Allied Office Products

1. NADIA NILA SARI (M987Z250) 2. Nguyen Pham Nhut Thien ( M987Z240) 3. Li merlina ( M987Z246)

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

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)

Background
The Value Chain Concept TFC
The Industry Chain
Trees Pulp Paper Forms Mfg. Forms Sales Customer Customer Purchasing Receiving Manager

TFC

Forms User

The TFC Chain

Storage & Inventory Financing Stock Selection & Pick Pack Order Entry & Billing Desk Top Delivery

Requisitioning

Freight

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

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

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

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

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

Desk Top Delivery Activity Analysis

Specialized delivery of orders to specific areas of customers 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 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 & Answers

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

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 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
310.000

Requisition Handling Charge = $ 1.801.000 = $ 5.81 / requisition 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

310.000*2.5*0.9

= $ 1.05

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

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

Activity Based Cost Analysis

Activity
Storage Requisition Handling Basic Warehouse Stock Delivery Pick Pack Data Entry Desk Top Delivery

Cost Driver
Number of Cartons Number of Requisitions Number of Requisition Lines

Customer Customer B A
350 364 910 910 910 0 700 790 2500 2500 2500 26

Number of Pick and Req. Lines Number of Requisition Lines Number of Desktop Deliveries

Activity Based Cost Analysis

Activity
Storage

Current

Activity Based Activity Based Customer A Customer B

$1,550.50 $3,101.00

Requisition Handling
Basic Warehouse Stock Delivery Pick Pack Data Entry Desk Top Delivery Subtotal ABC $10,250

$2,114.84
$891.80 $955.50 $718.90 $0.00 $6,231.54

$4,589.90
$790.00 $2,625.00 $1,975.00 $764.66 $13,845.56

Freight
Cost of Capital Total

$3,500
$2,350 $16,100

$2,250
$1,950 $10,432

$7,500
$6,500 $27,846

Activity Based Cost Analysis

Activity
Sales Product Cost

Current
$79,320 $50,000

Customer A
$79,320 $50,000

Customer B
$79,320 $50,000

Distribution/Services (32.2%) ABC

Return on Sales ($) Return on Sales (%)

$16,100 ---$13,220 16.7%

---$10,432
$18,888 23.4%

---$27,846
$1,474 1.9%

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.

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

>>>Yes TFC should implement SBP pricing system because its 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.