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Profitability Study for the Business Forms Division of Allied Office Products

Profitability Study for the Business Forms Division of Allied Office Products. Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge, Mike Taylor, Chuck Villarreal. Overview. Goals and Objectives Background Activity Based Cost (ABC) Analysis Recommendations

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Profitability Study for the Business Forms Division of Allied Office Products

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  1. Profitability Studyfor the Business Forms Divisionof Allied Office Products Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee,Jonathan Doddridge, Mike Taylor, Chuck Villarreal

  2. Overview • Goals and Objectives • Background • Activity Based Cost (ABC) Analysis • Recommendations • Potential Threats / Risk Mitigation • Summary • Q & A Allied Office Products

  3. Goals and Objectives • Review current state • Identify areas for improvement • Recommend costing model Allied Office Products

  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 inventory storage • 10 distribution centers Allied Office Products

  5. 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) Allied Office Products

  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 Allied Office Products

  7. Distribution CenterActivity 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 Allied Office Products

  8. Storage and Inventory FinancingActivity Analysis “Don’t you think we should do something to get that old inventory moving?” - Tim, Kansas City, MO Distribution Facility • 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 Allied Office Products

  9. 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 Allied Office Products

  10. Stock Selection / Pick Pack Activity Analysis “Almost everything is pick pack nowadays. No one seems to order a carton of 500 items anymore.” – Rick Fosmire, Warehouse Supervisor • 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 Allied Office Products

  11. Order Entry and Billing Activity Analysis “I’ve 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 Nutley, Data Entry Operator • Entry of customer order information into computer system • Current cost - $0.612M • Labor intensive with all manual entry • Requisitions submitted line by line Allied Office Products

  12. 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 Allied Office Products

  13. 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 Allied Office Products

  14. Breakdown of Expenses Activity Allocation Allied Office Products

  15. Activity Based Cost AnalysisCost Drivers Allied Office Products

  16. Activity Based Cost AnalysisAllocation Allied Office Products

  17. Net Sales for 1991 Allied Office Products

  18. Activity Based Cost Analysis Allied Office Products

  19. Activity Based Cost Analysis Allied Office Products

  20. Activity Based Cost Analysis Allied Office Products

  21. Recommendations 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 • Implement $30 desktop delivery charge • Institute minimum requisition fee structure • Discontinue forms outsourcing Allied Office Products

  22. Recommendations • 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 Allied Office Products

  23. Potential Threats Stakeholder Acceptance • Executive sponsorship • Sales team Customer Acceptance and Behavior • Customer perspective • Buying patterns Competition • Strategies • Response Allied Office Products

  24. Risk Mitigation Obtain Executive Sponsorship • Focus on continuous improvement • Demonstrate cross-subsidy elimination • Show projected financial metrics • Monitor projected vs. actual Alleviate Sales Team Concerns • Individual account analysis for account managers • Communicate value proposition to clients • Modify compensation plan Customer Acceptance & Behavior • Phased-in approach • Monitor purchase behavior Understand Competitor’s Position • Advantages / disadvantages • Pricing strategies • Competitor response Allied Office Products

  25. Summary▪ Review Proposal▪ Gain permission to move forward Allied Office Products

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