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DB Toys Sample Information
DB Toys Sample Information
DB Toys is a second tier toys based in Massachusetts with sales in more than 15 countries. In 2000
DB toys recorded net sales of 1.5 billion, down from 1.7 billion in 1999 Company was losing its
market share and its total annual sale was dropping at a fast rate. IT department was spending $30
million on supply chain which was half of IT budget. This was way above industry standards.
Company was looking for a way to reduce its supply chain costs by outsourcing its supply chain
activities to Inflection which is supply chain consulting and service company
The total IT budget of DB Toys is around $60 million. (50% of the entire IT budget, i.e. $30 million is
spent on Supply Chain). The intention of the company is to reduce the IT expenditure towards the
supply chain, which is above the industry average.
Inflection Consulting made an analysis and found out the inefficiencies in the existing Supply Chain.
DB Toys resources were only focused in the maintaining the status quo rather than improving the
systems.
Inflection Consulting brings two proposals with three options in each for reducing the expenditure as
well as for smoothing the entire operations by outsourcing the business applications or business
process.
Inflection Consulting claims that, by just outsourcing the Business Application reduces the IT Supply
Chain Expenditure by 20% a year. The same man power can be utilized for some other business
operations to make the entire operations a success.
Inflection Consulting suggested a design-build-run model that outsources the entire business process
that enhances the entire business process in a professional way that can reduce the overall
expenditure and increases the overall efficiency.
Lowered costs in total. Changing fixed costs to Variable costs based on Variable pricing
Out sourcing an activity which is not the firms core competency
Helping executive management to focus on the bottom line
Q) Which Option should DB Toys choose?
From Exhibit 10 it is found that, Weakness of DB Toys is in Supply chain support (60% of the
expenses are spent). Industry average is only 25%
Therefore immediate benefit can be seen in "Business application outsourcing”, where Inflection can
bring in efficiencies and thus reduce IT spending by 20% each year.
"Business process outsourcing" is a risky as it requires an investment of $ 28 million per year (almost
equal to current spending of $ 30 million) and financial impact of the improvements remains to be
tested such as less order time, less inventory etc.,
ADVANTAGES
Any risks associated with Project delays and costs are incurred by outsourcing partner
Relatively Quick and easy to implement
DISADVANTAGES
Option 1: Fixed Price $9.3 million/Quarter (i.e. 37.2 million annually). This is much higher
than current spending of $ 30 Million
Option 2: Fixed Price $11.7 million/Quarter (i.e. 46.8 million annually)
2) Cost-Plus Contract:
ADVANTAGES
Out sourcing partner will try to reduce the costs over time
DISADVANTAGES
Fixed Price 9.3 million/Quarter (i.e. 37.2 million annually). This is much higher than current
spending of $ 30 Million. There will be annual reduction of 2%
Base fees will fluctuate with annual cost incurred by the vendor
Outsourcing partner may not choose to strategic improvements due to prohibitive costs
ADVANTAGES
Clients with minimal cash flow prefer this option as no upfront payment is required
DISADVANTAGES
(Refer to Exhibit 9)
ADVANTAGES
DISADVANTAGES
Cost will be 37.2 million*0.4 =14.88+ 5*4 = 34.88 million (assuming 0.05 increase in EPS
based on revenue growth and operating cost cuts)
Cost will 14.88+ 3*4 = 26.88 million (if only 0.03 increase in EPS is taken in to consideration)
ADVANTAGES
Initial investment is nil, payments can be made as and when company generates value
DISADVANTAGES
"Fixed price model with annual share holder incentive clause" can be most suitable contract which
could cost less than the current IT spending of 30 million in Supply chain services
Q) What are the Strategic risks in outsourcing for each option?
Not clearly defining goals and objectives before starting the outsourcing process
Making the decision to outsource without complete information on internal costs and
processes.
Not considering the impact of outsourcing on other functions and areas of risk such as
environmental and regulatory factors
Not searching for potential providers of the service, and thus missing good candidates.
Not considering the full impact of an outsourcing agreement on a company's financial
condition
Not establishing an outsource relationship that has sufficient flexibility to deal with business
fluctuations
Initiating an agreement with a service provider that limits flexibility in the future
Continuous Improvement can be in jeopardy.