5 Callisto Retail (Callisto) is an on-line reseller of local craft products related to the historic culture of the country of
Callistan. The business started ten years ago as a hobby of two brothers, Jeff and George. The brothers produced
humorous, short video clips about Callistan which were posted on their website and became highly popular. They
decided to use the website to try to sell Callistan merchandise and good initial sales made them believe that they had
a viable business idea.
Callisto has gone from strength to strength and now boasts sales of $120m per annum, selling anything related to
Callistan. Callisto is still very much the brothers’ family business. They have gathered around themselves a number
of strategic partners into what Jeff describes as a virtual company. Callisto has the core functions of video clip
production, finance and supplier relationship management. The rest of the functions of the organisation (warehousing,
delivery and website development) are outsourced to strategic partners.
The brothers work from their family home in the rural North of Callistan while other Callisto employees work from
their homes in the surrounding villages and towns. These employees are involved in video editing, system
maintenance, handling customer complaints and communication with suppliers and outsourcers regarding inventory.
The employees log in to Callisto’s systems via the national internet infrastructure. The outsourced functions are
handled by multinational companies of good reputation who are based around the world. The brothers have always
been fascinated by information technology and so they depend on email and electronic data interchange to
communicate with their product suppliers and outsourcing partners.
Recently, there have been emails from regular customers of the Callisto website complaining about slow or
non-delivery of orders that they have placed. George has commented that this represents a major threat to Callisto as
the company operates on small profit margins, relying on volume to drive the business. He believes that sales growth
will drive the profitability of the business due to its cost structure.
Jeff handles the management of outsourcing and has been reviewing the contracts that exist between Callisto and its
strategic partner for warehousing and delivery, RLR Logistics. The current contract for warehousing and delivery is
due for renewal in two months and currently, has the following service level agreements (SLAs):
1. RLR agree to receive and hold inventory from Callisto’s product suppliers.
2. RLR agree to hold 14 days inventory of Callisto’s products.
3. RLR agree to despatch from their warehouse any order passed from Callisto within three working days, inventory
allowing.
4. RLR agree to deliver to customers anywhere in Callistan within two days of despatch.
Breaches in these SLAs incur financial penalties on a sliding scale depending on the number and severity of the
problems. Each party to the contract collects their own data on performance and this has led to disagreements in the
past over whether service levels have been achieved although no penalties have been triggered to date. The most
common disagreement arises over inventory levels held by RLR with RLR claiming that it cannot be expected to deliver
products that are late in arriving to inventory due to the product suppliers’ production and delivery issues.
Required:
Assess the difficulties of performance measurement and performance management in complex business
structures such as Callisto, especially in respect of the performance of their employees and strategic partners.
(17 marks)
