Over the recent months, the price of spice commodities has begun to rise. The majority of these spices are grown near the equator. The region around the equator has experienced some devastating weather events that have affected the supply and also driven up the prices of spices. Additionally, countries which produce spices, such as Egypt, have experienced long periods of political unrest, which has also affected the cost of the commodities. Further still, the economic downturn has affected the demand for spices, especially among restaurants. McCormick & Co., one of the world’s largest spice dealers has seen the effects of these factors. In an interview with the Wall Street Journal, McCormick’s CEO Alan Wilson states; “the prices of most of our commodities have really surged in the last year.” All the while, demand for spices has declined as people have begun making simple and inexpensive meals in an effort to save money.
In the face of these natural, political, and economic factors, McCormick & Co. has had to make important capacity and inventory decisions in order to try to keep their profit margins. In response to political unrest in Egypt, the company decided to build up their inventory of herbs from the country in order to ensure they had those commodities in the future. As we know from our activity “The Gaming Company” from last week, it costs money to hold high levels of inventory, especially if a large quantity is purchased up front. The company also made sure to find additional suppliers of the herbs they normally purchased from Egypt to ensure they wouldn’t face shortages.
As costs of certain inputs rise, McCormick has had to make decisions about their production levels in order to once again achieve optimal operating levels. They forecasted that the demand they had been receiving from restaurants would decrease, and subsequently changed their strategies to regular consumers. In order to try to ride out the economic downturn, the company has turned their focus to marketing simple and inexpensive, yet delicious, meals to families by recommending popular spices and recipes cooked in the home.
Lastly, in an effort to save money and reach more optimal operating levels, McCormick & Co. has made a four year goal of saving $150 million in operating costs. They project that they will meet their goal a year ahead of schedule because they have been so successful at creating more capacity at their plants and have been able to avoid building new plants.
I have outlined only a few scenarios where McCormick & Co. has had to make important capacity and inventory decisions. It is imperative for companies to maintain a close eye on the environment outside their business so they are prepared for whatever may come up. Do you think the company is on the right track with their strategies as they face different external factors that impact their business?
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