Copy of Copy of Allied_Office_Products_Case

#1 ABC Costs of Each Type Amount of Each Activity of Activities Type of Activities Storage 1550000 350000 Requisition Handling 1801000 310000 Basic Warehouse Stock Slection 761000 775000 "Pick-Pack" Activity 734000 697500 Data Entry 612000 775000 Desk top delivery 250000 8500

Cost Per Service $ $ $ $ $ $

4.43 5.81 0.98 1.05 0.79 29.41

per carton of inventory per requisition per line per pick pack per line entry per delivery

#2

Service Cost Customer A Customer B

$ $

3 Current Method Annual Sales Cost of Product Service Fee Charges(32.2%) Profit before taxes Taxes Gross Profit

Storage 1,550.00 $ 3,100.00 $

Requisition "Pick-Pack" Desk Top Handling Cost Basic Warehouse StockActivity Slection Data Entry Delivery Total 2,114.72 $ 893.56 $ 957.62 $ 718.61 $ $ 6,234.51 4,589.65 $ 2,454.84 $ 2,630.82 $ 1,974.19 $ 764.71 $ 15,514.21

Customer A $ $ $ $ $ $

79,320 50,000 16,100 13,220 4,627 8,593

Customer B $ 79,320 $ 50,000 $ 16,100 $ 13,220 $ 4,627 $ 8,593

ABC based service costs Annual Sales Cost of Product ABC service charges Freight Cost of Capital Total Expenses Profit before taxes Taxes Gross Profit

3 Under the current pricing system, Customer A is far more profitable. This is due to the fact that Customer A requires far fewer services than Customer B does. It is apparent from our analysis that these services are the root cause of the difference. If this problem were to be rectified in some manner, such as the ABC based costing that was used for analysis, it would make it much easier for Allied Office Products to manage its business. These services include, inventory/warehousing, pick-pack activity, desk top delivery, data entry,

Customer A 79320 50000 $ 6,234.51 2250 1950 60434.51039 $ 18,885.49 $ 6,609.92 $ 12,275.57

Customer B 79320 50000 $ 15,514.21 7500 6500 79514.20767 $ (194.21) $ $ (194.21)

costing that was used for analysis, it would make it much easier for Allied Office Products to manage its business. These services include, inventory/warehousing, pick-pack activity, desk top delivery, data entry, and requisition handling. Also, this analysis indicates that Allied Office Products has been valuing their customers in an improper manner. Allied needs to take these service charges into account when valuing their customers because it could mean the difference between turning huge profits and going bankrupt. Exhibits 4 and 5 show the 20 most and 20 least profitable clients under the current pricing system. These exhibits would change drastically if they clients were charged for their services.

4 We do recommend implementing the new Service Based Pricing (SBP). We also believe Allied should iplement additional chargest for desktop delivery and monthly charges for inventory over 9 months old (1.5% per month). The SBP system will allow Allied to charge their clients for what they actually use, resulting in much more reliable cost figures for each client. The 1.5% per month will add up quickly for some clients, which will force them to either continue to pay the prices (free money for Allied) or use up the inventory first (reducing the cost of warehousing for Allied). The desk top delivery is stated as being a huge pain and charging for these run will not only reduce internal complaints, but will help bring in revenue as well.

Also, the SBP system will allow Allied to value their customers more appropriately. As mentioned previously, Allied will not be able to find out a more realistic cost of supplying the clients with the merchandise and will be better able to determine which clients are making Allied money and which ones are hindering the company's growth. Furthermore, unhappy customers (due to the fact that some will be charged more) should not be a problem. The customers who are unhappy about the added costs are those that are using all of the fees for free right now and they are running up the expenses for Allied. If these clients are not turning a profit for Allied, it would be best to drop their accounts.

Our managerial advice concerning the TFC business is to drop the desk top delivery. However, management should be open to individual desk top delivery cases for increased fees.

60 million 3 years in, still growing

Our managerial advice concerning the TFC business is to drop the desk top delivery. However, management should be open to individual desk top delivery cases for increased fees. If Target Corp. were to buy a million dollars in merchandise and wanted it delivered Allied should do so to not only make Target happy, but to raise additional revenue by charging a high fee (TBD on a case by case basis) for the delivery. TFC needs to stay the way it is, sans the desk top delivery. The TFC is a small revenue generator ($60 million in a $900 million company) for Allied, but it has only been around for a little more than 2 years. Going from nothing to $60 million in revenue for any company in a matter of 2 years is pretty impressive, especially in a market that already existed. Additionally, the company is continuing to grow and should show even larger revenue streams in the future, especially once the SBP system is implemented. Finally, TFC is helping to distinguish Allied from its competitors. This is a nearly invaluable characteristic of TFC idea. In an industry where competitors are practically clones of one another is it very helpful to be able to show how your organization is different, and in this case better, than the other companies in the industry. Allied is the only company who has a system like this and it is helping the clients greatly by allowing the clients to focus on what they do best and not having to worry about storing the inventory or having too much or anything like that. TFC must stay.