Case 5-35 Midwest Office

Products (MOP)
PRESENTED BY: SUNNY SHAKYA 12MBA032
 Company Profile

▶ Regional distributor of office supplies

▶ 22% markups to cover expenses
▶ Introduced desktop delivery services charging 5% markup, to improve
margins and create loyal customers
▶ Introduce EDI for automatic order entry and new Internet site
▶ Despite an increase in sales the company suffered its first major loss in
2003.
▶ What actions to be taken to regain profitability?
 Activity Sequence of MOP

Order Processing of customers:

Unloading truckload 1. Manual Order
of shipments from 2. Electronic Order
manufacturer
Delivering the products:
1. Commercial Freight
2. Desktop delivery
Storage in
Warehouse
Characters in the Case

▶ John Malone, General Manager

▶ Melissa Dunhill, Controller
▶ Tim Cunningham, Director of Operations
▶ Wilbur Smith, Distribution Center Manager
▶ Hazel Nutley, Data Entry Operator
 Given Information

▶ 80,000 cartons processed, 75,000 shipped by commercial freight and 5,000 shipped under 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 on manual order, 0.075 hours per order for each line
item on manual process. Electronic process requires 0.1 hours per order 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 75000
Cartons Shipped by Desktop delivery options 5000
Total number of cartons 80000
Personnel Expense (Warehouse and Truck) $ 2,570,000.00
(-)Truck driver Expense $ 250,000.00
Warehouse Personnel Expense $ 2,320,000.00
Warehouse Expense (excluding personnel) $ 2,000,000.00
Warehouse Personnel Expense/ Carton $ 29.00
Warehouse Expense/ Carton $ 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 1750
Productive operator hours/ Year 1500
Total productive hours/ Year 24000
Cost of order entry/ hour $ 35.00
Average time of electronic order entry(in Hours) 0.1
Average time of manual order entry (in Hours)
Basic Information Entry 0.15
Line Item Entry 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 75000
Freight Cost $ 450,000.00
Cost of Shipping cartons on Commercial Freight/ carton $ 6.00

Cost per hour for desktop delivery

Cartons Shipped by Desktop delivery options 5000
No. of Desktop Deliveries 2000.00
Driver hours per year 1500.00
Total number of drivers 4.00
Total Driver hours 6000.00
Truck driver Expense $ 250,000.00
Delivery Truck Expenses $ 200,000.00
Total desktop delivery Expenses $ 450,000.00
Cost per hour for desktop delivery $ 75.00
 ABC Customer Profitability Analysis

Particulars 1 2 3 4 5
Sales Revenue $ 610.00 $ 634.00 $ 6,100.00 $ 6,340.00 $ 6,100.00
Acquisition Cost $ 500.00 $ 500.00 $ 5,000.00 $ 5,000.00 $ 5,000.00
Gross Margin $ 110.00 $ 134.00 $ 1,100.00 $ 1,340.00 $ 1,100.00

MSDA Expenses
Processing Cost $ 54.00 $ 54.00 $ 540.00 $ 540.00 $ 540.00
Order Entry Cost $ 3.50 $ 7.88 $ 3.50 $ 31.55 $ 31.55
Commercial delivery costs $ 6.00 $ - $ 60.00 $ - $ 60.00
Desktop delivery costs $ - $ 300.00 $ - $ 300.00 $ -
Interest Cost $ 6.10 $ 25.36 $ 61.00 $ 253.60 $ 244.00
Total MSDA activiy expenses $ 69.60 $ 387.24 $ 664.50 $ 1,125.15 $ 875.55

Customer Profitability $ 40.40 $(253.24) $ 435.50 $ 214.85 $ 224.45

% Customer Profitability 6.62% -39.94% 7.14% 3.39% 3.68%
Variation of Profitability

▶ 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 1 the MSDA expenses and profit was covered by 22% markup margin.
▶ There is a variation of profit between order 3 and 5 because of the impact of hidden
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

▶ 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 of warehouse operations and practice JIT
inventory strategy.
 Question D
Particulars No Time Total Time(hrs)
Manual orders 40000 0.150 6000
Line Items entered 200000 0.075 15000
Electronic orders 30000 0.100 3000
Total capacity Required 24000
(1) No unused capacity
Manual orders 20000 0.150 3000
Line Items entered 100000 0.075 7500
Electronic orders 50000 0.100 5000
Total capacity Required 15500
Cost of order entry per operator $ 52,500.00
Productive working hours by employee 1500
(2) No. of employees required 11
(2) Cost savings from the changes $ 262,500.00
(3) Total Capacity required 19200
(3) No. of employees required 13
(3) Cost savings from the changes $ 157,500.00