Hammond Cards, Inc: The Creative Acquisition

Topics: Process management, Cost accounting, Quality management Pages: 92 (10194 words) Published: November 5, 2013
Hammond Cards, Inc: The Creative Acquisition

AUTHORS
Paul Mulligan
Fidelity Faculty Term Chair
Assoc. Professor; Technology & Operations Management
Babson College
Olin Hall
Babson Park, MA 02457-0310
(781) 239-4595
mulligan@babson.edu

Alfred J. Nanni, Jr.
Professor of Management Accounting
Vander Wolk Chair in Management Accounting and Operational Performance Babson College
Luksic Hall
Babson Park, MA 02457-0310
781-239-5137
nanni@babson.edu

Shahid Ansari
Zwerling Term Chair Professor
Behavioral and Managerial Accounting
Luksic Hall
Babson Park, MA 02457-0310
Phone: (781) 239-4277
Email: sansari@babson.edu

Electronic copy of this paper is available at: http://ssrn.com/abstract=921475

Hammond Cards, Inc: The Creative Acquisition
ABSTRACT
This case is designed to show the interconnection between operations management, markets and strategic cost management. The central integration point in this case is the relationship between the selection of an operations/production strategy and its impact on profitability. The case deals with the proposed acquisition of Creative Designs by Hammond Cards. The two companies have different manufacturing operations and different customer profiles. Hammond produces simple and standard-sized greeting cards that are packaged in sets of 20 cards to a package. Hammond’s business model is low margin high volume. In contrast, Creative Designs specializes in so-called studio cards. These are highend greeting cards sold individually at retail. Creative’s production operations are optimized for high margin-moderate volume production.

Since the two production operations have essentially the same production steps, Hammond is hoping to exploit the synergy by sharing the peak demand across the two plants and to transfer best practices between plants. It also hopes to exploit the different distribution channels and customer segments that Creative will bring and thus smooth out seasonal demand fluctuations and allow efficient management of inventory.

The students are asked to take the role of consulting team hired by the CEO of Hammond to make certain that the expected benefits from the merger will be forthcoming. The case requires students to evaluate the operations of both Hammond and Creative. By analyzing cycle time, demand fluctuations, capacity bottlenecks, and quality management they are expected to form a judgment about the potential benefits from the merger. It turns out that though the plan to offload excess demand from Hammond to Creative is a good idea, it needs several modifications to be effectively implemented. To test the profit impact of the joint operations, the strategic cost analysis uses a new order from a customer as a test case to determine which of the two plants is best suited to produce the cards and which customer is the most profitable for this particular design. The answers are counter intuitive. Even though the Hammond plant is cheaper for production and the Creative customer less expensive to serve, the high prices commanded by Creative customers means selling to them regardless of the production site. The case has both separable discipline specific as well as integrative learning objectives that include understanding the need for a balance between operational efficiencies, cost efficiencies, and customer service costs in increasing profitability.

Electronic copy of this paper is available at: http://ssrn.com/abstract=921475

Hammond Cards, Inc: The Creative Acquisition
Introduction
Gregory Hammond founded Hammond Cards, Inc. 1951. The company, located in a suburb of Chicago, IL grew to become a major provider of greeting cards sold through traditional channels – card store chains, bookstores, pharmacy chains and supermarkets. By industry standards, Hammond was small, with annual revenues less than 1% of industry leader Hallmark. The company produced all of its cards in a single manufacturing plant that was located adjacent to the...
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