Profitability Study

for the Business Forms Division of Allied Office Products

February 9, 2007 Proposal Team: Brant Allegretti, Kirk Blackwelder, Rick Calero, Mary Coffee, Jonathan Doddridge, Mike Taylor, Carlos Villarreal

Overview

Background Goals and Objectives Options Situation Analysis Activities Based Cost (ABC) Analysis Potential Threats / Risk Mitigation Recommendations Summary
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February 9, 2007

Background

Annual sales of $900 million Forms Manufacturing

Business forms Specialty paper

Business Forms Inventory Management Services - Total Forms Control (TFC)

Warehousing Inventory financing Forms usage reporting Inventory control Distribution
(Pick pack & desktop delivery)

February 9, 2007

Allied Business Forms Division

Background

TFC Inventory Storage

10 distribution centers

Pricing
Clients charged flat monthly fee on product cost plus 32.2%, regardless of level of service Covers 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

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Allied Business Forms Division

Background
Value Chain Concept - TFC
Industry Chain
Trees Pulp Paper Forms Mfg. Forms Sales

TFC

Customer Purchasing Manager

Customer Receiving

Forms User

The TFC Chain

Storage & Inventory Financing Requisitioning Stock Selection & Pick Pack Order Entry & Billing Desk Top Delivery Freight

February 9, 2007

Allied Business Forms Division

Goals & Objectives

Review Current State Identify Areas for Improvement Increase ROI on TFC from 6% to 20%

February 9, 2007

Allied Business Forms Division

Storage & Inventory Financing

Dont you think we should do something to get that old inventory moving? --Tim, Kansas City, MO Distribution Facility

Inventory Obsolescence Excess Inventory Cost of Capital

Customer does not pay for inventory until requisition submission

February 9, 2007

Allied Business Forms Division

Requisitioning
Ive gotten to the point where I know the customers so well, that all the order information is easy. The only thing that really matters is how many lines I have to enter. Hazel Nutley, Data Entry Operator

310,000 requisitions per year Each requisition average 2.5 lines Reduce data entry - incorporate purchase history in requisition process; determine frequent reorders
Institute minimum requisition requirements; under $X, extra fee charged
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February 9, 2007

Stock Selection / Pick Pack

Almost is everything pick pack nowadays. No one seems to order a carton of 500 items anymore. --Rick Fosmire, Warehouse Supervisor

90% of all orders are pick pack Reduce pick pack orders: Work with Allied to reconfigure cartons to meet top 40 accounts buying patterns

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Allied Business Forms Division

Order Entry & Billing

Ensure requisition process /order entry / billing is a one-step process Goal: Reduce redundant data entry

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Desktop Delivery

Currently, no extra charge to clients for this time intensive activity Implement desktop delivery fees

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Freight

Cost coverage set fee is not equitable across customer base Implement pass-through freight cost leveraging new computer system

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Activity Based Cost Analysis

Activity and Cost Drivers
Activity
Storage

Cost Driver
Number of Cartons

Activity Based Cost

1.550

Requisition Handling

Number of Requisitions

1.801

Basic Warehouse Stock Delivery

Number of Requisition Lines

0.761

Pick Pack

Number of Pick & Requisition Lines

0.734

Data Entry

Number of Requisition Lines

.612

Desktop Delivery

Number of Desktop Deliveries

.250

Total

5.708

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Activity Based Cost Analysis

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Activity Based Cost Analysis

Individual Customer Profitability

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Activity Based Cost Analysis

Impact to Bottom Line

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Recommendations
Activity Based Management (ABM)

Management Philosophy

Focus on cost reduction Make informed decisions Create & maintain a competitive advantage Reduce non-value added activities

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Recommendations
Supply Chain Management (SCM)

Optimize Warehouse Space

Reconfigure aisles Consider consolidation of DCs for TFC LOB

Optimize Customer Inventory Levels

Incorporate Just In Time Inventory (JIT) System with Allied (for 179 customers that represent 72% of sales)

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Recommendations
Activity Based Costing (ABC)

Storage & Inventory Financing

Charge 1.5%/mo. for on-hand inventory > 9 months

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Recommendations

Establish Preferred Vendor Price Strategy (PVPS) with Allied

1. Preferred price list at __% of retail 2. Eliminate sales force outsourcing option

Engage Fiveandone for Competitive Market Analysis (CMA) Implement Services Based Pricing Structure If CMA reflects optimal market timing, implement Supply Chain Management Plan
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February 9, 2007

Potential Threats

Stakeholder Acceptance
Will the sales team perceive plan will decrease commissions?

Customer Acceptance
Will customers view this positively or negatively?

Competition
Market Timing Response to our new strategy

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Risk Mitigation

Get Our Sales Team On Board!

1. Prepare account analysis for each account manager 2. Train account managers thoroughly on client benefits

Make Sure Our Customers Understand Our Value Proposition

1. insert verbage

Understand Our Competitors Position

1. Competitive advantages/disadvantages 2. Understand competitors past, present (and most importantly) future pricing strategies 3. Provide basis to develop strategies to achieve competitive advantage in the future 4. Predicted competitor response to new pricing strategy

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Summary
Allied Philosophy We know what you need the right product at the right place at the right time.
Preferred Vendor Price Strategy + Competitive Market Analysis + Distribution Optimization Plan = Allied Business Forms Division Success!

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