Allied Office ProductsAllied Office Products

1. NADIA NILA SARI (M987Z250)2. Nguyen Pham Nhut Thien 阮範日禪 ( M987Z240)

3. Li merlina李美靈 ( M987Z246)

BackgroundBackground

• 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

BackgroundBackground

• 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)

BackgroundBackgroundThe Value Chain Concept – TFCThe Value Chain Concept – TFC

Trees Pulp PaperFormsMfg.

FormsSales TFC

CustomerPurchasingManager

CustomerReceiving

FormsUser

Storage &InventoryFinancing

RequisitioningStock

Selection &Pick Pack

OrderEntry &Billing

Desk TopDelivery

Freight

The TFC Chain

The Industry Chain

Distribution Center Activity AnalysisDistribution 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

Storage and Inventory FinancingStorage and Inventory FinancingActivity AnalysisActivity 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

Requisitioning Activity AnalysisRequisitioning Activity Analysis

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

Stock Selection / Pick Pack Activity Stock Selection / Pick Pack Activity AnalysisAnalysis

• 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

Order Entry and Billing Activity Order Entry and Billing Activity AnalysisAnalysis

• Entry of customer order information into computer system

• Current cost - $0.612M• Labor intensive with all manual entry• Requisitions submitted line by line

Desk Top Delivery Activity Desk Top Delivery Activity AnalysisAnalysis

• 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

Freight Activity AnalysisFreight 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

Questions & AnswersQuestions & Answers

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 $ 1,550Requisition Handling $ 1,801Basic Warehouse Stock $ 761“ Pick-Pack “ Activity $ 734Data Entry $ 612Desk top delivery $ 250Total $ 5,708

Q1. Using the information in the text and in Exhibit 2, calculate “ ABC “ based service costs for the TFC business.

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%

ANALYZE THE COST USING ACTIVITY – BASED SYSTEMActivity – 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

• 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

Activity Based Cost AnalysisActivity Based Cost Analysis

Activity Cost Driver Customer A Customer B

Storage Number of Cartons 350 700

Requisition Handling Number of Requisitions 364 790Basic 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

Q2. Using your new costing system, calculate distribution services costs for “ customer A” & “ customer B”

Activity Based Cost AnalysisActivity Based Cost Analysis

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 $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

Activity Based Cost AnalysisActivity Based Cost Analysis

Activity Current Customer A Customer B

Sales $79,320 $79,320 $79,320

Product Cost $50,000 $50,000 $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%

Q3.What inference do you draw about the profitability of Q3.What inference do you draw about the profitability of these two customers?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.

Q4 : should TFC implement the SBP (Service Based Q4 : should TFC implement the SBP (Service Based Pricing) pricing system?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.