order frequency 52x/year 12x/year order frequency 12x/year 12x/year
Customer count 4 1,000 Customer count 4 1,000
average annual sales $ 324,480.00 $ 289,200.00   Average annual sales $ 303,480.00 $ 1,131,600.00
3.4.3 Average Order by Customer Type and Projections

3.5 Analysis

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

There are many different factors that will affect the outcome if the permanent switch to only 120 mL

bottles were to happen. Looking at table 3.4.2, it shows that from a production standpoint, making the

switch to the bigger bottle would result in higher margins per unit sold. Although FLAVORx’s margins

are way above company standard, this report is about improving the bottom line in any way possible.

The major cost savings in this instance would not come because of offering only the higher priced

product, but from eliminating the costs involved in splitting the production and bottling costs. With one

product line, labor and time can be saved due to the consistency of the packaging process.

Table 3.4.3 shows the average order size FLAVORx has had over the past five years, including

ordering frequency, number of bottles per order, and total cost of an average order. Using the

production costs and pricing structure from table 3.4.2, we were able to determine projections for if the

switch to larger product would result. When calculating the average yearly sales projections while the

total sales for our wholesale partners would slightly decrease, due to the bigger bottle size and

therefore, lower order frequency. And even with that slight decrease in annual sales on the wholesale

side, the projections for direct orders rises 74.4% (from $289k to 1.13mil).

One thing that is not accounted for in the data above is the uncertainty of the frequency of

reorders. While we can project that, since the bottle is four times as large, that reorder frequency could

be divided by four, it is very difficult to know how it will play out. As mentioned earlier, using all a one-

ounce bottle can take anywhere from two weeks to three months. With such a larger bottle, it is almost

definite that reorders will spike initially, but then level off throughout the rest of the year. Table 3.4.1

shows Q2 data from 2018 as well as what projections would look like if FLAVORx were to switch to only

four-ounce product. With such a dramatic increase in early year sales due to the large increase in price,

allocation of sales and keeping up with projections is key in this analysis.

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

FLAVORx is the only company to offer this service to pharmacies, which helps make their

decision much easier. Wholesalers need to stock the product for their pharmaceutical customers, and

with no one-ounce option, they will be somewhat forced to buy the same quantity of bottles, but at a

much larger price to make sure their distribution centers are fully stocked. That will result in a major

increase in sales along with steady orders coming in (although less frequent: from ordering weekly to

monthly. The concern comes with the 1,000+ pharmacies that order from FLAVORx directly. With the

flavor bottles having an eight-year expiration date and the product used so little at a time, the projection

of each pharmacy ordering from FLAVORx twelve times a year is something that can not really be

projected. Since the flavors are staying the same, and there is only one flavor per bottle, we projected

that the ordering frequency would stay relatively similar.

3. Conclusion

Discontinuing a product to the public is a major decision that should be analyzed and thought out by

all parties involved. For shareholders, the decision could influence their decisions to continue to

invest or pull their funds from the company. For customers such as wholesalers and independent

pharmacies, if the switch is made, delivery of the news and communication of new processes or

pricing is key in retention. FLAVORx is in a lucky position because they have such a dominant piece

of the medication flavoring market share, that discontinuing the one-ounce flavor bottle would not

turn customers to a competitor. One last risk associated with the switch would be for customers to

stop ordering and using the flavoring program all together. We projected that only one out of every

sixty-five customers would be so repulsed by the price increase and having no alternative, that they

would stop ordering completely.

By looking at the massive increase in bottle prices and average value of each order, regardless of

how much less frequent it is, this report suggests that FLAVORx do discontinue the on-ounce (30 mL)

product line. The main factor in this decision was the proprietary business that FLAVORx runs with

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Cost Benefit Analysis – Final Report SPEX670 - Nelson

little to no competition in the field. They are such a leader in their industry and have such a good

reputation, that customers should have no problem with the change. Savings made on eliminating

the production of one glass bottle, but still using the same flavor inventory for the bigger bottles will

reduce production costs by almost 50%. FLAVORx has been running smoothly on one-ounce bottles

for the past twenty years and, while there is a cost increase to the customer, the longevity of the

product life and proprietary ingredients seem to show that the customers will continue to purchase.

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