As part of an industry with generous profit margins and high barriers to entry, American th Greetings had spent decades in a comfortable position. Beginning at the turn of the 20 century, it had helped to create a mass market for the greeting card and had presided over its growth into a multi-billion-dollar industry. Because the manufacturing of cards—especially those with special designs or attachments—could be complex, and because customers were used to choosing from a large selection of cards, it was difficult for new players to offer the big, established card companies any serious competition.
By the end of the 20 century, American Greetings was the second-largest greeting card company in the world, after Hallmark, and had bought out several of its lesser competitors. It had expanded its expertise to become a major manufacturer of gift wrap, party goods, stationery, calendars, and other “social expression” products. And it had also been successful as the creator of licensed characters such as Holly Hobbie, Strawberry Shortcake, and Care Bears.
But the core of its business remained the profitable greeting card. As senior vice president and executive supply chain officer Michael Goulder put it, “The average card has 25 to 40 cents of variable cost in it, we wholesale it for a buck or so, and the retailer sells it for $3.00. What a wonderful industry!” However, by the late 1990s, the business had become more challenging. Growth in greeting card sales stagnated, and existing customers began to turn to online cards. At the same time, the company began to experience pressure from retailers who wanted an increasingly larger share of the healthy margins.
Greeting cards were still a wonderful industry, but there were worries about the future. As executives began to look for cost-cutting strategies, it was clear that the manufacturing process needed to be re-examined. In Goulder’s words, “because of the way the industry worked for a long time, we were late in focusing on the efficiency of operations.” But the question turned out to be complex, because American Greetings had incomplete data on its manufacturing costs and no data on outsourcing alternatives. Before it could decide on a plan for reducing costs, it had to more precisely measure the company’s current costs for machinery, production, labor, and transportation. Then the company had to decide on the most effective way to economize. Two main options rose to the top: improvements in process and technology, and outsourcing to China. A number of executives assumed that the answer lay in moving production overseas, but others argued that more savings could be obtained by improving existing facilities and upgrading legacy equipment. In March 2005, partisans of outsourcing and partisans of upgrading were both making their cases, as the company looked to determine the future of manufacturing.
The Greeting Card Business
Greeting Card History The greeting card dates back to the 15 century, when valentines and new year’s greetings began to be th exchanged in Germany and other parts of Europe. But it was not until the mid-19 century that it became a popular means of communication. In 1843 in London, the first Christmas card was created, and in the 1860s the Irish firm Marcus Ward and Co. began selling mass-produced cards and calendars. (See Exhibit 1 for an image of the first Christmas card.) In America, Louis Prang, a skilled printer and lithographer, began selling Christmas cards in the 1870s. When cheap imports flooded the market in the 1890s, he abandoned the business, but a decade later new card enterprises were up and running. The Founding and Growth of American Greetings American Greetings was founded in Cleveland in 1906 by a Polish immigrant, Jacob Sapirstein, who sold penny postcards from a horse-drawn cart. The business expanded during the Depression, when greeting cards were given instead of more expensive gifts, and it further expanded during World War II, when people used greeting cards to stay in touch with far-away family members. In 1952 American Greetings made its initial public offering of stock, and in 1989 it was officially added to the S&P 500 list of companies. Over the years American Greetings bought out a number of smaller companies. In 1956 it expanded its business beyond the United States by acquiring Carlton Cards, a Canadian company. In subsequent years it bought card businesses in Mexico, England, Australia, and South Africa. It also purchased companies specializing in wrapping paper, party
goods, and accessories. In a major purchase in 2000, American Greetings bought out Gibson Greetings, America’s third-largest card company. Throughout this era of expansion, the company was led by Sapirstein’s son, Irving Stone. As the company grew, it adapted its products to changing societal moods. During the 1950s it began designing “studio cards,” tall, narrow cards that featured cartoon-style artwork and irreverent humor. During the 1960s and beyond, it expanded its content to include cards featuring ethnic diversity, environmentalism, and new-age spirituality. It created cards for new holidays, from Groundhog Day to National Teacher Appreciation Week to Maidyozarem Gahanbar, the Zoroastrian spring festival. During the 1990s the company branched out into customized electronic cards, building the industry’s largest online card website. And following the September 11 terrorist attacks, it created holiday cards with patriotic themes. American Greetings also expanded its expertise into non-card consumer products, such as hair accessories, picture frames, and wrapping paper. In 1967 the company created Holly Hobbie, the first “licensed character,” a girl in a blue bonnet whose image was imprinted not just on cards but also on clothing, gift wrap, coffee mugs, toys, and other products. A number of other licensed characters followed, the most profitable being Care Bears and Strawberry Shortcake. These properties generated tremendous levels of loyalty and sales: for example, in less than a year, the company created more than 600 different Strawberry Shortcake products, and the character appeared in two television specials and numerous magazines. As American Greetings approached its 100-year anniversary, it was a flourishing company. By 1986 the business that began by selling penny postcards had reached one billion dollars of revenue. By 2005 the company boasted annual sales of $1.8 billion. (See Exhibit 2 for American Greetings financial data and Exhibit 3 for American Greetings stock performance.) In 2005 American Greetings employed 20,000 2 american greetings th
associates; approximately 8,000 were full-time employees and 12,000 were part-time merchandisers who supplied the cards and displays for a particular retail outlet. American Greetings was one of the largest players in a large and successful industry. At the start of the 21 century, the market was dominated by two companies, Hallmark and American Greetings, but there were
some 3,000 greeting card publishers in the country, and cards were a huge business. Americans were purchasing about seven billion greeting cards per year, and the household penetration rate was 78 percent. Greeting cards generated over $5 billion in business overall, with Christmas cards accounting for onethird of sales. “Although the English invented the Christmas card, Americans have elevated it to an obsession, sending out 2.6 billion cards a year—roughly 10.4 for every man, woman and child in the country,” reported The Wall Street Journal.4 Greeting cards had become a part of every American’s life. As American Greetings’ 2005 annual report put it, “From childhood to maturity, as our consumers grow up and grow older, we are there with them through their milestones and celebrations, their happiness and their sorrow.” The company was a success not only in financial terms but also as a force shaping American culture. st
Changes in the Late 20th Century
At the same time, the card business was no longer growing at a rapid postwar pace. As the economy changed, American Greetings was faced with challenges from customers, retailers, and competitors. Saturation of the Market By the 1980s and 90s, the card industry had matured. As The Wall Street Journal reported in 1987, “Although Americans buy seven billion cards annually … growth in the … industry has stagnated. And the industry—after introducing cards for everything from grandparents’ day to Martin Luther King, Jr.’s birthday in recent years—has practically exhausted occasions to celebrate.”5 Ten years later the market for greeting cards was still growing only one to two percent per year, with middle-aged women accounting for 80 to 90 percent of sales.6 Card sales were also affected by technological changes. The creation of a new medium in the Internet resulted in the shift of some customers away from the paper card to the e-card. Although AmericanGreetings.com became the most popular e-card site on the web, it faced new competition from websites that featured offbeat humor. For example, the site someecards.com, whose motto was “when you care enough to hit send,” developed a niche market with educated, urban young people who could not find appropriate messages of self-expression with the existing card companies.7 In addition, new greeting card software made it possible for consumers to create their own artwork and verses and then print the
cards on their own printers. Although card companies stood to benefit from the sale of the software, this development threatened to further erode the market for sales of paper greeting cards. More Demanding Retailers The struggle to increase sales was aggravated by changes in the relationship between American Greetings and its retailers. During the 1980s and 90s the company had appeared to be in a good position with its distribution strategy. Hallmark’s strategy focused on its corporate owned and franchised stores, while American Greetings was selling primarily through mass retailers. This system worked to the company’s advantage, because customers began favoring retail outlets where they could do one-stop shopping. As The Wall Street Journal reported, “…the grass-roots popularity of American Greetings cards at places like Wal-Mart and Walgreen… [is] where the growth is….”8 But problems occurred when the company’s retailers began to ask for more of the sales margins. As independent retailers died out and large chains such as Wal-Mart and Target expanded, they began to 3 american greetings
demand more favorable terms from the card-makers. Representatives of the large stores played the card companies off one another, encouraging them to fight for shelf space. As a result, American Greetings was forced to reduce its own margin on cards and to give more to the retailers. “We’re always battling Hallmark for long-term contracts with the retailers,” said Goulder. “And because the incremental gross profit is significant, there is intense pressure to win that contract. Starting in the early 1990s, this became the competitive dynamic in the industry. As a result, much of the profit in the industry shifted from the card publishers to the retailers.” In addition, the rise of the dollar store created demand for cheaper cards. When stores such as Dollar General, Dollar Tree, and Family Dollar became interested in selling greeting cards, they requested product that they could sell at two for a dollar rather than the customary $2 to $3 apiece. When the card companies complied, other retailers responded by demanding a similar cheaper product line. “There was a two-pronged ripple effect,” remembered CEO Zev Weiss. “Not only were the dollar stores taking share from a unit perspective; they also caused other retailers to decide that they could no longer sell cards at $2.50, if the competition was selling cards at fifty
cents.” A Fundamental Shift in the Business While the pressures were increasing during the 1980s and 90s, American Greetings was able to grow through acquisitions of its competitors. However, after 2000, when the company bought out Gibson Greetings, this avenue for growth also became limited, because there were now only two large card companies left. As Goulder summarized it, “We’ve got a duopoly with little consumption growth. The market is flat, and the only way for Hallmark to grow is to take a bite out of our hide.” Indeed, it had proved difficult for American Greetings to increase its market share. Because Hallmark was a privately held company, reliable share numbers were hard to come by. But in spite of its acquisitions, in 2005 American Greetings held roughly a 30 percent share of the market, according to industry pundits, compared to Hallmark’s 60 percent. The days of high margins were over. As Weiss recalled, the changes th during the late 20 century “created a fundamental shift in our business. Our cost structure became inappropriate for that new reality. So we looked at our cost structure in the early 2000s and said, ‘We have to make changes, or we’re in trouble.’”
Historically, American Greetings had stayed profitable by increasing sales. Because of its healthy margins, for many years it was able to absorb rising costs. As director of manufacturing services Dick Finlay explained, “It’s a low cost of goods industry, so most cost-control design techniques from traditional manufacturing and engineering never evolved here. It was cheaper to waste product than it was to be careful designing it.” However, as part of a corporate restructuring in the late 1980s, the company began to look for ways to improve the efficiency of its operations. American Greetings had a complex vertically integrated supply chain. For many years the company performed all procurement, manufacturing, distribution, service, and ordering activities in its Cleveland headquarters. Later the company moved its manufacturing to plants in the south, but it continued to direct all steps of the supply chain. (See Exhibit 4 for a map showing locations of facilities.) The production of greeting cards was far more complex than most ordinary commercial printing jobs. Company executives sometimes marveled at the intricacy of card production. As vice president of manufacturing and
distribution Ken Jayjack put it, “It’s amazing how difficult it can be to manufacture a folded piece of paper.” The process featured seven main steps: product specification, creative design, sheet arrangement, lithography, sheetwise finishing, cardwise finishing, and packaging and distribution. At
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each step of the process there were complexities, which multiplied because of the large number of card designs. Product Specification In the first step of card production, the marketing department worked with the creative department (and occasionally with retailers) to plan new designs for the upcoming year. Cards were divided into two types: seasonal, which included cards for Christmas, Valentine’s Day, and other holidays, and everyday, which included cards for birthdays, anniversaries, and other occasions that were not specific to a particular time of year. The company looked at trends in design, color, and other factors and then planned an entire program of cards for a particular occasion. The demands of this phase of card production were significant, because the greeting card industry was characterized by “SKU intensity.” This meant that a company like American Greetings produced a high number of “stock-keeping units,” or unique card designs, each marked with a different bar code. As Jayjack put it, “we’re not making the same gallon of milk all the time.” Indeed, the company manufactured about 50,000 unique greeting card SKUs per year. There were several reasons for this multiplicity of SKUs. First, customers demanded a large variety of cards. They wanted to find the right card for the occasion and recipient, and they did not want to buy the same card again and again. Also, the variety of channels and retail formats tended to create a need for breadth. Finally, customer preferences changed over time, so it was not enough to design a card one time and then sell it year after year. Although certain best-selling designs were carried over from one season to the next, a significant percentage of the product line was “refreshed” each year. The number of SKUs was increased further, because several major retailers had their own brand of cards with a set of unique designs. For example, Wal-Mart’s brand was named “Just for You,” and Target’s brand was named “Carlton.” American Greetings attempted to minimize the work involved by
creating similar cards with a separate brand name on the back; however, the cards had to be different enough to satisfy the demands of the retailers. As Goulder explained, “Carlton won’t let us have the same exact card as Just for You. We must engineer in enough of a distinctiveness to satisfy the commercial need for differentiation.” Company executives were challenged by the intricacies of planning 50,000 SKUs each year, but they realized that this was the source of the company’s profitability. “It’s a love-hate relationship,” said Goulder. “It’s a laborious process to create the 2,000 SKUs required to supply a card department in the average drug store. But if it were easy, the barriers to entry in this industry would be much lower.” Creative Design The company boasted that it was home to one of the world’s largest creative studios, employing hundreds of full-time writers and artists. In the second step of the production process, the company’s creative department designed the artwork and verses for each card. Once a general plan was laid out by the marketing department, “creative,” as the department was known, identified a subject for the card. Then an artist created a prototype, which was executed as a painting, a photograph, a sculpture, a computerized design, or some other format. The artwork was scanned into a digital image, and then a card template was created. At the same time, a writer worked with the artist to create a verse in an appropriate font, color, and placement on the card. Finally, the creative department produced a color proof of the card, and a digital file was put in a queue for the sheet arranger. There were a number of challenges to integrating the creative work with the manufacturing work. Executives spoke of “two cultures” within the organization: the artists, who were committed to their craft, and the business and operations side, who were concerned about practicalities and efficiencies. This relationship sometimes required delicate negotiations. 5 american greetings
For example, the creative department preferred long lead times so as to have the maximum allowance for producing new designs. However, particularly for seasonal cards, the business side of the company wanted the shortest possible lead time so as to be able implement new marketing strategies based on current sales data. It was an ongoing problem to balance the needs of the creative side with those of the business side. Another challenge was that
creative would design cards that were difficult to manufacture. They might request finishings that were not in common use. Or they might design an unusual card that was expensive to mass-produce. “We are trying to improve the communication between creative and manufacturing, so that they are aware of the consequences of what they design,” said Finlay. “But we don’t want to overburden them, because they need to have the consumer’s eye. They want to design pretty cards, and we want them to design pretty cards. But they need to be aware when they do something that puts an unreasonable strain on our production side.” To help designers understand the business dilemmas, the company established a cost-estimating system that showed the artists how much a particular design would cost and gave them budget targets to meet for each card program. Sheet Arrangement The most difficult step of all was the sheet arrangement. Layout specialists received a batch of cards in an electronic queue and then had to map a strategy for printing and finishing. It was a major logistical challenge to group the card designs on the sheet of paper in the most efficient way so as to reduce paper waste and minimize the number of equipment setups. Cards were printed on 28-by-40-inch sheets of paper, which might fit 12 cards. The arrangement of cards on the sheet could make a critical difference in costs. The simplest arrangement would be to print 12 of the same card on a single sheet and then do the required finishing operations. However, every time a new sheet was started, the factory had to perform a new equipment setup, which took about 45 minutes. If the company wanted 36,000 copies of each of 12 designs, it was not economical to arrange one design on a sheet and print the sheet 3,000 times, because this layout would require 12 different setups and nine hours of setup time. Instead, it was far more efficient to arrange 12 different designs on a sheet and print the sheet 36,000 times, for only one setup of 45 minutes. The longer the sheet run, the cheaper the cost per thousand cards. The same tradeoffs had to be considered when it came to the finishing operations. The challenge came from variations in the size of the cards, in the number of each card required, in the time when the card was needed for distribution, and in the printing and finishing requirements for each card. First, because the highest cost in terms of materials was the paper, it was necessary to make maximum use of each sheet. Layout specialists in the manufacturing plants were assigned to arrange cards of different sizes and
shapes on each sheet so as to use the fewest number of sheets possible. But size was only one of the variables to consider. Cards also differed in the number of copies required, ranging from 4,000 to 30,000 or more for the most popular cards. Paper would be wasted if half of the cards on the sheet required 30,000 copies and half required only 15,000. There was also variability in the time requirements for each design: some cards that were specific to a certain season had to meet strict deadlines for arrival in the retail outlets, while everyday cards might have a more flexible timetable. Finally, each design had different printing and finishing requirements. At the printing stage, there were variations in the type of paper, the coating to be added to the paper, and the color combinations required for each design. Layout specialists tried not only to put the same kind of design on each sheet but also to group similar sheets together so as to shorten the setups between each sheet. Sheets were put into an electronic queue that was arranged to minimize the make-ready times. There were further variations at the finishing stage in the embossing or hot-stamp requirements of each card design. For example, it was 6 american greetings
more economical to place many cards requiring the same type of foil together on one sheet so as to minimize the number of machine passes required. With 2,000 unique SKUs created each week, it was a complicated job to sort the cards into “families” that could be combined efficiently and printed in a single sheet run. Although the manufacturing department was able to provide some simple rules for arranging a good sheet, the process was sufficiently complex that no computer algorithm had yet been developed to automate the process. Instead, experienced layout specialists in the factory worked out the sheet arrangements mostly by hand. Lithography Once the sheet arrangement puzzle was solved, the printing of the cards was relatively simple. The plant made plates for each sheet and then printed the sheets in the batches required. The machinery was adapted from printing presses designed to make cardboard boxes for the packaging industry. The presses could run about 15,000 sheets per hour, and the average job length was 12,000 sheets. With a setup time of 45 minutes, it often took as long to prepare the press as it did to run it. But at a cost of approximately one cent per card, lithography was relatively inexpensive, compared to the
finishing operations. Some simple “ink-on-paper” cards—about 20 to 25 percent of the total production—were completed relatively easily by cutting, folding, packaging, and sending them to a distribution center. But most cards required some kind of finishing. Sheetwise Finishing After the cards were printed, they were sent to a separate plant for two types of finishing. The first type, “sheetwise finishing,” could be applied to the card while it was still on the sheet. This type of finishing might be a hot-stamp foil, which involved attaching foil to the cardstock. It might be an embossing, which involved stamping the paper to make certain parts stand out. Finally, at the last step of sheetwise finishing, every card was cut out of the sheet. Although the same machine might be used for hot-stamping and embossing, for each type of sheetwise finishing setup times and machine passes were increased. Sheetwise finishing was relatively fast because it could be automated for an entire sheet of cards. However, the setup times were long, anywhere from 30 to 60 minutes, depending on the type of finishing to be performed, and the run times were also longer than those required for lithography. Time and labor were also added, because before this finishing could be performed, a die had to be made for each operation, whether stamping or embossing or cutting. With some 50,000 SKUs designed each year, the factory quickly accumulated a huge “library” of dies. The creative department was encouraged to re-use dies from year to year; nevertheless, many of the dies were discarded, because to maintain thousands of them with uncertain prospects for use quickly became unmanageable. Cardwise Finishing The second type of finishing, “cardwise finishing,” was more labor-intensive, because it had to be done on each card individually. This type of finishing included silk screening, or creating an image using a stencil; thermo finishing, or producing a raised image; inserts, such as a piece of translucent paper; and attachments, such as bows, glitter, or computer chips that played a song. At the end of the process, most cards were folded. Some cardwise operations, such as folding, could be done on a machine, but others had to be performed by hand, which was a laborious and expensive process. For example, a card might have a penny glued onto it, and it was essential that the coin be heads-up and in proper alignment with the rest of the design. This was a process that could not be done by machine, at least not for a one-time card design that would be obsolete next year. About
five percent of a typical year’s card portfolio required some kind of hand finishing. 7 american greetings
Packaging and Distribution Finally, after the cards were finished, they were packaged and sent to the distribution centers in Osceola, Arkansas, and Danville, Kentucky, for shipment to the company’s retail customers around the United States.
Cost-Cutting Options: Automate or Outsource
By the early 2000s it was clear that American Greetings would have to improve the efficiency of its operations. Steve Willensky, senior vice president and executive sales and marketing officer, recalled, “When I began with the company in 2002, the thing that struck me was that our costs were high, we had redundancy in our plants, and the supply chain was a nightmare.” American Greetings was considering two approaches to reducing manufacturing costs: streamlining and automating domestic production, and outsourcing to China. It seemed to some in the company that outsourcing most or all production was the obvious solution. But top executives did not want to jump to conclusions without studying the problem. For a number of months the company engaged in an internal debate about the merits of improving its existing systems versus transferring manufacturing overseas. The Case for Outsourcing Many senior managers assumed that outsourcing was both desirable and inevitable. As CEO Weiss remembered, “Initially there was a bias in favor of sending manufacturing offshore. The reasoning was, ‘Everybody is doing it. We haven’t done the math yet, but that’s going to be the answer.’” Indeed, some of the company’s competitors had already moved in that direction. For example, in 1998 Gibson Greetings decided to outsource manufacturing of all of its products. Not only was outsourcing a trend; in some ways, it seemed to be a logical extension of what had happened at American Greetings a generation earlier. Originally all manufacturing had been done at company headquarters in Cleveland. But beginning in the 1970s, the company had moved production from the highly unionized industrial Midwest to Kentucky and Tennessee. This brought the advantages not only of cheaper labor and higher productivity but also lower transportation costs, because manufacturing was now done in the center of the country. At first
glance, outsourcing seemed to be a similar decision. As Goulder recalled, “Many long-time company executives drew an analogy and suggested that the outsourcing decision was the same as when we went to the mid-south.” American Greetings was already sourcing gift bags from Asia, so why not greeting cards? The greatest advantage to outsourcing seemed to be the expected reduction in labor costs. Gary Kopechek, vice president of global sourcing and services, pointed out that because every card was unique, the business involved not only variable labor but a high amount of overhead, as well. “We get huge seasonal spikes—Christmas, Valentine’s Day, Mother’s Day—on top of our everyday business, which is relatively flat,” said Kopechek. “That’s problematic in keeping our work force fully utilized. Outsourcing to vendors allows them not only to produce our high labor content cards but also to schedule our seasonal spikes into their overall production mix.” Outsourcing manufacturing to China or Mexico seemed to offer a significant labor advantage. The initial design and planning phases needed to remain local, but manufacturing could be done anywhere. The Case for Automation Other executives, especially those on the manufacturing side of the company, believed that they could best maintain the quality and efficiency of operations by streamlining manufacturing in the United States and 8 american greetings
investing in upgraded equipment. These executives pointed to problems with transportation, lead times, and training that would occur if production were sent to a distant location. In particular, the logistical costs of outsourcing were significant. To ship product halfway around the world was more expensive than to truck it from the mid-south to the company’s distribution center. The problems caused by the longer distances were compounded by the lead times required for some cards. With manufacturing located in the mid-south, maximum flexibility could be given to the company’s planners and designers. It was relatively easy to send last-minute changes to the plant or to add rush jobs for important customers. But with the increased transportation times that would come with outsourcing, this responsiveness might be degraded. Chris Furlong, vice president of supply chain planning, noted that seasonal cards were particularly hard to send offshore because of the tight schedule required at the specification and
design phases of production. “Let’s say creative has to output 1,000 new designs for Christmas,” explained Furlong. “They cannot process enough of them early enough to get them to China and back.” In considering a new supply-chain strategy, it would be essential either to do some short-term production close to home or to pay high costs for air-freight for the inevitable rush jobs. As sales and marketing head Willensky put it, “Working with a foreign vendor is an unforgiving system. You can’t call your local plant down the street and say, ‘Get that job done tomorrow!’ You are dependent on people far away, and more can go wrong.” Another challenge that had to be considered was the difficulty of training a foreign manufacturer. Because American Greetings was used to working with domestic plants that had been in the business a long time and knew card manufacturing, it had relatively rough and informal specification documents. But to potential vendors in China, mass-production of greeting cards was new. Chinese manufacturers had the capability for high-speed printing of catalogs and similar products, but they had little experience with greeting cards. This meant that it would be crucial for American Greetings to specify its processes precisely, explaining how to lay out, print, and finish all of the variety of cards it created. It would take time for Chinese manufacturers to update their equipment and processes to be able to handle high production volumes efficiently. The sheet arrangement was the most intricate problem for a new manufacturer to solve but not the only one. It was also a delicate matter for a card manufacturer to match the colors and designs of the card template. Finlay said, “If we were going to outsource, we wanted the vendor to develop the capability to print to our standards. We are accustomed to sending the manufacturer a file that contains the information the way we want it to appear, and it’s up to them to get it on the paper that way.” A parallel problem was that a foreign vendor who did not understand card production would also not know how to estimate costs. “Greeting cards are complex in terms of pricing,” said Robert Dedinsky, director of global sourcing and services. “Because other products are one-up operations, it’s easier to get a quote for a manufacturing job. But cards are based on sheeting efficiencies and on variations in the printing and finishing operations required, so the price will differ depending on the pool of cards the vendors get.” Manufacturing executives and others at the company
believed that it was important not to underestimate these communication challenges. As global sourcing head Kopechek put it, “It’s easy to sit here in Cleveland and say, ‘Buy me a party favor in China.’ But there is a lot of instruction that we have to give the suppliers so they know how to make the cards, what testing they have to perform, and what tolerances we’ll accept or not accept.” American Greetings was especially cautious because of the struggles that its former rival Gibson had encountered in outsourcing. CEO Weiss said,
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When Gibson Greetings decided to outsource their whole greeting card business, they had a hard time shipping their seasonal cards on time. Because the first Christmas they went through was difficult, the company lost confidence, and the retailers lost confidence. This was a good company with good people. So we were very sober about the idea of outsourcing. We didn’t want to fall into the same problems. Risks of Going to China There were further risks specific to transferring manufacturing to China. First, there were concerns about quality and safety. Goulder explained it this way: “China has the advantage of being free of the bureaucracy of the EPA and OSHA, but in the absence of those controls problems can occur. We need to ensure they conform to our standards” Although the printing of greeting cards did not require the same vigilance as the production of party plates or children’s toys, there were concerns about maintaining a high level of quality, cleanliness, and appropriate workforce management in the plants. There were also risks involved in the required currency transactions. The Chinese yuan was pegged to the U.S. dollar, but financial analysts wondered how long this currency pairing would last. Many said that the yuan was undervalued and speculated that the Chinese government would eventually separate it from the dollar. If this were to happen, American companies who had to pay foreign plants in yuan might be hit by cost increases. In doing business with China there were also potential political problems to consider. China was in a state of rapid transition from a command economy to a free market. But the Chinese government was attempting a delicate balance of allowing economic freedom while still maintaining authoritarian, oneparty
rule. This experiment was still in progress, and some analysts wondered whether it was sustainable long-term. In other countries, economic reforms went hand in hand with democratic political reforms. Would China experience another Tiananmen Square uprising, with students demanding free elections? If so, would there be a violent clash between demonstrators and government forces? Or would the country continue on a path of peaceful growth? Political problems could also take the form of public relations challenges at home. As Kopechek put it, “One of my biggest concerns was market reaction to everything made in China.” Although even American flags were now made in China, protectionist politicians still criticized companies that sent manufacturing overseas. A move to China also could cause an internal identity crisis. For decades the firm had prided itself on doing all the design, manufacturing, and distribution of the full variety of greeting cards. Some updating of this tradition might be necessary, but it was clear that a decision to outsource card production to China would change the nature of the organization in a fundamental way. American Greetings needed to be prepared for the full range of risks and benefits of outsourcing.
In order to assess the risks and benefits in more detail, American Greetings formed a Card Supply Strategy Team in March 2005. Members of the team were drawn from the manufacturing, global outsourcing, and finance divisions of the company. Goulder gave director of strategic operations Jason Shefrin responsibility for developing a detailed economic model to analyze alternative strategies. With an MBA from the University of Chicago, Shefrin was familiar with financial analysis methods and inventory models. The first option evaluated was the outsourcing of all seasonal cards to China. The team’s analysis showed some significant labor savings, but these benefits were offset to some degree by the costs of transportation. In addition, there was the massive disruption that would happen during the transition, as well as the currency and political risks. There was also the downside associated with longer lead times and 10 american greetings
the loss of sheeting efficiency for production that remained in the United States. The option of outsourcing seasonal cards appeared to be problematic.
Outsourcing by Card Category Goulder then requested that detailed cost comparisons of outsourcing versus domestic automation be performed for all cards, both everyday and seasonal. These analyses were to be cut for each of the four main product categories: 1) simple ink-on-paper cards; 2) moderately complex cards; 3) very complex cards without hand finishing; 4) very complex cards with hand finishing. These four types of cards required progressively greater labor to produce, the last having the highest labor content. In performing the cost-benefit analysis on the four categories, the base case was the current production in the U.S. before any improvements in process or technology. (See Exhibit 5 for annual card volumes as well as labor, material, and allocated overhead costs for each of the four categories in the base case.) Outsourcing for Category 4 Cards The Card Supply Strategy Team first evaluated the economics of outsourcing cards in category 4. These were the most complex items that involved finishing operations that could best be done by hand, such as adding ribbons and other decorative attachments. Because of the immense variety of finishings required, investing in more automated technology was not a practical option for category 4 cards. After discussions with companies in China, the team estimated that the Chinese bid price for a category 4 card would be 15 cents per card. The Chinese bid price reflected the fact that in the near term at least, productivity was expected to be much lower in Chinese plants compared to production in the U.S. This was true for category 4 production as well as for production of cards in categories 1 – 3. (See Exhibit 6 for wage rates in the United States and China. See Exhibit 7 for a breakdown of labor costs for printing and hand finishing for U.S. manufacturing of category 4 cards.) Transportation, Lead Time, and Inventory Considerations After coming up with a basic per-card cost for outsourcing category 4 cards, the team wanted to factor in the impact of transportation costs, lead time, and inventory costs for outsourcing any of the categories of cards. The costs of shipping from China were straightforward. (See Exhibit 8 for transportation costs from China to the U.S.) The impact of outsourcing on lead time and inventory was more difficult to calculate. Total card production consisted of seasonal cards and everyday cards, with total volume across the four categories divided evenly between the two types. Outsourcing to China would only affect the inventory levels for everyday cards. Order quantities for seasonal cards
were set well before the start of each seasonal campaign, and Shefrin believed the quantities would remain the same whether the cards were produced in China or in the U.S. Printing and hand finishing category 4 cards in China would add eight weeks to the average lead time. There was concern throughout the organization, particularly among manufacturing 11 american greetings
managers, about the impact on safety stock resulting from the much longer lead time required for product outsourced to China. For everyday cards American Greetings used an economic order quantity with uncertainty (Q,r) model to determine its order quantities and reorder points. For each SKU, it set the reorder point and therefore the safety stock by specifying a fill rate of 98 percent. In assessing the impact on safety stock, Shefrin treated the six-week domestic production lead time as constant, but he recognized that the estimated 14-week lead time from China was an average and that actual lead time might be longer because of bad weather, port problems, or other delays. He had no data on actual lead times from China and therefore had to make an estimate of variability based on judgment alone. He assumed that the standard deviation of the lead time from China would be about four weeks. In order to compensate for the variable lead time, Shefrin decided to add one standard deviation to the mean lead time. In other words, the lead time could be treated as a constant 18 weeks. Shefrin wanted to compare the cost of carrying safety stock for everyday items under the China option to the cost of carrying safety stock for the current system of producing category 4 cards in the U.S. He found that there were 1,571 everyday SKUs in category 4. With 50 percent of total volume comprising everyday cards, he determined that the annual average demand per card was about was 60,000, which was 5,000 per month or 5,000/4 = 1,250 per week. The company used an order quantity Q equivalent to six weeks of demand or 7,500 cards, and the firm’s inventory carrying percentage was 10 percent. From historical data Shefrin estimated that the standard deviation of weekly demand for this “average” SKU was 600. (See Exhibit 9 for a summary of inventory-related data). Assuming demands from week to week were independent, he had enough information to calculate the safety stock for the average SKU under the China option and the safety stock under the U.S. option. Automation versus
Outsourcing for the Other Three Categories Finally, for categories 1 to 3, Shefrin and the team examined the costs and benefits of investing in new technology compared to outsourcing to China. First the team developed a factory-of-the-future plan that called for an investment of about $30 million across all card categories. Compared to current manufacturing in the U.S., the analysis showed an internal rate of return of about 40 percent and a payback period of about two years. The main effect of these investments would be to reduce the number of labor hours required for domestic production. See Exhibit 10 for the manufacturing costs for categories 1-3 if the factory-of-the-future technology plan were implemented. Second, after discussions with Chinese factory owners, Shefrin estimated bid prices for cards in categories 1-3 at the factory in China. For categories 1, 2, and 3 respectively, these were 3.6 cents, 5.9 cents, and 9.8 cents per card.
As American Greetings pondered its options, top executives were committed to looking at the problem as objectively as possible. CEO Zev Weiss said, “We needed to have a neutral view, and we needed to have our head of manufacturing and our head of global sourcing lay out the best possible cases on both sides. Just because outsourcing made sense for toys did not mean that it would also make sense for greeting cards.” The more the company looked at the problem, the more complex it seemed to be. Executives wondered if the answer lay somewhere in between complete outsourcing and complete domestic production. “It’s not
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just a question of make versus buy,” said Finlay. “The question is what stays, what goes, and how do you improve what stays?” With its customers clamoring for a great share of the profits and marketing executives asking for new product funding, the decision seemed urgent. But the most important challenge was to analyze the problem correctly so that the company would neither leave potential savings on the table nor jeopardize service levels with an unreliable supply chain.
This case has been developed with the assistance of American Greetings for pedagogical purposes. The case is not intended to furnish primary data, serve as an endorsement of the organization in question, or illustrate either effective or ineffective management techniques or strategies. Copyright © 2008 Yale University. All rights reserved. Reprinted with permission of Yale University School of Management. To order copies of this material or to receive permission to reprint any or all of this document, please contact the Yale SOM Case Study Research Team, 135 Prospect Street, New Haven, CT 06520.
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Case Writer, Yale School of Management. Yale School of Management class of 2008. Professor of Operations Research, Yale School of Management.
Clare Ansberry, “Why the Billions of Christmas Cards? Love and Guilt—Also, There Is Business to Do, and Customers to Woo,” The Wall Street Journal, December 8, 1994, p. A1. Gregory Stricharchuk, “Card Makers’ Tough Tactics Belie Sweet Verse as Competition Rises,” The Wall Street Emily Nelson, “Dearest Mom, Greetings from My CD-ROM,” The Wall Street Journal, September 4, 1996, p. B1. J. Courtney Sullivan, “Don’t Care to Send the Very Best?” The New York Times, September 23, 2007.
Journal, December 24, 1987.
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John R. Dorfman and Wendy Bounds, “American Greetings Gets Warm ‘Hello’ from Investment Pros Who Cite Mass Market,” The Wall Street Journal, June 1, 1994, p. C2.
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Exhibit 1: The First Christmas Card
By John Callcott Horsley, London, 1843
Source: Public Domain
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Exhibit 2: American Greetings Financial Data, 2004
Consolidated Statement of Operations, Years Ending February 29, 2004, and February 28, 2003, and 2002
Thousands of dollars except share and per share amounts
2004 Net sales Costs and expenses: Material, labor and other production costs Selling, distribution and marketing Administrative and general Restructure charges Interest expense Other (income) expense – net 937,619 649,679 225,400 — 85,828 (60,334) 1,838,192 Income (loss) before income tax expense (benefit) Income tax expense (benefit) Net income (loss) Earnings (loss) per share Earnings (loss) per share – assuming dilution Average number of shares outstanding Average number of shares outstanding – assuming dilution 170,751 66,081 $ 104,670 $ 1.57 $ 1.40 66,509,332 80,088,377 881,771 620,885 240,129 — 79,095 (26,858) 1,795,022 200,838 79,732 $ 121,106 $ 1.85 $ 1.63 65,636,621 78,980,830 937,001 685,942 313,655 56,715 78,599 51,758 2,123,670 (196,324) (74,014) $ (122,310) $ (1.92) $ (1.92) 63,615,193 63,615,193 $ 2,008,943 2003 $ 1,995,860 2002 $ 1,927,346
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exhibit 2 continued
Consolidated Statement of Financial Position, February 29, 2004, and February 28, 2003
Thousands of dollars except share and per share amounts
2004 ASSETS CURRENT ASSETS Cash and cash equivalents Trade accounts
receivable, less allowances for sales returns of $85,638 ($86,318 in 2003) and for doubtful accounts of $18,183 ($35,595 in 2003) Inventories Deferred and refundable income taxes Prepaid expenses and other Total current assets GOODWILL OTHER ASSETS PROPERTY, PLANT AND EQUIPMENT – NET 250,554 246,171 158,689 236,104 1,176,968 228,955 708,957 369,133 $2,484,013 309,967 278,807 202,485 234,766 1,234,488 209,664 748,540 391,428 $2,584,120 $ 285,450 $ 208,463 2003
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exhibit 2 continued
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Debt due within one year Accounts payable Accrued liabilities Accrued compensation and benefits Income taxes Other current liabilities Total current liabilities LONG-TERM DEBT OTHER LIABILITIES DEFERRED INCOME TAXES SHAREHOLDERS’ EQUITY Common shares – par value $1 per share: Class A – 75,452,637 shares issued less 12,571,924 Treasury shares in 2004 and 73,886,138 shares issued less 12,586,963 Treasury shares in 2003 Class B – 6,064,472 shares issued less 1,476,248 Treasury shares in 2004 and 6,064,472 shares issued less 1,464,470 Treasury shares in 2003 Capital in excess of par value Treasury stock Accumulated other comprehensive income (loss) Retained earnings Total shareholders’ equity $— 129,362 129,785 70,896 14,513 78,407 422,963 665,874 96,325 31,311 $ 133,180 167,195 146,050 82,782 57,813 112,377 699,397 726,531 66,379 14,349
62,880 4,588 331,765 (438,612) 20,638 1,286,281 1,267,540 $2,484,013
61,299 4,600 310,872 (438,704) (42,494) 1,181,891 1,077,464 $2,584,120
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Exhibit 3: American Greetings Stock Performance, 1980-2005
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Exhibit 4: American Greetings Supply Chain Locations
Kalamazoo, MI Danville, KY Berea, KY
Bardstown, KY Greeneville, TN
Ripley, TN Forest City, NC Osceola, AR
Burgaw, NC McCrory, AR
Philadelphia, MS (Choctaw)
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Exhibit 5: Volumes and U.S. Manufacturing Costs by Card Category, 2005
1 – Simple Category Volume Direct Labor Indirect Labor Materials Allocated Overhead Total Cost 1,884,860,889 $21,850,266 $3,508,171 $21,663,947 $15,225,529 $62,247,913
2 – Moderately Complex
3 – Very Complex without Hand Finishing 183,069,742 $9,235,666 $1,155,198 $8,382,630 $653,993 $19,427,487
4 – Very Complex with Hand Finishing 188,603,877 $14,570,391 $1,190,120 $8,636,035 $11,108,135 $35,504,680
782,999,026 $19,674,321 $2,941,694 $17,298,914 $11,859,047 $51,773,976
1 – Simple
2 – Moderately Complex
3 – Very Complex without Hand Finishing
4 – Very Complex with Hand Finishing Cost per Card $0.077 $0.006 $0.046 $0.059 $0.188
Category Direct Labor Indirect Labor Materials Allocated Overhead Total
Cost per Card $0.012 $0.002 $0.011 $0.008 $0.033
Cost per Card $0.025 $0.004 $0.022 $0.015 $0.066
Cost per Card $0.050 $0.006 $0.046 $0.004 $0.106
Note: Cost per card equals cost (from previous table) divided by volume.
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Exhibit 6: Wage Rates in U.S. Plants and China
Country United States China Hourly Rate $17.00 $1.25
Exhibit 7: Direct Labor Costs for U.S. Production of Category 4 Cards (Very Complex with Hand Finishing) Indirect LaType of Labor Printing Hand Finishing Direct Labor Total Direct Labor Cost $7,179,912 $7,390,478 $14,570,391 bor Cost $442,543 $747,577 $1,190,120
Exhibit 8: Transportation Costs from China
Average Ocean Rate per Container Other Costs per Container* Total Cost per Container Cubic Feet per Container Cost per Cubic Foot $2,662.24 $537.95 $3,200.18 2,112 $1.515
Transportation Conversions: 4 cards = 1 unit 72 units = 1 “C” Box 1 “C” Box = 23″ x 8.5″ x 7.5″ = 0.85 cubic feet *Other China-related costs include customs, fuel, and trucking from U.S. ports to distribution centers. 21 american greetings
Exhibit 9: Inventory Data
Total Annual Volume: Total Annual SKUs: Annual Demand per SKU = Average Monthly Demand per SKU = Average Weekly Demand per SKU = Standard Deviation of Weekly Demand = Order Quantity for Average Card = Inventory Carrying Percentage = 3 billion cards 50,000 60,000 5,000 1,250 600 7,500 10 %
Exhibit 10: Labor Costs by Category for Factory of the Future
Factory of the Future Savings Category % Labor Reduction 1 – Simple 2 – Moderately Complex 3 – Very Complex without Hand Finish 14% Cost per Card $0.043 $0.005
27% Cost per Card
53% Cost per Card $0.012 $0.002
Direct Labor Indirect Labor Total (including materials and overhead)
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