Cheesy Wheezy

Starting as a small retail store in New Glarus, Wisconsin, the Cheezy Wheezy firm had slowly grown into a chain of nine retail shops located in southern Wisconsin and northern Illinois. In recent years, nearly all its competitors had begun issuing catalogs, widely distributed in late October, advertising gift packages of cheeses, jams, jellies, and other fancy food items. Henry Wilson, son of the firm’s founder, had convinced his father that Cheezy Wheezy should also issue a catalog. It was then March, and the last snows were melting.

Henry Wilson had called his third staff meeting in as many weeks to discuss the catalog project. Present were Henry (whose title was vice president); Susan Moore, the sales manager; Jeff Bell, the inventory manager; and Robert Walker, the traffic manager. Also present was Robert Caldwell, from a Milwaukee-based ad agency that was handling many aspects of the catalog project. Moore and Caldwell had just finished describing the catalog’s tentative design and the allocation of catalog pages to various product lines.

Right now we’re thinking of a Santa Claus–shaped figure molded out of cheese. “Enough of that,” said Wilson, “this group isn’t here to discuss Santa dolls. We’re here to design the order form.

We may also have to talk a little about selling terms. Susan? ” Responding to her cue, Moore said, “Our biggest problem is how to handle the transportation and shipping costs. We’ve studied all our competitors’ catalogs. Some absorb the costs into the product’s price, some charge by weight of the order, some charge by money value of order, and some ship COD. ” “How important are shipping costs, Susan? ” asked Bell. “Plenty,” was her response. They run $2 to $3 for a 1- or 2-pound package. If you take a pound of cheese that we sell in our retail stores for $2, here are our costs if it goes by catalog: cost of goods, $1; order management, 50 cents; overhead, including inventory carrying costs, 50 cents; packaging for shipment, 50 cents; and transportation costs to any point in the United States ranging between $1. 75 and $3. 20. If, however, we’re dealing with bigger shipments, the relative costs vary. ” “I’m not following you,” said Wilson. “It’s like this,” responded Moore.

The wholesale cost of cheese to us is the same per pound, no matter how much is sold. Order-processing costs are approximately the same for each order we’ll be receiving by mail. Overhead and inventory carrying costs are always present but may be allocated in a variety of ways. Packaging costs are also about the same per order. They go up only a few cents as we move to larger cartons. Transportation costs are hard to describe because of their tapers. Right now our whole catalog project is bogged down with the problem of transportation cost tapers. ”

“Tapers? ” said Wilson, turning to Walker. You’ve never told me about tapers before. It sounds like some kind of animal. ” “That’s tapir, t-a-p-i-r,” said Walker. “We’re talking about tapers, t-a-p-e-r-s. ” “Oh,” said Wilson. “What are they? ” “When one ships small packages of cheese,” said Walker, “rates are based on two factors, the weight being shipped and the distance. As weight or distance increases or both—the rates go up but not as quickly. This is called the tapering principle. To ship 2 pounds of cheese from New Glarus to St. Louis costs $2. 40; 3 pounds cost $3. 30; 5 pounds cost $4. 60; and so on.

One hundred pounds—no, 50 pounds is a better example because some of the parcel services we’ll be using won’t take 100 pounds—50 pounds would cost $21. There’s also a distance taper. The 2-pound shipment that costs $2. 40 to St. Louis is $3. 40 to Denver and $4. 15 to Los Angeles. ” “Can’t we use the average transportation costs? ” asked Bell. “That’s what we do with inventory carrying costs. ” “Won’t work,” said Caldwell. “You’ll be overpriced for small, short-distance shipments and will lose sales. For heavy long shipments, you’ll be underpriced and will make so many sales that you might soon go belly up. Wilson shuddered and inquired, “Does that mean we charge by weight and by distance? ” Moore answered, “It’s not that easy. In the cheese business, people buy by the pound, but shipping weights—which include packaging—are actually more.

A customer who orders 3 pounds of cheese is in fact receiving 3 pounds of cheese plus 6 ounces of packaging materials. I wish we could sell a pound of cheese that consisted of 14 ounces of cheese and 2 ounces of packing material, but that would be illegal at worst, and of questionable ethics, at best. ” “We have the same problems with distance,” added Walker. We’re trying to sell in 50 states, but who knows how far they are from New Glarus? We could have tables and maps in the catalog, but they take up valuable selling space. Also, if it looks too complex, we may just turn off some potential customers before they complete their orders. ” “Some of our clients have another problem,” added Caldwell, “and that is split orders. The customer will want 10 pounds of cheese, but it will be five 2-pound packages sent to five different locations. That has an impact on both packaging and transportation costs. ” “So, what do we do? ” asked Wilson.