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Allied Office ProductsSubmitted by:Group-2Mayank PandeyNishant KumarSavita SoniVarun Pai

BackgroundAnnual sales of $900 millionForms ManufacturingBusiness formsSpecialty paperBusiness Forms Inventory Management Services - Total Forms Control (TFC)WarehousingInventory controlInventory financingDistributionForms usage reporting (Pick pack & desktop delivery)February 9, 2007Allied Business Forms Division2Background

TFC Inventory Storage 10 distribution centersPricingClients charged flat monthly fee on product cost plus 32.2%, regardless of level of serviceCovers warehousing, distribution, cost of capital for inventory & freight expense (based on 1990 aggregated financial data)Profit Margin Sales force charges average of 20% of product & services; individual accounts can vary from standard formula

February 9, 2007Allied Business Forms Division3BackgroundValue Chain Concept - TFCFebruary 9, 2007Allied Business Forms Division4Industry ChainThe TFC ChainTreesPulpPaperForms Mfg.Forms SalesTFCCustomer Purchasing ManagerCustomer ReceivingForms UserStorage & Inventory FinancingRequisitioningStock Selection & Pick PackOrder Entry & BillingDesk Top DeliveryFreightIssues faced by AlliedThe Business Forms Division in 1988 earned a 20 percent Return on Investment (ROI). But returns have been dropping for several years. TFC isprojected to earn an ROI of only 6 percent for 1992. TFC profitability was suffering in October 1992. It tells that Allied is not managing this business very well. It seems that the charge for services needs closer scrutiny

CustomerProfitability.Notallcustomersare profitable but very often without ABC, it is very difficult to know which ones are profitable.

Pricing. Charges for services needed closer scrutiny. It isnot fair fortwo clients who buy the same amount of product but uses different level of services to pay the same service fee.

Current Cost Accounting SystemForms manufacturing and TFC activities are separate profit centers.Transfer ofproduct to TFC is atarms length with transfer price set at fairmarket value.

Clients in forms management program keep an inventory of forms at one of Allieds 10 distribution centers. The forms are distributed to the client as needed.

If a TFC client made use of any of the distribution services, they were supposed to be charged a price for the forms which was high enough to allow for an additional 32.2% of product cost to cover warehousing and distribution expenses.

The cost of capital is tied up in inventory and freight expense.Cost of product is marked up by 20% on average.Current cost accounting system

Distribution Center Activity AnalysisIdentified and reviewed six primary activities across five distribution centers-Storage-Requisition handling-Basic warehouse stock selection-Pick-pack activity-Data entry-Desktop deliveryInterviews with key staffSite ManagerWarehouse SupervisorData Entry OperatorConducted activity cost analysisIdentify cost driversTim and John assigned costs to these below activities as follow for a sample of five of the distribution centers :Q1. Using the information in the text and in Exhibit 2, calculate ABC based service costs for the TFC business.

ActivityCost $Cost DriverStorage$ 1,550Number of CartonsRequisition Handling$ 1,801Number of Requisitions Basic Warehouse Stock $ 761Number of Requisition Lines Pick-Pack Activity$ 734Number of Pick and Req. LinesData Entry$ 612Number of Requisition LinesDesk top delivery$ 250Number of Desktop DeliveriesTotal$ 5,708Tim 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 SYSTEMTFC management called ABS based pricing system SBC ( Service Based Pricing ).An accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods.The calculation using ABS system :

Storage Charge = $ 1.550.000 = $ 4,43 / carton 350.000 Requisition Handling Charge = $ 1.801.000 = $ 5.81 / requisition 310.00 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 Analysis

ActivityCost DriverCustomer ACustomer BStorageNumber of Cartons350700Requisition HandlingNumber of Requisitions 364790Basic Warehouse Stock DeliveryNumber of Requisition Lines9102500Pick PackNumber of Pick and Req. Lines9102500Data EntryNumber of Requisition Lines9102500Desk Top DeliveryNumber of Desktop Deliveries026Q2. Using your new costing system, calculate distribution services costs for customer A & customer B 13Activity Based Cost AnalysisActivityCurrentActivity Based Customer AActivity Based Customer BStorage*$1,550.50$3,101.00Requisition Handling$2,114.84$4,589.90Basic Warehouse Stock Delivery$891.80$790.00Pick Pack$955.50$2,625.00Data Entry$718.90$1,975.00Desk Top Delivery$0.00$764.66 Subtotal ABC$10,250$6,231.54$13,845.56Freight$3,500$2,250$7,500Cost of Capital$2,350$1,950$6,500 Total$16,100$10,432$27,846Activity Based Cost Analysis

ActivityCurrentCustomer ACustomer BSales$79,320$79,320$79,320Product Cost$50,000$50,000$50,000Distribution/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%*Storage for customer A is for 350 units of inventory while for customer B it is for 700 units of inventory. In case only storage charges and average inventory balance is given and no info for inventory charges. Thus only storage consideredQ3.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. 17Q5 : what managerial advice do you have for allied about Total Forms Control (TFC) business? How does exhibit 6 relate to this question?The managerial advice I have for Allied about TFC ; they have to implement SBP (Service Based Pricing) system so itll help to raise their profit and also make them easier for the warehousing, charge for individual freight, prevent the clients changing their old forms because it will cost them on old inventory, and give charge for desktop delivery so it wont cause client change too many times.

Exhibit 6 relate because if they do the SBP then some customers might not let their inventory in the warehousing, changing their request because TFC need to do order-billing entry again.

TFC will charges the clients based on the SBP in the TFC chain to prevent company loss cause by inventory and delivery cost. ImplementingSBPsystemwillcauseresistanceinthe organization, especially from salespeople. We can persuade and give explanation about the purposes and benefits of implementing this new system. ABC system will help management to analyze theprofitability of each customer, and hopefully it will restore theprofitability of the company.

WebelievethatTFCcansignificantlyimprovingprofitby concentrating on individual account management. This can be done withthehelpofServicesBasedPricing(SBP)schemein identifying service costs, and then calculating contribution for each account and then ranking the accounts in order to identify theprofitable ones.

However, dont drop out the bottom 20 customers, because the total cost is still the same. Do notsee the unit cost. The unit costis unitized fixed cost. If TFC drop out the bottom 20 customers, unit cost will go up because the total cost is spread on the remaining customers. This will cause some of the remaining customers to look unprofitable. So, if TFC drop these customers, the unit cost will be higher.

TFC should charge its customers based on their service usage. We suggest TFC used cost plus pricing strategy. It means that the customers should be charged based on the cost of products plus service charge (based on SBP schemes) plus mark-up. So, it will be fair for customers that have the same sales but different level ofservices to be charged differently, based on the services they used.THANK YOU