Profitability Study for the Business Forms Division of Allied Office Products

1
Profitability Studyfor the Business Forms
Divisionof Allied Office Products

• Brant Allegretti, Kirk Blackwelder, Rick Calero,
  Mary Coffee,Jonathan Doddridge, Mike Taylor,
  Carlos Villarreal

2
Overview

• Goals and Objectives
• Background
• Options
• Situational Analysis
• Activities Based Cost (ABC) Analysis
• Potential Threats / Risk Mitigation
• Recommendations
• Summary

3
Goals and Objectives

• Review current state
• Identify areas for improvement
• Recommend costing model

4
Background

• Total annual Allied sales of 900M
• Annual TFC sales of 60M
• Forms manufacturing
• Business forms
• Specialty paper
• Business forms inventory management services
  Total Forms Control (TFC)
• Warehousing
• Inventory financing
• Forms usage reporting
• Inventory control
• Distribution (pick pack and desk top delivery)
• TFC projected ROI 6 (1992), down from 20 (1988)

5
Background

• TFC inventory storage
• 10 distribution centers
• Traditional pricing model
• Clients charged flat fee on product cost, plus
  32.2
• Covers warehousing, distribution, cost of capital
  for inventory, and freight expense
• Sales margin
• Sales force charges average of 20 of product and
  services
• Individual accounts can vary from standard formula

6
BackgroundThe Value Chain Concept TFC
The Industry Chain
Trees
Pulp
Paper
FormsMfg.
FormsSales
TFC
CustomerPurchasingManager
CustomerReceiving
FormsUser
The TFC Chain
Storage InventoryFinancing
Requisitioning
StockSelection Pick Pack
OrderEntry Billing
Desk TopDelivery
Freight
7
Distribution CenterActivity Analysis

• Review six primary activities across five
  distribution centers
• Interviews with key staff
• Site Manager
• Warehouse Supervisor
• Data Entry Operator
• Conducted activity cost analysis
• Identify cost drivers
• Compare traditional and ABC model

8
Storage and Inventory Financing
Dont you think we should do something to get
that old inventory moving? - Tim, Kansas City,
MO Distribution Facility

• Kirk to insert brief description
• Current cost - 1.55M
• Inventory obsolescence
• Excess inventory
• Current inventory 350,000 cartons
• Cost of capital 13
• Customer does not pay for inventory until
  requisition submission

9
Requisitioning
Ive gotten to the point where I know the
customers so well, that all the order information
is easy. The only thing that really matters I
how many lines I have to enter. - Hazel Nulty,
Data Entry Operator

• Kirk to insert brief description
• Current cost - 1.801M
• 310,000 requisitions per year
• Each requisition averages 2.5 lines

10
Stock Selection / Pick Pac
Almost everything is pick pack nowadays. No one
seems to order a carton of 500 items anymore.
Rick Fosmire, Warehouse Supervisor

• Kirk to insert brief description
• Current combined cost - 1.495M
• Stock selection - 0.761M
• Pick pack - 0.734M
• 90 of all orders are pick pack

11
Order Entry and Billing

• Kirk to insert brief description
• Current cost - 0.612M
• Labor intensive with all manual entry
• Requisitions submitted line by line

12
Desk Top Delivery

• Kirk to insert brief description
• Current cost - 0.250M
• Premium service with no additional fees
• Average time to complete 1.5 to 2 hours
• 8500 requests completed per year

13
Freight

• Kirk to insert brief description
• Current cost for 1990 - 1.648M
• Charges based on a percentage of product cost,
  not actual utilization
• New computer system coming online to track
  individual freight charges

14
Breakdown of Expenses Activity Allocation
Cost Pools         (000's)
Storage Expense 1,550 27.2
Requisition Handling Expense 1,801 31.6
Warehouse Activity 1,745  
Basic Warehouse Stock Selections (44) Basic Warehouse Stock Selections (44) Basic Warehouse Stock Selections (44) Basic Warehouse Stock Selections (44) Basic Warehouse Stock Selections (44) 761 13.3
"Pick-Pack" Activity (42) 734 12.9
Desk Top Delivery (14) 250 4.4
Data Processing Expense         612 10.7
Total 5,708 100.0
15
Activity Based Cost AnalysisCost Drivers
Activity Cost Driver Units
Storage Number of Cartons 350,000
Requisition Handling Number of Requisitions 310,000
Basic Warehouse Stock Delivery Number of Requisition Lines 775,000
Pick Pack Number of Pick and Requisition Lines 697,500
Data Entry Number of Requisition Lines 775,000
Desk Top Delivery Number of Desktop Deliveries 8500

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Activity Based Cost AnalysisAllocation
Activity Total Cost Total Cost Driver Units Overhead Allocation
Storage 1,550,000 350,000 4.43
Requisition Handling 1,801,000 310,000 5.81
Basic Warehouse Stock Delivery 761,000 775,000 0.98
Pick Pack 734,000 697,500 1.05
Data Entry 612,000 775,000 0.79
Desk Top Delivery 250,000 8500 29.41
Total 5,708,000
17
Net Sales for 1991
18
Activity Based Cost AnalysisBrant to verify
number format
Activity Cost Driver Customer A Customer B
Storage Number of Cartons 350 700
Requisition Handling Number of Requisitions 364 790
Basic Warehouse Stock Delivery Number of Requisition Lines 910 2500
Pick Pack Number of Pick and Req. Lines 910 2500
Data Entry Number of Requisition Lines 910 2500
Desk Top Delivery Number of Desktop Deliveries 0 26
19
Activity Based Cost AnalysisUnderstanding
Customer Profitability
Activity Current Activity Based Customer A Activity Based Customer B
Storage 1,550.50 3,101.00
Requisition Handling 2,114.84 4,589.90
Basic Warehouse Stock Delivery 891.80 790.00
Pick Pack 955.50 2,625.00
Data Entry 718.90 1,975.00
Desk Top Delivery 0.00 764.66
Subtotal ABC
Freight 2250 7500
Cost of Capital 1950 6500
Total 10,432 27,846
20
RecommendationsActivity Based Management (ABM)

• Jonathan to insert points (condense from
  following slides)

21
RecommendationsActivity Based Management (ABM)

• Management Philosophy
• Improve profitability through aggressive
  management
• Create maintain a competitive advantage by
  adapting to customer buying patterns
• Reduce non-value added activities
• To immediately reverse trend in declining ROI
• Introduce Service Based Pricing
• Charge 1.5 per month for aged warehouse
  inventory (9 months)
• Pass through actual freight charges
• Institute minimum requisition fee structure

22
RecommendationsSupply Chain Management (SCM)

• Company Optimization
• Centralize data entry into single location
• Build a staffing model designed to reduce
  headcount, possibly by consolidating warehouses
• Modify compensation plan to help encourage sales
  behavior focused on growing customer revenue and
  profitability
• Implement Customer Profiling Program
• Initiate Just In Time Inventory (JIT) System with
  Allied (for 179 customers that represent 72 of
  sales)
• Incorporate purchase history into requisition
  process and establish autofill order process
• Introduce customer needs assessment and
  cross-sell initiative
• Reduce pick-pack orders work with Allied to
  reconfigure cartons to meet top 40 accounts
  buying patterns

23
Potential Threats

• Stakeholder acceptance
• Will the sale team perceive plan will decrease
  commissions?
• Customer Acceptance
• Will customers view this positively or
  negatively?
• Competition
• Market timing
• Response to our new strategy

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Risk Mitigation

• Get our sales team on board
• Prepare account analysis for each account manager
• Train account managers thoroughly on client
  benefits
• Make sure our customers understand our value
  proposition
• Insert verbiage
• Understand our competitors position
• Competitive advantages / disadvantages
• Understand competitors past, present, and future
  pricing strategies
• Provide basis to develop strategies to achieve
  competitive advantage in the future
• Predicted competitor response to new pricing
  strategy

25
Summary
Allied Office Products Philosophy We know what
you need the right product at the right
placeat the right time.
Preferred Customer Price Strategy Competitive
Market Analysis Distribution Optimization
Plan Allied Business Forms Division Success!