American Greetings

American the 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 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 Hobble, 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 Shoulder put It, “The average card has 25 to 40 nets of variable cost In It, we wholesale It for a buck or so, and the retailer sells It for SO_O_ What a wonderful Industry! ” However, by the late sass, 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 Shoulder’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. H Greeting Card History The greeting card dates back to the 15 century, when valentines and new year’s greetings began to be the 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 sass 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 sass.

When cheap imports flooded the market in the sass, 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 Separatist, who sold penny custards 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 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 Aspiration’s son, Irving Stone. As the company grew, it adapted its products to changing societal moods. During the sass it began designing “studio cards,” tall, narrow cards that featured cartoon-style artwork and irreverent humor. During the sass 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 Midyears Ghanaian, the Zoroastrian spring festival.

During the sass the company branched out into customized electronic cards, building the industry 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 Hobbies, 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 American Greetings financial data and Exhibit 3 for American Greetings stock performance. In 2005 American Greetings employed 20,000 2 American greetings the 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 nonwhite 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. 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. SST 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 sass and ass, 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, Jar.

‘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 or 80 to 90 percent of sales. 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 Americanization. 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 comrades. 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.

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 sass and ass the company had appeared to be in a good owned and franchised stores, while American Greetings was selling primarily wrought 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 Wall-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 Wall-Mart and Target expanded, they began to 3 American greetings demand more favorable terms from the card-makers.

Representatives of the large tortes 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 Shoulder.

“And because the incremental gross profit is significant, there is intense pressure to win that contract. Starting in the early sass, 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, he 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 Cave 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. 0, if the competition was selling cards at fifty cents. ” A Fundamental Shift in the Business While the pressures were increasing during the sass and ass, 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 Shoulder 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 Hallmarks 60 percent. The days of high margins were over.

As Weiss recalled, the changes the 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 sass and said, We have to make changes, or we’re in trouble. ” Examining Manufacturing 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 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 sass, 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 many 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 Skyjack 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, streetwise finishing, crabwise finishing, and packaging and distribution. At 4 American greetings 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, ND 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 Skyjack put it, “we’re not making the same gallon of milk all the time. ” Indeed, the company manufactured about 50,000 unique greeting card SKU per year.

There were several reasons for this multiplicity of SKU. 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 ere carried over from one season to the next, a significant percentage of the product line was “refreshed” each year. The number of SKU was increased further, because several major retailers had their own brand of cards with a set of unique designs.

For example, Wall-Mart’s brand was named “Just for You,” and Target’s brand was named “Carlton. ” American Greetings attempted to minimize the work involved cards had to be different enough to satisfy the demands of the retailers. As Shoulder 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 fertilization. ” Company executives were challenged by the intricacies of planning 50,000 SKU each year, but they realized that this was the source of the company’s profitability. “It’s a love-hate relationship,” said Shoulder. It’s a laborious process to create the 2,000 SKU 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 tepee 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 finishing 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 hey are aware of the consequences of what they design,” said Finial. “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 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 squired, 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 ACH 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 SKU 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 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.

Streetwise Finishing After the cards were printed, they were sent to a separate plant for two types of finishing.

The first type, “streetwise 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 cartoons. It might be an embossing, which involved stamping the paper to make certain parts stand out. Finally, at the last step of streetwise finishing, every card was cut out of the sheet. Although the same machine might be used for hot-stamping and embossing, or each type of streetwise finishing setup times and machine passes were increased.

Streetwise 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 SKU 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.

Crabwise Finishing The second type of finishing, “crabwise 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 crabwise 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. American greetings Packaging and Distribution Finally, after the cards were finished, they were packaged and sent to the distribution centers in Solaces, 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 sass it was clear that American Greetings would have to improve the 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 ending 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 sass, 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 Shoulder 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 Kopeck, 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 Kopeck.

“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 o 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 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 awards 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 Willingly 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 title 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.

Finial 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 Density, 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 Kopeck 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