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Allied Office Products

Allied Office Products. NADIA NILA SARI (M987Z250) Nguyen Pham Nhut Thien 阮範日禪 ( M987Z240) 3. Li merlina 李美靈 ( M987Z246). Background. Total annual Allied sales of $900M Annual TFC sales of $60M Forms manufacturing Business forms Specialty paper

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Allied Office Products

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  1. Allied Office Products

  2. NADIA NILA SARI (M987Z250) • 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. 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

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

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

  19. Activity Based Cost Analysis

  20. Activity Based Cost Analysis

  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. Thank you for your attention

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