Case 5-35 Midwest Office Products (MOP)

 

Case 5-35 Midwest Office Products (MOP) PRESENTED BY: SUNNY SHAKYA 12MBA032

 

Company Profile ▶

Regional distributor of office supplies

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22% markups to cover expenses

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Introduced desktop delivery services charging 5% markup, to improve margins and create loyal customers

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Introduce EDI for automatic order entry and new Internet site Despite an increase in sales the company suffered its first major loss in 2003.

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What actions to be taken to regain profitability?

 

Activity Sequence of MOP

Order Processing of customers: 1. Manual Order  2. Electronic Order 

Unloading truckload of shipments from manufacturer 

Delivering the products: 1. Commercial Freight Storage in Warehouse

2. Desktop delivery

 

Characters in the Case ▶

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John Malone, General Manager  Melissa Dunhill, Controller 

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Tim Cunningham, Director of Operations

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Wilbur Smith, Distribution Center Manager 

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Hazel Nutley, Data Entry Operator 

 

Given Information ▶

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80,000 cartons processed, 75,000 shipped by commercial freight and 5,000 shipped under un der desktop delivery. 2000 desktop deliveries made. Compensation of truck drivers $250,000 per year. Each driver worked 1500 hours. 16 entry operators, $840,000 order entry cost. Total productive 1500 hours of work per year per operator. 0.15 hours required to enter basic information inf ormation on manual order, 0.075 hours per order or der for each line item on manual process. Electronic process requires 0.1 hours per order o rder for verification. MOP taken out working capital loan to finance its growth. Interest rate 1% per month on the average loan balance.

 

Cost of processing cartons through facility Cost of processing cartons through facility Cartons Shipped by commercial Freight Cartons Shipped by Desktop delivery options Total number of cartons Personnel Expense (Warehouse and Truck) (-)Truck driver Expense Warehouse Personnel Expense Warehouse Expense (excluding personnel) Warehouse Personnel Expense/ Carton Warehouse Expense/ Carton

75000 5000 80000 $ 2,570,000.00 $ 25 250,000.00 $ 2,320,000.00 $ 2,000,000.00 $ 29.00 $ 25.00

Cost of Processing per Carton through facility

$

54.00

 

Cost of entering electronic and manual customer orders Cost of entering electronic and manual customer orders Number of order entry operators 16 Order Entry Expenes $ 840,000.00 Operator hours/ Year Productive operator hours/ Year Total productive hours/ Year Cost of order entry/ hour  Average time of electronic order entry(in Hours)

$

Average time of manual order entry (in Hours) Basic Information Entry Line Item Entry

1750 1500 24000 35.00 0.1 0.15 0.075

Cost of entering electronic order entry per order 

$

3.50

Cost of entering manual order entry Basic Information Entry per order 

$

5.25

Line Item Entry per item

$

2.63

 

Cost of Shipping Cartons on Commercial Freight and Desktop delivery Cost of Shipping Cartons on Commercial Freight Cartons Shipped by commercial Freight Freight Cost $ Cost of Ship Shipping ping car cartons tons on Comm Commerc ercial ial Frei Freight/ ght/ car carton ton $

Cost per hour for desktop delivery Cartons Shipped by Desktop delivery options No. of Desktop Deliveries Driver hours per year Total number of drivers Total Driver hours Truck driver Expense Delivery Truck Expenses Total desktop delivery Expenses

75000

450,000.00 6.00

5000

$ $ $

2000.00 1500.00 4.00 6000.00 250,000.00 200,000.00 450,000.00

Cost per hour for desktop delivery

$

75.00

 

ABC Customer Profitability Analysis Particulars Sales Revenue

1

2

3

$ 610.00

$ 634.00

$ 6,100.00

$ 6,340.00

$ 6,100.00

Ac sita iorn G roqsus iM giC n ost

$ $5 10 10 0..0 00 0

$ 0..0 00 0 $ 5 10 34

$ $5 1,,0 10 00 0..0 00 0

$ 0 $5 1,,0 30 40 0..0 00

$1 5,,1 00 00 0..0 00 0 $

MSDA Expenses Processing Cost Order Entry Cost Commercial delivery costs Desktop delivery costs Interest Cost Tota Totall MSDA MSDA acti activi viy y expe expens nses es

$ 54.00 $ 3.50 $ 6.00 $ $ 6.10 $ 69.6 69.60 0

$ 54.00 $ 7.88 $ $ 300.00 $ 25.36 $ 387. 387.24 24

$ $ $ $ $ $

$ 540.00 $ 31.55 $ $ 300.00 $ 253.60 $ 1,12 1,125. 5.15 15

$ $ $ $ $ $

Customer Profitability % Customer Profitability

$ 40.40 $(253.24) $ 6.62% -39.94%

540.00 3.50 60.00 61 61.00 664.5 664.50 0

4

435.50 $ 7.14%

5

214.85 $ 3.39%

540.00 31.55 60.00 244.00 875.5 875.55 5 224.45 3.68%

 

Variation of Profitability ▶

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Order 3 is the most profitable because it incurred less MSDA expenses by adopting electronic order system, commercial freight shipment and timely payment of receivables. Order 1 and 2 are of similar nature but order 1 was profitable whereas order 2 was in loss  because in order orde r 1 the MSDA expenses and profit p rofit was covered by b y 22% markup margin.

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There is a variation of profit between order 3 and 5 because of the impact of hidden

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interest expenses. Order 4 shows that desktop delivery is only profitable when customers orders in huge number of cartons.

 

Actions to be taken by John Malone ▶

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Timely collection of account receivables, increase account receivable turnover ratio by provision of discounts. Revise the surcharge of desktop delivery services for customers, limit orders size to access desktop delivery and charge according to distance. Promote electronic data interchange and use of internet among its customers, to reduce manual order expense. Improve the efficiency efficiency of warehouse operations and practice JIT inventory strategy.

 

Question D Particulars

No

Time

Manual orders Line Items entered Electronic orders

40000 200000 30000

Manual orders Line Items entered Electronic orders

Total capacity Required (1) No unused capacity 20000 100000 50000 Total capacity Required Cost of order entry per operator Productive working hours by employee (2) No. of employees required (2) Cost savings from the changes (3) Total Capacity required (3) No. of employees required

Total Time(hrs) 0.150 0.075 0.100

6000 15000 3000 24000

0.150 0.075 0.100

3000 7500 5000 $

52,500.00

15500 1500 11

$ 262,500.00 19200 13

(3) Cost savings from the changes

$ 157,500.00