Fiesta Gifts Mending The Spending Case

IMB 761
FIESTA GIFTS: MENDING THE SPENDING
JAYANTH JAYARAM AND SHANKAR VENKATAGIRI
Jayanth Jayaram, University of South Carolina and Shankar Venkatagiri, Associate Professor of Information Systems, prepared
this case for class discussion. This case is not intended to serve as an endorsement, source of primary data, or to show effective or
inefficient handling of decision or business processes.
Copyright © 2019 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or transmitted
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permission of Indian Institute of Management Bangalore.
This document is authorized for use only in Prof. Sreedevi's 99-1-PGPM:OM course at S P Jain Inst of Mgmt and Res (SPJIMR) from Jun 2021 to Nov 2021.
Fiesta Gifts: Mending the Spending
“Christmas season has begun, and we are in reactive mode all over again. It’s been a year since our shopping
portal went live, and we continue to grapple with our customer orders!” Penelope Sanchez growled at the
managers gathered in the room. “It’s 2011, guys! This whole mortgage crisis is behind us. Competition is
beginning to knock on our door, so unless we bring down our costs and improve deliveries, we will quickly
go bust,” she declared. Sanchez was the CEO of Fiesta Gifts, whose clientele chiefly consisted of all-
occasion gift stores spread across the continental United States. Fiesta’s website carried an extensive variety
of items. Of late, the company had built a reputation for gifts with British themes, such as union jack
buntings and regency tea cups (see Exhibit 1).
Sanchez had launched her company in mid-2010 with the backing of a small group of investors. Having
raised a tidy sum of USD 3 million, she reported to a team led by Malaika Mahoney, who was known as a
hawk within equity circles. The National Retail Federation (NRF) had predicted a 2.3% hike in holiday
sales for the year. After a series of hiccups, Fiesta’s online shopping portal went live on December 1, 2010.
In line with the NRF forecast, holiday sales had improved in November; however, the numbers went soft
during December.1 If only the IT team had commissioned the site in October like they had promised, the
company would have ridden the wave of Thanksgiving gift sales; as per NRF estimates, an average shopper
had spent $365 during that weekend alone. Hindsight was always 20/20.
“Are we looking at soaring expenses again this year?” Sanchez thundered, fixing her sights on Peter
Bridges, who handled supply management and inbound logistics as Fiesta’s Chief Procurement Officer
(CPO). Bridges was a trusted lieutenant of Sanchez ever since she had launched the business. Nobody had
anticipated servicing 4,500 orders in the very first year. Sourcing 3,140 different stock keeping units
(SKUs) from over 570 suppliers, and routing them efficiently to 20 distribution centers (DCs) spread across
the United States (see Exhibit 2) had been an ongoing struggle. For its part, the procurement team had met
on a weekly basis to pore over aggregated spend reports and chalk out the next steps; they had given their
best.
Tara Rao was Fiesta’s latest hire as the CFO; an MBA with a strong background in accounting, she had
spent several years in FMCG retail. Each retail sector had its own cadence, and Rao was yet to develop a
good grasp of the gifting sector. Data was generally considered as gold to a retailer, especially for Fiesta
with its wide diversity of SKUs to procure and sell. Once the CFO came on board in September 2011, she
initiated an extensive data gathering and cleansing exercise. Spend numbers across all regions were pulled
together and enriched with information such as the location of each item’s supplier, the distance from the
supplier to the DC, and so on; this exasperating exercise had taken two weeks from start to finish.
Responding to Sanchez’s salvo, Bridges said:
I get it that you are serious about trimming our spend and reducing our lead times. My
managers have collated all of their numbers to date.2 We now have good visibility of our
1
Parija Kavilanz in CNN Money, January 2011. Holiday store sales chilled. Retrieved on January 30, 2019 from
https://money.cnn.com/2011/01/06/news/economy/holiday_sales_december/index.htm
2
The data is downloadable as an Excel spreadsheet from the IIMB website http://hrm.iimb.ernet.in/iimb/Harvard/Fiesta/index.htm
Page 2 of 21
spend profile. Tara and I shall be going over it this weekend. What we shall be looking for
are specific patterns in the data, so we can identify opportunities to rationalize suppliers
and streamline our spend. We should get back to you with a list of things to decide on;
expect to make some major changes.
The CEO ended the meeting on a tough note, declaring:
To date, we have paid out a million dollars to our suppliers just to keep us afloat. Instead
of making our money on gifts, we seem to be gifting away our money!
INDUSTRY CONTEXT
Globally, gifting constituted an active market segment; the US Census had dedicated a specific sector
category to “establishments primarily engaged in retailing new gifts, novelty merchandise, souvenirs,
greeting cards, seasonal and holiday decorations, and curios.” The year-end holiday season covering
Thanksgiving, Hanukkah and Christmas dominated purchasing activity in this segment. It was critical for
businesses to keep their operations running smoothly during the last quarter to meet annual performance
targets, and also to develop postseason strategies for discounting prices on items that remain unsold.
Annual sales in the gifting sector had taken a hit from their peak during the dot-com era (see Exhibit 3),
and had made a steady recovery over the next few years. The 2008 crisis dealt another blow; it took until
the end of the decade for the market to stabilize. During this period, e-commerce outfits such as Amazon
and EBay had shown that their online storefronts were a trustworthy channel for customers to procure a
range of merchandise, including gift items. In 2009, Toys “R” Us had boosted its online play with a series
of acquisitions.3
Two decades since the advent of the Internet, the pure play online retail format had moved from being an
experimental option to a veritable threat for brick-and-mortar retailers, as revealed by the following
observation from a consumer survey:4
Household names go out the window when consumers are online and looking for a deal.
Of the consumers surveyed, 67% say they would purchase an identical product from an
unknown webstore if the [online] retailer offered a better value.
With Internet access and mobile telephony gaining ubiquity, there were tectonic shifts in retail at the turn
of the century (see Exhibit 4). Even as shopping at physical store premises was the prevalent norm,
customers had begun to use their “smartphones” to check and compare prices on the Internet. A 2010
Deloitte Survey5 highlighted this practice:
3
Toys “R” Us Historical Timeline retrieved on January 30, 2019, from https://www.toysrusinc.com/press/fact-sheets-media?download=tru-
historical-timeline
4
Quoted from ChannelAdvisor, 2010 Consumer Shopping Habits Survey retrieved on January 30, 2019 from
go.channeladvisor.com/rs/channeladvisor/images/us-wp-consumer-survey-2010.pdf
5
Quoted from Store 3.0. The Store is Dead. Long live the Store. Deloitte Report (2010)
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Another trend is the consumer’s use of smartphones to check prices, locate stores, find
promotions, and order products. Sixteen percent of consumers surveyed by Deloitte for its
2010 Annual Holiday Survey responded that they would like to, or already do, access
product information in stores by scanning the product’s barcode with their mobile phones.
In due course, the world of gifting began to shift online, with formats ranging from pure plays like Fiesta
to click-and-mortar models like that of Toys “R” Us, Target and Walmart. Setting up an online storefront
was not as facile as designing and commissioning an engaging website; a complete and flawless supply
chain integration was critical to sustain the operation, failing which there would be scathing reviews on the
Internet, which a smaller player could never recover from. The disastrous delays experienced by shoppers
of Toyrsus.com during Christmas 1999, and the more recent failure of Target.com6 during its launch served
to highlight the consequences of poor implementation.
Complicating this need for total integration were several factors. Seasonal staffing at cramped DCs was an
annual event in the retail industry, with players competing for the scarce supply of temporary labor.
Furthermore, the winter months exacted a harsh toll on the country’s logistics infrastructure due to extreme
weather patterns, and led to congestion on the highways as well as airways. Delays could simply not be
tolerated; it was unthinkable for a customer to receive a shipment past the holiday season, after which the
items would not sell.
COMPANY INFORMATION
Headquartered in a scenic building within the River North District of Chicago, Fiesta Gifts was a small and
lean firm with 20 employees. In the absence of data to forecast purchasing trends, the startup was operating
on a risk averse, pull-based business model: with each order that came through the website, a procurement
plan was drawn up. Items would then be sourced from a network of suppliers and shipped to a designated
DC, before making their way to the customer. With each payment made by the customer, the company
would realize a tidy profit margin, roughly based on procured price, and inbound as well as outbound
shipping costs. The combined margins on an SKU basis tended to vary, with the median margin hovering
around 50%.
Bridges was an industrial engineer by training, with over a decade of experience in managing supply chains
at pharmaceutical companies, whose demand patterns were stable. He had built a reputation as a team player
who could see the big picture and collaboratively accomplish tough missions. With the infusion of capital
by Fiesta’s investors, the CPO and his team of commodity managers had spent the first 6 months building
and linking up the firm’s supply chain. This involved liaising with over 570 suppliers for the 3,140 items
that were displayed on the website, and working with third party providers to lease 20 DCs in different
regions of the country (Exhibit 2). Not knowing how the processing volumes would turn out, Bridges had
negotiated a fixed sum of USD 100,000 to operate each DC.
6
Brian LaFrance. OMG Target. Really? Retrieved on January 30, 2019 from https://authoritylabs.com/blog/omg-target-really/
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In due course, there would be sufficient data for the Fiesta team to forecast volumes, and draw up strategies
to stock top selling SKUs in the inventories at designated DCs. This move would help the team aggregate
volumes, negotiate better prices with suppliers, and cut the lead time for delivery by a large amount. The
retail industry suffered from acting prematurely on this front. Daniel Fritsch, an expert in inventory
management, summarized the problem:7
From an optimization point of view, companies looking to drive down working capital and
carrying costs should be analyzing inventory far more frequently as these industry averages
leave the door open for large quantities of excess stock and obsolete stock to pile up in
warehouses. Unfortunately, most wholesale distributors and manufacturers do not put this
into practice and as a result have a large percentage of working capital tied up in unhealthy
inventory levels.
Fiesta was set up to operate fully on the Internet; this was the initial avatar of a cloud startup. Its IT team
had worked meticulously to eliminate the burden of purchasing costly servers and operating enterprise-
level software on the company’s premises. A flexible Internet service provider (ISP) had helped them host
all their operations online and achieve increasing economies of scale. Embracing a service oriented
architecture or SOA model8 meant that all activities from supplier management to inbound logistics,
facilities management, payments and CRM were enabled by a web service. Pay-as-you-go agreements were
in place for each service, so set-up costs were low, and ongoing expenses could be monitored.
In alignment with the company’s IT strategy, the business development team had decided to solely work
with suppliers with whom they could transact using an SOA-style web interface, or good old fashioned EDI
(Electronic Data Interchange) format. This would not only minimize inbound cycle time but also help Fiesta
provide an estimated time for outbound delivery, and to complete a customer order. It made the entire
purchasing experience “Amazon-like” for the customer, as Sanchez proclaimed to her investors. The
holiday season of 2011 appeared to be positive for the inbound team, with spend numbers for the first week
of December exceeding that of the whole month one year prior, by 50%.
With all systems in place, business was brisk. In little more than a year of operation, the total spend had
closed in on USD 3 million; however, the overall picture was disheartening. Despite a 50% net margin on
sales9, Fiesta was yet to turn a dime in profit (see Exhibit 5). Staff compensation had wholly consumed the
margin; another million dollars had been spent on IT, office rentals, leasing contracts for the DCs and
logistics providers, and other costs. Redundancies that had been built into the supply chain (e.g. sourcing
from multiple vendors) had destroyed the net profit margin, leaving Fiesta in the red. While the investors
were patient, Mahoney had given Sanchez one more year to turn things around or close shop.
7
Daniel Fritsch. Retrieved on January 30, 2019 from https://www.eazystock.com/blog/2015/07/10/how-does-abc-analysis-affect-inventory-
optimization/
8
Wikipedia article on Service Oriented Architecture, retrieved on January 30, 2019 from https://en.wikipedia.org/wiki/Service-
oriented_architecture
9
Krista Fabregas. Top 10 Retail Analytics Every Store Needs to Measure. Retrieved on January 30, 2019 from https://fitsmallbusiness.com/retail-
analytics/
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PRELIMINARY FINDINGS
With Sanchez breathing down their necks, Rao and Bridges went to work. Observing a few Pareto splits –
often termed as the 80-20 rule – as well as other structural patterns in the data, they were able to spot
opportunities that were low hanging fruits. In fact, 80% of the total spend was accounted by 22% of the
SKUs (see Exhibit 6); 50% of the SKUs had contributed to 95% of the spend. This was as close as one
could get to a Pareto split in reality.
The top selling item had hauled in over USD 235,000; at the other extreme, a full one-thirds of the SKUs
advertised on the Fiesta site had amounted to less than USD 60,000 or 2% of the annual spend. Would it be
prudent to delist these SKUs, – traditionally termed as ‘‘C-items’’ by retailing analysts? Or could the
commodity managers explore alternative options to source them more effectively? Should the CPO initiate
some kind of supplier consolidation efforts?
It was a standard mantra for a retail outfit to be around for all customers, be it the select few that brought
in profits, or the vast majority that added more to the overhead, but contributed little to the bottom line. A
case could be made for not eliminating the C-items in order to sustain business. Customers could be
bundling their A-item purchases with C-items; companies like Amazon went on to discount such bundles.
However, many an online retailing operation had C-items to blame for their demise. In fact, this practice
was enshrined in the business model of a dot-com era outfit named Kozmo.com, which had focused
exclusively on fulfilling small orders of low value items, without even charging for their delivery.
Predictably, the operation went defunct in 2001, three years after it was founded.
The analysis further established a pattern of considerable variance in item prices for the same SKU (see
Exhibit 7). One would imagine that sourcing an entire year’s requirement upfront for each item from its
lowest cost supplier – perhaps through an evergreen contract – would be a smart move. Disregarding
holding costs, and assuming that these suppliers were able to fulfil bulk orders, the strategy of procuring
every ‘‘top 10’’ item at its rock bottom price would deliver a sizeable 9% in savings. If this alternative were
not feasible, then one could attempt to source the items from multiple suppliers, at price points that were
close to the average for the sourcing period in question. However, the resulting spend would overshoot the
actual spend by close to 9%. What then should be the correct sourcing strategy?
On the distribution front, there was a wide variation in the utilization of DCs. Contract workers at the
Harrisburg, PA center had begun to complain of burnout. A drilldown of activities revealed that one in eight
spend dollars was being routed through this busy DC. On the other hand, a full third of the DCs were
underutilized, due to optimistic staffing projections that had been made prior to launch. Bridges had some
tough decisions to ponder on, as to whether Fiesta must increase sales in deficit regions with targeted
promotions, divert shipments to less busy DCs in adjacent regions, right size the “deficit” DCs, or terminate
them and move their loads to other DCs situated nearby. While it was tradition to source parts from suppliers
who were located close to the designated DCs, what cost would this new strategy place on Fiesta? It was
time to introspect.
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STRATEGIC SOURCING
The 20th century witnessed the rise and fall of asset-rich firms with vertically integrated supply chains.
Innovations in technology at the turn of the century helped globalize a firm’s value chain; managers could
now outsource non-core functions to specialized suppliers, exploit economies of scale and maximize the
supply chain surplus. Recognizing this shift, Gottfredson and others10 advocated the necessity to develop a
strategic rather than a tactical vision of sourcing:
Greater focus on capability sourcing can improve a company's strategic position by

reducing costs, streamlining the organization, and improving quality. Finding more-
qualified partners to provide critical functions usually allows companies to enhance the
core capabilities that drive competitive advantage in their industries.
Engel11 defines strategic sourcing as an organized and collaborative approach to leverage targeted spend
across locations with select suppliers that are best suited to create knowledge and value in the customer-
supplier interface. Strategic sourcing addresses the long term impact of supply base deliberations on the
overall supply chain design, planning and implementation. Typical considerations are make-versus-buy
decisions, determining when and how to outsource activities, and defining linkages and alignments between
the supply base and rest of the firm.
SPEND ANALYSIS
A foundational aspect of strategic sourcing is spend analysis. Pandit and Marmanis 12 describe spend
analysis as the process of aggregating, classifying, and leveraging spend data for the purpose of reducing
costs, improving operational performance, and ensuring compliance. Scrutinizing a firm’s spend data is
critical to identify hard-dollar savings opportunities, and to develop sourcing, budgeting and planning
strategies. Spend analysis can unearth maverick purchases, and promotes compliance with negotiated
contracts. Along the way, it helps discover missed opportunities. In addition, it facilitates compliance with
federal legal regulations, specifically as they relate to bids and grants management.
Besides increasing the visibility of a company’s spend, the typical goals of a spend analysis are to optimize
the allocation of business across the global supply base, and to identify and share best practices across its
divisions and geographies. Specifically, it seeks reductions in purchase prices, total cost of ownership
(TCO), and supply risk; these initiatives form the basis for spend audits, and for evaluating the success of
spend negotiations.
Spend analysis is key to assessing the performance of a sourcing organization. Typically, after the initial
‘‘low hanging fruit’’ sources of reducing spend are identified, it is difficult to extract additional savings
without a systematic data analysis. For example, once suppliers appear to have offered the maximum
10
Gottfredson, M., Puryear, R., & Phillips, S. (2005). Strategic sourcing: from periphery to the core. Harvard Business Review, 83(2), 132-139.
11
Engel, Robert J. Strategic Sourcing: A step by step practical model. 89th Annual International Supply Management Conference, April 2004.
12
Pandit, Kirit, and Marmanis, Haralambos. Spend analysis: The window into strategic sourcing. J. Ross Publishing, Fort Lauderdale FL, 2008
Page 7 of 21
possible discount, additional savings may be harder to garner. It might become necessary to source from
low cost countries and identify less expensive materials to meet any additional product savings goals.
SPEND VISIBILITY
Different divisions of an organization tend to operate as silos, posing a hurdle to implementing a spend
analysis. Small teams at decentralized locations make sourcing decisions on common items and services;
the lack of organization-wide visibility leads to loss of leverage with suppliers. A dispersed company that
transacts in multiple geographies with different languages can make this visibility even harder. Other
challenges include the presence of incompatible or diverse book-keeping applications, oftentimes as a result
of M&A activity – and data that is disparate and disaggregated. Lastly, the processes followed to evaluate
the sourcing of direct and indirect spend are not consistent.
Technology plays a key role in lending greater visibility to a company’s purchasing activities; it supports
data-driven communications to various stakeholders, including category champions, suppliers and teams.
Large companies may choose to employ an existing ERP platform, a stand-alone sourcing package or a
custom developed software implementation13 for spend analysis. These platforms help procurement teams
derive insights from systematic investigations such as flattened cube analysis and ABC analysis.
With adequate visibility into a company’s spend, managers can identify patterns in item, category and
supplier specific purchases by rolling up expenses along the dimensions of a spend cube (Exhibit 8).
Quarterly reports help them identify opportunities to aggregate demand, bundle complementary items, and
negotiate better deals with suppliers. Managers can check if rebates promised by a supplier have been
applied uniformly. Item price variance can be monitored to curtail maverick or out-of-contract spend. Over
time, supplier information is enriched with attributes such as the preference ranking for a category of items,
credit rating, risk exposure, diversity classification status as minorities, women owned enterprises, and so
on.
ABC ANALYSIS
The technique of ABC Analysis involves a 3-category classification (A, B and C), based on specific criteria
such as the total spend on SKUs, spend with suppliers, spend for customers, price per unit, criticality of the
item, and contribution to profits, to name a few. ABC analysis involves breaking down large datasets into
segments (Exhibit 6) that aid decision making. Typically, Category A represents the most valuable items
that contribute highly to the overall profits of a company. Category B represents the next set of items that
are not as profitable as items in Category A, but may be just as valuable. Category C usually comprises the
largest category; they pertain to small transactions that do not contribute highly to profits, but could still be
valuable to the company in terms of complementarity and overall coverage.
13
Limberakis, C. G. (2012). Spend Analysis: Lessons from. Supply Chain Management Review, 16(2), 10-12.
Page 8 of 21
Supplier rationalization is a critical outcome of an ABC analysis. Sourcing a low value item in low
quantities from multiple suppliers consumes time and resources, while also adding to the cost of relationship
management. Terminating contracts with some of these suppliers and aggregating the demand increases the
leverage that a firm can wield with the remaining suppliers. An ABC analysis and categorization could
systematically reveal the top suppliers in terms of spend, highest volume product categories, and items with
highest annual spend. Collectively, such insights could be instrumental in crafting a solid supplier
consolidation strategy.
FINAL ANALYSIS
Up until the time when the new CFO came on board, there had been no concerted efforts by Fiesta’s
management to systematically gather data, cleanse it, and examine patterns in spend and suggest
improvements. Bridges and Rao knew that there had to be a systematic way to wade through the large pool
of numbers, and resolve the many problems with inbound logistics that the company was facing. Amidst
heavy snowfall, the two made it to work over the weekend, and sifted through the spend data that had been
accumulated over the year, constructed a slew of pivot tables, and visualized trends. They could not afford
the mistakes that were made in the previous year.
The company had been dealing with a dizzying variety of SKUs. It was imperative to bring a greater focus
to Fiesta’s registry of items, which would in turn streamline the supply chain. The following overarching
principle governed the deliberations.
Decision 0: We must carry forward as many items that are currently advertised on our
website as possible. We must however consolidate or discontinue those items, suppliers
and item types that fail to meet some liberal criteria on the total spend.
While it was a recommended practice in spend analysis to classify items according to a universal schema
such as UNSPSC (United Nations Standard Products and Services Codes), items within the gift, novelty
and souvenir sector exhibited tremendous heterogeneity; there existed no universally accepted mode of
categorization. The procurement team had applied a basic text mining technique14 to the item descriptions
in order to classify the 3,140 stock keeping units (SKUs) into 181 item types (see Exhibit 9). Thereafter,
the suppliers were labeled using a simple scheme, as 100 + Item Type ID + 0 + a serial number. To illustrate,
lights comprised a popular category with a Type ID of 13; the suppliers of lights were labeled as 1001301,
1001302, and so on.
ABC ANALYSES
Insights began to emerge from a slew of analyses that were conducted along SKUs, suppliers, and item
types. Looking to uncover a few Pareto splits, Bridges and Rao observed that a sum of USD 60,000,
amounting to two percent of Fiesta’s total spend for the year, was attributable to one-thirds of the SKUs;
14
Singh, M., et al. 2005. Automated cleansing for spend analytics. In Proceedings of the 14th ACM international conference on Information and
Knowledge Management, pp. 437-445.
Page 9 of 21
the spend on each item in this group hovered around USD 140. After carrying out an ABC breakdown by
SKU spend, the two began to identify opportunities for consolidation within C-category items. Specifically,
they examined such SKUs whose associated annual spend was low enough to be considered a burden to
market, procure and sell. This helped them arrive at their first set of decisions:
Decision 1: If the total spend on an SKU falls below a threshold value, then mark the SKU
for consolidation.
Decision 2: For those SKUs that have been marked for consolidation under Decision 1,
discontinue the associated supplier relationship if no other SKUs have been procured from
them (see Exhibit 10). Should the need arise, we can arrange to source these SKUs by
alternative means, perhaps by using another supplier that caters to items with the same type
classification.
Next, Bridges and Rao carried out an ABC breakdown by supplier spend value, and spotted more
opportunities for consolidation. Transacting with a supplier carried with it an overhead; the procurement
efforts alone cost an average of USD 500 per supplier per annum. Taking into account other costs of
transacting with suppliers, the duo arrived at the next set of decisions:
Decision 3: If the total spend on a supplier falls below a threshold value, then redistribute
the spend among the remaining suppliers (Exhibit 11), preferably to those classified as
Category A or B; avoid vendor lock-in wherever possible.
Proper visual merchandizing was critical in the retail world. Commodity managers as well as the marketing
team often complained that Fiesta’s inventory was excessively diverse, which had complicated navigation
for users of the website. An ABC analysis by Item Type revealed that the bottom thirds amounted to less
than one percent of the total annual spend. The duo formulated a decision to rationalize the item types:
Decision 4: If the total spend on an item category falls below a threshold value, then
rationalize the category (Exhibit 12). If it is eliminated, then the associated suppliers, as
well as the set of items that they provide, will have to be pulled from the website.
By choosing to eliminate an item category, SKUs as well as suppliers that were classified under the old
item type might have to be re-categorized. The shopping portal had to be updated to reflect any changes. In
a few instances, the associated suppliers might have to be discontinued.
NETWORK OPTIMIZATION
Distribution centers were the hubs of activity for any retail venture. Fiesta’s twenty DCs were operated by
third party providers for a fee, and had been set up to handle the rush of orders during the holidays. This
way, the onus of managing dynamic staffing patterns was shifted to an external party. The lead time for
delivering an item as well as the cost of shipping the item depended on the distances between the supplier
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and the designated DC, and between the DC and the customer. Bridges and Rao turned their attention to
reducing lead times. There were many shipments for which the DC appeared to have been incorrectly
assigned, resulting in increased shipping costs and elevated lead times. This led to the following decision:
Exhibit 13 partially depicts the inbound logistics scenario for clocks; a fifth of the shipments to DCs in
California had originated from suppliers located all the way across the United States in Maine. Unless there
were mitigating circumstances such as supplier stock-outs or a mandated exercise of minority sourcing,
these SKUs could have been procured from suppliers that were located much closer. This led to the
following decision:
Decision 5: Examine the shipments where supplier-to-DC or DC-to-customer distances

exceed a threshold. Identify the reasons for assigning the DC. Select a different DC that
optimizes the distance from the supplier to the customer.
The top 20 A-category items contributed to over two-thirds of the total spend for the company. Based on
the initial projections of their demand made by Fiesta’s Marketing team, suppliers were identified for each
SKU. However, popular items like buntings (Exhibit 1) turned out to be expensive to procure from the four
suppliers for this item type; the average supplier-DC distance was 1,800 km. This increased the cost and
wait time for customers, who could proceed to purchase it from another source, leading to an expensive
exit from the portal. This led to the following decision:
Decision 6: If there is heavy demand for an A- or B-category SKU and the distances are
inordinately high, then identify new suppliers for the item, with a preference for a wider
geographic dispersion.
The top third of the DCs accounted for over two-thirds of the spend; these centers appeared to be
understaffed, an issue that was unraveled by a scrutiny of the performance of the third party responsible for
these DCs. The bottom third, on the other hand, contributed to a mere twelfths of the spend. One option for
consolidation would be to dismantle the low-activity DCs, and move the volumes elsewhere. The following
decision was formulated:
Decision 7: Examine DCs whose annual activity falls below a threshold spend value.
Consider shifting their volumes to nearby DCs in such a way that it does not overwhelm
operations at the other DCs, and lead times will remain unaffected.
DEMAND FORECASTING
Item prices in the gifting sector followed a predictable cycle; the demand for an SKU was a natural
reflection of the price (see Exhibit 14). Equipped with a full year’s data, the Procurement team could
forecast the quantities of top selling SKUs to procure in advance and stock as inventory at various DCs.
This would not only eliminate the supplier-DC leg in the delivery cycle and improve lead times, but also
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bring down the spend if prices were negotiated carefully. This line of reasoning led to formulating the
following decision:
Decision 8: Examine the price-versus-demand trends in the Category A SKUs that have
been shipped during 2011, and apply forecasting models. Provided there is physical space
to store the inventory, procure these items in advance in order to maximize savings.
CONCLUSION
It was the afternoon of Wednesday. Sanchez called upon Bridges and Rao for a lunch meeting. Little did
she realize that their discussion would last well into midnight. While she understood the technical rigor
with which the duo had performed their analysis, Sanchez was also hesitant to take on drastic measures.
After all, gifting was a year-round industry,15 and Fiesta had only been in operation for a year or so.
QUESTIONS
1. What are some drawbacks with the procurement team’s current mode of functioning? How can data-
driven decision making be improved at Fiesta?
2. Identify five significant SKUs whose Item Type codes, i.e. item categories, have been miscategorized,
and discuss remedies.
3. Focus your attention on the two distance columns within the spreadsheet. Examine the entries that have
been marked as NA. Do you see a potential problem for these entries? If so, how would you handle it?
4. Examine the entries in the spreadsheet for all items of item type “clock”. Do you see a problem? What
is the impact of this problem that you have isolated? How would you handle this problem?
5. Using Exhibits 6 & 7 and the supplied data, how would you arrive at the preliminary findings made by
Rao and Bridges?
6. For each decision, analyze the impact of implementing it. Are the outcomes of each decision independent
of each other? If not, what are the potential consequences?
7. What steps and decisions are difficult to implement using standard spreadsheet tools? How would you
address this limitation or gap?
8. What considerations must be taken into account for making a Build (in house) versus Buy decision in
the context of spend analysis software?
9. Ultimately, Bridges and Rao must convince CEO Sanchez, who is more of a customer-facing manager.
In part, they must indicate how cost savings can be packaged as revenue opportunities, and their
associated return on sales (ROS). How can such calculations be put in place on a continuous basis?
Similarly, an appropriate communication strategy to inform Mahoney should also be put in place.
10.What key success factors must be taken into account in executing spend analysis projects?
15
Danziger, P.N. The Gifting Market is a Year-Round Retail Opportunity, Forbes, https://www.forbes.com/sites/pamdanziger/2017/10/29/the-
gifting-market-is-a-year-round-retail-opportunity-not-just-from-black-friday-to-christmas/#1b7e4f5e5534 retrieved on January 30, 2019
The authors would like to acknowledge the detailed review and comments provided by Prof. Prashant Chintapalli of
the Indian Institute of Management Bangalore.
Page 12 of 21
Exhibit 1
Examples of British themed gift items
Source: Pixabay
Exhibit 2
Fiesta’s distribution centers by region
Source: Map generated by software program
Page 13 of 21
Exhibit 3
Annual sales in the US from gift, novelty, and souvenir stores
Source: Data Courtesy: US Census Bureau (Figures in millions of USD)

https://www2.census.gov/retail/releases/current/arts/sales.xls
Exhibit 4
Changing role of the store
Source: Store 3.0. The Store is dead. Long live the Store. Deloitte Report (2010)
Page 14 of 21
Exhibit 5
Statement of Accounts for December 1, 2010 – December 1, 2011
5a. Balance Sheet Data (Figures in US$’000s)
Fiesta Gifts Inc.

(in $’000s)
ASSETS
Cash $900
Accounts receivable $1,900
Inventories $1,200
Total current assets $4,000
Intangible assets $1,500
TOTAL ASSETS $5,500
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $850
Accrued payroll and employee benefits $650
Total current liabilities $1,500
Long-term debt $1,000
Owners' equity $3,000
TOTAL LIABILITIES AND OWNERS’ EQUITY $5,500
Source: Data generated in support of the case
Page 15 of 21
5b. Statement of Income Data (Figures in US$’000s)
Fiesta Gifts Inc.
Net sales $6,000
Cost of goods sold $3,000
GROSS INCOME $3,000
Salaries $1,200
Selling, general, and administrative expenses $600
Full service DC fee $2,000
Interest expense $200
Total Indirect expenses $4,000
NET INCOME/LOSS -$1,000
Source: Data generated in support of the case
Exhibit 6
ABC Categorization of SKUs by revenues
Source: Data spreadsheet
Page 16 of 21
Exhibit 7
Top 10 items with price variance
SKU Code Sum of Sum of Total Min of Unit Max of Unit Average of Unit
Quantity Price Price Price Price
22423 3533 56431 15.33 17.85 17.39
85099B 12060 31225 2.31 2.91 2.81
84879 12067 26263 2.03 2.37 2.35
47566 3652 23258 5.25 6.93 6.84
85123A 6005 22937 3.57 4.13 4.04
22386 6621 17143 2.31 2.91 2.82
23203 6051 16320 2.45 2.91 2.88
79321 2394 15706 5.35 8.05 7.54
85099F 5343 13664 2.31 2.91 2.80
23084 4878 12589 2.51 2.91 2.80
Page 17 of 21
Exhibit 8
Spend cube
Source: Image Courtesy: Pandit and Marmanis (2008) (reproduced with permission)
Exhibit 9
Item schema with a typical supplier
SKU Description Item Item Type Supplier

Code Type ID ID
23843 PAPER CRAFT , LITTLE BIRDIE 90 craft 1009004
22423 REGENCY CAKESTAND 3 TIER 6 cake 100602
85099B JUMBO BAG RED RETROSPOT 1 bag 100103
84879 ASSORTED COLOUR BIRD ORNAMENT 173 ornament 10017304
47566 PARTY BUNTING 24 bunting 1002402
85123A WHITE HANGING HEART T-LIGHT HOLDER 9 hanging 100902
22386 JUMBO BAG PINK POLKADOT 1 bag 100103
23203 JUMBO BAG DOILEY PATTERNS 1 bag 100102
79321 CHILLI LIGHTS 13 light 1001302
85099F JUMBO BAG STRAWBERRY 1 bag 100103
23084 RABBIT NIGHT LIGHT 13 light 1001301
Page 18 of 21
Exhibit 10
SKU Rationalization
SKU Description Item Item Total Quantity Suppliers

Code Type ID Type Spend
22266 EASTER DECORATION 9 hanging 123 350 100901,...,

HANGING BUNNY 100905
22825 DECORATIVE PLANT 145 pot 122 7 10014501

POT WITH FRIEZE
Exhibit 11
Supplier rationalization
Scenario A: Reassign spend to Category B supplier
SupplierID Sum of Count of Sum of Category Action

TotalPrice InvoiceNo Quantity
10024001 463.176 25 310 C Rationalize
10024002 1833.86 19 902 B Continue
10024003 182.91 11 85 C Rationalize
Scenario B: Redistribute spend and consolidate into fewer suppliers

1003601 263.704 22 432 C Rationalize
1003602 786.436 22 2148 C Continue
1003603 454.454 30 231 C Rationalize
1003604 446.978 29 507 C Rationalize
Page 19 of 21
Exhibit 11 (Contd.)
Scenario C: Consolidate into one supplier

1004401 70.91 10 61 C Rationalize
1004402 301.14 19 152 C Rationalize
1004403 121.45 12 51 C Rationalize
Scenario D: Eliminate these suppliers

1009701 69.44 5 14 C Rationalize
1009702 16.45 6 11 C Rationalize
Exhibit 12
Top 3 item types under threshold = USD 500
ItemType Item Type ID Sum of Sum of

TotalPrice Quantity
Basket 184 497.21 223
Sticker 224 496.23 1231
Suki 76 493.766 1200
Page 20 of 21
Exhibit 13
Shipments from suppliers for clocks
Supplier Location
DC Location KS ME OK TX Grand
Total
PA 63 39 43 54 199
NC 43 44 39 42 168
KS 123 123
CA 33 27 31 30 121
Exhibit 14
Trend in monthly spend for SKU 22423
Page 21 of 21

Fiesta Gifts Mending The Spending Case

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Fiesta Gifts Mending The Spending Case

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FIESTA GIFTS: MENDING THE SPENDING

JAYANTH JAYARAM AND SHANKAR VENKATAGIRI

Responding to Sanchez’s salvo, Bridges said:

The CEO ended the meeting on a tough note, declaring:

Greater focus on capability sourcing can improve a company's strategic position by

Decision 5: Examine the shipments where supplier-to-DC or DC-to-customer distances

Source: Map generated by software program

Source: Data Courtesy: US Census Bureau (Figures in millions of USD)

5a. Balance Sheet Data (Figures in US$’000s)

Fiesta Gifts Inc.

Accounts receivable $1,900

Total current assets $4,000

Intangible assets $1,500

TOTAL ASSETS $5,500

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable $850

Accrued payroll and employee benefits $650

Total current liabilities $1,500

Long-term debt $1,000

Owners' equity $3,000

TOTAL LIABILITIES AND OWNERS’ EQUITY $5,500

Source: Data generated in support of the case

5b. Statement of Income Data (Figures in US$’000s)

Fiesta Gifts Inc.

Net sales $6,000

Cost of goods sold $3,000

GROSS INCOME $3,000

Selling, general, and administrative expenses $600

Full service DC fee $2,000

Interest expense $200

Total Indirect expenses $4,000

NET INCOME/LOSS -$1,000

Source: Data generated in support of the case

Source: Data spreadsheet

22423 3533 56431 15.33 17.85 17.39

85099B 12060 31225 2.31 2.91 2.81

84879 12067 26263 2.03 2.37 2.35

47566 3652 23258 5.25 6.93 6.84

85123A 6005 22937 3.57 4.13 4.04

22386 6621 17143 2.31 2.91 2.82

23203 6051 16320 2.45 2.91 2.88

79321 2394 15706 5.35 8.05 7.54

85099F 5343 13664 2.31 2.91 2.80

23084 4878 12589 2.51 2.91 2.80

Source: Data spreadsheet

SKU Description Item Item Type Supplier

23843 PAPER CRAFT , LITTLE BIRDIE 90 craft 1009004

22423 REGENCY CAKESTAND 3 TIER 6 cake 100602

85099B JUMBO BAG RED RETROSPOT 1 bag 100103

84879 ASSORTED COLOUR BIRD ORNAMENT 173 ornament 10017304

47566 PARTY BUNTING 24 bunting 1002402

85123A WHITE HANGING HEART T-LIGHT HOLDER 9 hanging 100902

22386 JUMBO BAG PINK POLKADOT 1 bag 100103

23203 JUMBO BAG DOILEY PATTERNS 1 bag 100102

79321 CHILLI LIGHTS 13 light 1001302

85099F JUMBO BAG STRAWBERRY 1 bag 100103

23084 RABBIT NIGHT LIGHT 13 light 1001301

Source: Data spreadsheet

SKU Description Item Item Total Quantity Suppliers

22266 EASTER DECORATION 9 hanging 123 350 100901,...,

22825 DECORATIVE PLANT 145 pot 122 7 10014501

Source: Data spreadsheet