Orrington Office Supplies Case

Our client, Orrington Office Supplies, is a leading manufacturer of office products in 1992

 Orrington Office Supplies (OOS) is one of the largest diversified manufacturers of office
products, with sales of $275 million in 1991.
- Strong brands
- Significant advertising and marketing expense to support these brands
- Historical growth generated by product line extensions and four key acquisitions
 OOS is organized into 5 autonomous operating divisions, but with shared manufacturing
and marketing functions
- Shared costs (45% of total) are allocated to products
- Current manufacturing capacity utilization is ~50%
 Orrington Office Supplies is a potential acquisition target
- OOS is a publicly-traded company on the NASDAQ
- The company’s current P/E ratio is 8
- It has little long-term debt
- Some industry analysts are predicting that OOS will become an acquisition target
in the near future, given a strong balance sheet but weakening earnings

Figure 1: OOS Sales and Profit Trend

 Figure 2: OOS’s Product Line Compare to its Competitors

There are some general market trends that affect the client in this case
1. The U.S. office supplies market grew at a 5% CAGR during the 1980s
o In 1990 and 1991, however, the market declined at 5% per year
2. The superstore channel is becoming increasingly critical
o Superstores have gained 10 share points in the past two years
o Superstores typically offer products at a 30% discount to small retailers/dealers
3. Superstores are aggressively substituting private label products for traditional brand
names
o For example, Staples Inc. is currently negotiating with private-label stapler
manufacturers in China
o Acme’s most profitable product is a high-end branded stapler - Staples, Inc. is
now Acme’s largest single customer

Figure 3: OOS’s Distribution Channels

 Figure 4: Overview of OOS’s Production Plants

Figure 5: OOS's Plants Face a Different Fixed and Variable Cost Structure

Client has a few Queries as follows:

1. How would consolidating to Chihuahua change revenues, which are currently $275
million per year?
2. How would this change production costs? What are they now?
3. How would this change pre-tax profits, which are currently $25 million per year?
4. What do you suggest to the client either to go for consolidation or not and why?
5. What could be the potential issues need to be notice while going for consolidation?