Chabot Wallpaper Company Case
What are the major issues and problems facing Chabot? Chabot faces a variety of issues and problems in the
wallpaper industry. First off, as the number of wallpaper manufacturers decreases over each year, remaining
company’s market share is increasing, this in turn is creating more competition among these companies.
Depending on the market share, some of these companies may be exerting more power and control over
retailers than others are able to.
Wall coverings outside of wallpaper are also eating at the profits of wallpaper manufacturers as these
manufacturers must not only produce a good that is highly valued but is also offered at a reasonable cost.
When wallpaper pattern designs become obsolete, markdowns are necessary to help get rid of this old
inventory. These markdowns are a key factor in the recent trend of decreasing net income. Since Chabot has
made the decision to reimburse retailers for markdowns, Chabot’s total profit margin is reduced relative to
the markdown reimbursement costs.
Markdown costs have nearly tripled since 2006 and show no sign of slowing down because every four
months a new pattern is introduced which creates less demand for the older patterns. The markdowns can be
traced back to poor forecasting. Chabot’s forecasting is causing them to build up a very undesirable level of
obsolete inventory. This increasing number of obsolete inventory also has a negative effect on inventory
turnover.
Retailers are very concerned with this turnover rate because it carries a heavy cost on inventory holding.
Retailers are threatening to remove Chabot’s products from their shelves in order to make space for products
with higher turnover rates which will help minimize inventory costs for the retailers. Keeping up with
demand is another issue for Chabot. Chabot is unable to keep a steady supply of its successful patterns
which is unacceptable to loyal customers and ultimately hurting Chabot’s level of customer service.
Retailers of Chabot wallpaper are also unwilling to increase initial store set quantities which does not help
Chabot either, but I imagine they are refusing to in the fear of inventory costs and the possibility of the
wallpaper being unsuccessful and going obsolete. Chabot is in a difficult position because retailers are
pressuring Chabot to maintain lower in-store inventory levels while consumers are pressuring Chabot to
adequately provide a wide selection of wallpaper. Chabot is creating demand by providing a wide selection
of wallpaper that appeal to consumers, but may be providing oo large of a selection that production lead time
suffers. More wallpaper patterns are slowing down the manufacturing process because changing over from a
line pattern increases lead time by up to 2 hours. Chabot is constraining itself to produce patterns in one
batch run which builds up the amount of production time necessary to complete the rest of the wallpaper
patterns. Chabot is also wasting a lot of time and money on creating separate packaging, labels, and SKU’s
for each retailer. Chabot is also wasting possible storage space at DC’s. 2. What would you recommend to
solve these problems?
Chabot needs to increase the flexibility in its supply chain. Chabot is an innovative product manufacturer
trying to utilize an efficient supply chain. In order to be able to meet demand, the company needs to deploy
excess buffer capacity. Lead time is not up to par so Chabot needs to increase its inventory if it plans to meet
unpredictable demand. This will also help increase Chabot’s level of service by reducing stock outs. They
have excess inventory capacity at DC’s so they should have plenty of room to create an appropriate level of
excess inventory. Chabot will also need to focus on forecasting in order to reach higher inventory levels.
There should be a threshold for possible levels of demand. These thresholds should be constructed based on
a confidence level. In order to reduce the uncertainty of demand, Chabot will probably have to invest a little
capital into finding sources of new data that can be used as leading indicators. Chabot also needs to try and
cut its lead time down. They may be able to do this by reducing the amount of new patterns introduced each
year or at least space out new introductions further than 4 months. Chabot may want to consider setting up
some type of trial survey that would have potential customers rate new patterns.
This would help get a better picture of demand and may even save money in the end if they decide to cancel
certain patterns based on low ratings from trials. Chabot should also consider creating a universal package,
label, or SKU. This would speed up the final steps in the manufacturing process and reduce costs. 3. Are
there any postponement opportunities in the wallpaper supply chain? Chabot could really benefit from
postponement in its supply chain. Postponement would allow for real time data to become more readily
available instead of relying solely on forecast results.
Its manufacturing process is set up so that after the first two steps of production, substrate material
preparation and the application of paste to the substrate material, can be completed and then completion of
the process can be postponed. This would allow for forecasting to estimate demand more accurately as the
time gap between forecasting and production would be decreased. Instead of having an assembly line go
through all four steps, they could finish steps one and two and build up a buffer and wait for demand to
become more certain.
Not only does this reduce lead time but now with more accurate demand, obsolete inventory should be
reduced and the risk of markdowns should also be reduced. Stock outs may still possibly occur, but the
reaction time due to these stock outs will be greatly shortened. 4. Why are your solutions justified? My
solutions are justified because based on the given information, Chabot is not running its supply chain as
potentially well as it should be. The idea of postponement seems to have been neglected by Chabot’s
management. They have the extra space to build up a buffer, so why haven’t they already done this?
For a company with whose products life cycle is short, there should be much more flexibility in the supply
chain whereas this company is focusing too much on the efficiency of the manufacturing process. They
should be trying work with suppliers who are able to supply materials on a flexible basis rather than going
with cheaper suppliers to help reduce costs. They’re wasting money on reimbursing markdowns and obsolete
inventory when steps such as trial ratings and extra data could have been invested into to help reduce
certainty.