Introduction

Central Insurance Canada (CIC) was one of the biggest insurance companies in Canada.

The company offered business, home owner, and automobile insurance to its target customers

and sold mainly to Canadian adults. CIC provides mail room operations, where the mail room

department spent approximately $400,000 in postage and processed nearly 620,000 units of

envelopes, policy statements and inserts. Since it was important to apply the correct postage to

every envelope, it was also important to determine the correct weight of the envelope and its

specific contents. To achieve this, Rutherford took samples of inserts, recorded their weight, and

added the weights.

Key issues
Issue No. 1

Customer to pay difference in attached stamps

One major issue faced by CIC is the error made by the Canada Post that caused the company to

lose its key customer. For example, Rachel Simmons was annoyed by the incident where she

paid 2-cent GST and 26 cents difference of the stamps attached. Indeed, the envelope had her

policy statement that indicated that outstanding balance she owed CIC. For that reason, she was

not supposed to pay for an envelope that enclosed her bill. This compelled the client to cancel

her automobile policy with company, thus making the company to lose its major customer.

Issue No. 2

Sending Overweight mails to customers

Another key issue faced by the company was sending out some overweight mails. There

existed three main reasons for overweight mails. To start with, Quickpost could malfunction and
insert several copies of one insert into the envelope, thus pushing the weight over the set postage

limit. Second, Mr. Rutherford discovered the weight of these inserts differed for 0.5 grams for

every page of differences in ink weight, paper humidity and thickness. Lastly, some policy

holders did not receive the same combination of inserts. This key issue had several serious

implications to the company, including poor image reputation, lost customers, the heavy costs

linked with re-stamping mailings that were initially vetoed by Canada Post and exposing CIC’s

promise of receiving policy statements within one week.

Alternatives

Alternative # 1

The first alternative is acquisition of a software package that could be used with the

Quickpost system to provide solution to the two major issues faced by the company. The

software will enable the Quickpost system to compute the weight of each envelope and apply the

most accurate amount of postage. This software will eliminate the errors that can cause damages

to the customers. It will also enable the company to avoid losing customers to the competing

insurance companies. In addition, it will also improve the reputation of the company since it will

apply the correct package of envelop.

Alternative # 2

The second alternative is acquisition of the Digi-calc machine. This machine was used to

weigh envelopes, and it was made and marketed by Edelbrook. This alternative will prevent the

company from sending overweight mails to the customers. The machine will not malfunction,

thus maintaining the set weight limit. This is possible since the machine uses digital scale to

weigh all envelopes and apply the accurate postage.

 Analysis of Alternatives

Advantages and Disadvantages

There are three major advantages of the software. First, the software would provide

excess capacity. This means that it can handle large units of the mails at the same time, thus

helping the company to handle the large quantity of envelopes in a single day. Second, the

software can be integrated with the Quickpost machine, implying that the company can compute

the weight of all stuffed envelope and apply the accurate amount of postage. This could avoid

errors that have caused several damages to the customers, making majority of customers cancel

with their contracts with CIC. Lastly, the software is cheaper than the Digi-calc machine. The

software had cost of $18,500. Therefore, it can be afforded by the company without financial

distress.

Despite having advantages, the alternative has also two major disadvantages. First, it has

been found that Kamai equipment have experienced an average of 11 malfunctions on yearly

basis. Kamai is the same company that has manufactured the software. This implies that the

software can have several malfunctions which can make the company to experience similar

issues it had before. It also makes the company to have some doubts with the software. Second,

the software might not be able to provide accurate amount of postage, thus making the company

to send out incorrect amount of mails or envelopes to the customers. Therefore, these

disadvantages should be taken into account when making final decision.

The advantages of Digi-calc machine include that Edelbrook equipment has experienced

smaller number of malfunctions than Kamai equipment. This implies that Digi-calc machine,
which is manufactured by Edelbrook, will experience reduced number of malfunctions in its

daily operations. Another advantage is that it would offer adequate capacity to handle all mails of

customers. This would make it possible for the company to eliminate postage errors and cases of

overweight mails. This too can be integrated with the existing Quickpost machine. Another

advantage of this alternative is that it could be handled by the present workforce. This means that

the company does not need any additional workforce to operate the machine if it goes with this

alternative.

There are two major disadvantages of Digi-calc machine. First, Digi-calc machine is

more costly than the software. The machine costs $23,900, and requires $1,200 per year for

machine maintenance. Second, the services offered by the company that manufactures Digi-calc

machine are less admirable. Therefore, the company might not be able to fix the malfunctions of

the machine within the set timeframe. This can make it impossible for the company to handle

huge volume of envelopes.

Strengths & weaknesses

The software has both strengths and weaknesses. The strengths of the software include

that its manufacturer (Kamai) has a good reputation for quicker response to demands for service.

This implies that the software would be serviced without any delays. Another strength is that

Kamai has ability of fixing seventy five percent of the software malfunctions within a period of

six hours. This means that its service record is admirable. However, the alternative is exposed to

some weaknesses, which include that the Kamai equipment experienced eleven malfunctions

every year. Also, the equipment are prone to breakdown, making it insert several copies of a

single insert into the envelope, thus pushing the weight over the required limit. This can make

the software less dependable.

 Equally, Digi-calc machine has both strengths and weaknesses. The strengths of the

machine includes, it is less prone to malfunction as compared to the other alternative. It also has

digital scale that computes weight of each envelop and ensure that the correct amount of postage

is applied and ensure that envelopes do not exceed the set weight limit. However, the Edelbrook

takes longer time to rectify machine malfunctions. Also, the manufacturer of the machine has

less admirable service record. This could be a big challenge for the company to service the

machine.

Financial analysis

There are items on balance and income statements that are likely to be impacted by the

acquisition of software and Digi-calc machine. First, items on income statement that can be

impacted include sales, operating costs and net profits. The software and Digi-calc machine will

both increase annual sales by more than $250 million. It is worth noting that the software and

machine will eliminate all errors associated with the current machine. This would help the

company to attract new customers and retain the existing customers, thus increasing demand for

services offered by CIC. As a result, the annual sales would increase by a greater proportion. The

software will increase operating costs after the company incur maintenance costs of $700 per

year. The increase in operating costs will also lead to the decrease in net profits for the company

On other hand, Digi-calc machine will increase operating costs by $1,200 per year. This will

translate to decrease in net profits by similar amount.

Second, items on balance sheet that can be impacted by the software and Digi-calc

machine are fixed assets and total assets. The acquisition of the software will increase fixed

assets by $18,500. Similarly, the purchase of Digi-calc machine will increase fixed assets by

$23,900. The total amount of assets will also increase by $18,500 and $23,900, respectively. This
is critical to the company since it will have sufficient amount of assets to meet its financial

obligations that fall due in the long-run. The company will be more solvent because it will have

more total assets than total liabilities.

The case study does not provide the income statement and balance sheet of Central

Insurance Canada. For that reason, it is not possible to compute the financial ratios of the

company. However, the acquisition of the software and Digi-calc machine can impact the key

financial metrics. The two alternatives can increase gross profit margin because it will increase

company’ sales. An increase in sales can lead to increase in gross profit margin because the

company will have sufficient amount of sales to cover its cost of sales. Equally, debt ratio will

be lower because the total amount of assets will surpass the total liabilities by a larger amount.

However, the net profit margin may decrease due to the sharp increase in the total amount of

operating costs.

Recommendation

After thorough analysis of each alternative, I am recommending Digi-calc machine as the

better alternative. The four main reasons for choosing this alternative are; First, the alternative

will have smaller number of malfunctions than the software. The company manufactures the

machine has experienced reduced number of malfunctions in the past years. Second, the

alternative is chosen because of its implementation time as Edelbrook could have the Digi-Calc

installed by May 15, thus improving their routine mails and giving CIC sufficient post

installation support time before the next promotional mailing scheduled for June 23. Third, the

alternative will offer adequate capacity to handle steps in the mail room department. This will

make it possible for the CIC to eradicate postage errors and cases of overweight mails, thus
increasing the number of customers. Last, the machine has digital scale that calculates weight of

each envelop and ensures that the correct quantity of postage is applied.