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Allied Office Products. 1.NADIA NILA SARI (M987Z250) 2.Nguyen Pham Nhut Thien 阮範日禪 ( M987Z240) 3. Li merlina 李美靈 ( M987Z246)

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Presentation on theme: "Allied Office Products. 1.NADIA NILA SARI (M987Z250) 2.Nguyen Pham Nhut Thien 阮範日禪 ( M987Z240) 3. Li merlina 李美靈 ( M987Z246)"— Presentation transcript:

1 Allied Office Products

2 1.NADIA NILA SARI (M987Z250) 2.Nguyen Pham Nhut Thien 阮範日禪 ( M987Z240) 3. Li merlina 李美靈 ( M987Z246)

3 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 inventory storage – 10 distribution centers

4 Background Current 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 TFC projected ROI 6% (1992), down from 20% (1988)

5 Background The Value Chain Concept – TFC TreesPulpPaper Forms Mfg. Forms Sales TFC Customer Purchasing Manager Customer Receiving Forms User Storage & Inventory Financing Requisitioning Stock Selection & Pick Pack Order Entry & Billing Desk Top Delivery Freight The TFC Chain The Industry Chain

6 Distribution Center Activity Analysis Identified and reviewed 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

7 Storage and Inventory Financing Activity Analysis Storage and inventory management of business form cartons 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

8 Requisitioning Activity Analysis Processing of orders according to customer request Current cost - $1.801M 310,000 requisitions per year Each requisition averages 2.5 lines

9 Stock Selection / Pick Pack Activity Analysis Process of selecting cartons and partial cartons to meet customer orders Current combined cost - $1.495M – Stock selection - $0.761M – Pick pack - $0.734M 90% of all orders are pick pack

10 Order Entry and Billing Activity Analysis Entry of customer order information into computer system Current cost - $0.612M Labor intensive with all manual entry Requisitions submitted line by line

11 Desk Top Delivery Activity Analysis Specialized delivery of orders to specific areas of customer’s location Current cost - $0.250M Premium service with no additional fees Average time to complete – 1.5 to 2 hours 8500 requests completed per year

12 Freight Activity Analysis Cost of shipping orders to customer 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

13 Questions & Answers

14 Tim and John broke down distribution into 6 primary value added activities – storage, requisition handling, basic warehouse stock selection, “pick-pack” activity, data entry and desktop delivery. They assigned costs to these below activities as follow for a sample of five of the distribution centers : Storage$ 1,550 Requisition Handling$ 1,801 Basic Warehouse Stock $ 761 “ Pick-Pack “ Activity$ 734 Data Entry$ 612 Desk top delivery$ 250 Total$ 5,708 Q1. Using the information in the text and in Exhibit 2, calculate “ ABC “ based service costs for the TFC business.

15 Tim then estimated the following for 1992 based upon historical information and current trend for the sample of five warehouses : On average, these 5 distribution centers scattered across the country, will have combined inventories of approximately 350,000 cartons ( most cartons were of fairly standard size ) They will process about 310,000 requisitions for 1992 Each requisition will average 2.5 lines About 90% of the lines will require “pick-pack” activity ( as opposed to shipping an entire carton) Cost of capital in 1992 was probably about 13%

16 ANALYZE THE COST USING ACTIVITY – BASED SYSTEM Activity – Based System ( ABS ) is method of allocating cost to product and service. Generally used as a tool fpr planning and control. TFC management called ABS based pricing system SBC ( Service Based Pricing ). The calculation using ABS system : Storage Charge = $ 1.550.000 = $ 4,43 / carton 350.000 Requisition Handling Charge = $ 1.801.000 = $ 5.81 / requisition 310.000 Basic warehouse = $ 761.000 = $ 0.91 / line stock selection 310.000 * 2.5

17 Data Entry = $ 612.000 = $0.79 / line 310.000*2.5 Charge for “pick-pack” = $ 734.000 = $ 1.05 310.000*2.5*0.9 Charge for Desk Top Delivery = $ 250.000 = $ 29.41 8500 - Freight out is charged based on actual rates - Cost of inventory financing is 13% of average inventory balance - Inactive inventory will be charged 1.5% / month after 9 month

18 Activity Based Cost Analysis ActivityCost Driver Customer A Customer B StorageNumber of Cartons 350700 Requisition HandlingNumber of Requisitions 364790 Basic Warehouse Stock Delivery Number of Requisition Lines 9102500 Pick Pack Number of Pick and Req. Lines 9102500 Data EntryNumber of Requisition Lines 9102500 Desk Top Delivery Number of Desktop Deliveries 026 Q2. Using your new costing system, calculate distribution services costs for “ customer A” & “ customer B”

19 Activity Based Cost Analysis ActivityCurrent 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$10,250$6,231.54$13,845.56 Freight$3,500$2,250$7,500 Cost of Capital$2,350$1,950$6,500 Total$16,100$10,432$27,846

20 Activity Based Cost Analysis ActivityCurrentCustomer ACustomer B Sales$79,320 Product Cost$50,000 Distribution/Services (32.2%)$16,100---- ABC----$10,432$27,846 Return on Sales ($)$13,220$18,888$1,474 Return on Sales (%)16.7%23.4%1.9%

21 Q3.What inference do you draw about the profitability of these two customers? Company A costs Allied less money to service, they are also a much smaller source of potential growth for the company. Company B on the other hand utilizes far more services and has the potential to earn Allied much greater revenue. With the information we have from the new ABC costing scheme we now know that Allied should be charging far more for the services rendered to company B, and less for the services used by company A. Current information shows that company B utilizes $11.746 more in service costs than we were previously charging them, while company A is utilizing ($5.668) less.

22 Q4 : should TFC implement the SBP (Service Based Pricing) pricing system? >>>Yes TFC should implement SBP pricing system because it’s not fair amount for the customer who does not put too many thing in their inventory and constantly request small shipment with the customer who stock a lot of inventory and no constant shipments get charge the same service fees.

23 Q5 : what managerial advice do you have for allied about Total Forms Control (TFC) business? How does exhibit 6 relate to this question?  The managerial advice I have for Allied about TFC ; they have to implement SBP (Service Based Pricing) system so it’ll help to raise their profit and also make them easier for the warehousing, charge for individual freight, prevent the clients changing their old forms because it will cost them on old inventory, and give charge for desktop delivery so it won’t cause client change to many times because the company will have loss for the delivery cost  Exhibit 6 relate because if they do the SBP then some customers might not let their inventory in the warehousing, changing their request because TFC need to do order-billing entry again  TFC will charges the clients based on the SBP in the TFC chain to prevent company loss cause by inventory and delivery cost

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