Allied Office Products

1. NADIA NILA SARI (M987Z250)

2. Nguyen Pham Nhut Thien
阮範日禪 ( M987Z240)
3. Li merlina 李美靈 ( M987Z246)
 Background
• Total annual Allied sales of $900M
• Annual TFC sales of $60M
• 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 and desk top delivery)
• TFC inventory storage
– 10 distribution centers
 Background
• Current pricing model
– Clients charged flat fee on product cost, plus 32.2%
– Covers warehousing, distribution, cost of capital for inventory,
and freight expense
• Sales margin
– Sales force charges average of 20% of product and services
– Individual accounts can vary from standard formula
• TFC projected ROI 6% (1992), down from 20% (1988)
 Background
The Value Chain Concept – TFC
The Industry Chain

Customer
Forms Forms Customer Forms
Trees Pulp Paper
Mfg. Sales TFC Purchasing
Receiving User
Manager

The TFC Chain

Storage & Stock Order

Desk Top
Inventory Requisitioning Selection & Entry & Freight
Delivery
Financing Pick Pack Billing
Distribution Center Activity Analysis

Identified and reviewed six primary activities across five

distribution centers
Interviews with key staff
– Site Manager
– Warehouse Supervisor
– Data Entry Operator
Conducted activity cost analysis
– Identify cost drivers
 Storage and Inventory Financing
Activity Analysis
• Storage and inventory management of business form
cartons
• Current cost - $1.55M
• Inventory obsolescence
• Excess inventory
– Current inventory – 350,000 cartons
• Cost of capital – 13%
– Customer does not pay for inventory until requisition
submission
 Requisitioning Activity Analysis

• Processing of orders according to customer request

• Current cost - $1.801M
• 310,000 requisitions per year
• Each requisition averages 2.5 lines
Stock Selection / Pick Pack Activity
Analysis
• Process of selecting cartons and partial cartons to
meet customer orders
• Current combined cost - $1.495M
– Stock selection - $0.761M
– Pick pack - $0.734M
• 90% of all orders are pick pack
 Order Entry and Billing Activity
Analysis
• Entry of customer order information into computer
system
• Current cost - $0.612M
• Labor intensive with all manual entry
• Requisitions submitted line by line
 Desk Top Delivery Activity
Analysis

• Specialized delivery of orders to specific areas

of customer’s location
• Current cost - $0.250M
• Premium service with no additional fees
• Average time to complete – 1.5 to 2 hours
• 8500 requests completed per year
 Freight Activity Analysis

• Cost of shipping orders to customer

• Current cost for 1990 - $1.648M
• Charges based on a percentage of product cost, not
actual utilization
• New computer system coming online to track
individual freight charges
Questions & Answers
Q1. Using the information in the text and in Exhibit 2,
calculate “ ABC “ based service costs for the TFC business.
Tim and John broke down distribution into 6 primary value
added activities – storage, requisition handling, basic
warehouse stock selection, “pick-pack” activity, data entry
and desktop delivery. They assigned costs to these below
activities as follow for a sample of five of the distribution
centers :
Storage $ 1,550
Requisition Handling $ 1,801
Basic Warehouse Stock $ 761
“ Pick-Pack “ Activity $ 734
Data Entry $ 612
Desk top delivery $ 250
Total $ 5,708
Tim then estimated the following for 1992 based upon
historical information and current trend for the sample of five
warehouses :

• On average, these 5 distribution centers scattered across

the country, will have combined inventories of approximately
350,000 cartons ( most cartons were of fairly standard size )

•They will process about 310,000 requisitions for 1992

•Each requisition will average 2.5 lines

•About 90% of the lines will require “pick-pack” activity ( as

opposed to shipping an entire carton)

•Cost of capital in 1992 was probably about 13%

 ANALYZE THE COST USING ACTIVITY – BASED SYSTEM
Activity – Based System ( ABS ) is method of allocating
cost to product and service. Generally used as a tool fpr
planning and control.
TFC management called ABS based pricing system SBC
( Service Based Pricing ).

The calculation using ABS system :

• Storage Charge = $ 1.550.000 = $ 4,43 / carton

350.000
• Requisition Handling Charge = $ 1.801.000 = $ 5.81 / requisition
310.000
• Basic warehouse = $ 761.000 = $ 0.91 / line
stock selection 310.000 * 2.5
• Data Entry = $ 612.000 = $0.79 / line
310.000*2.5

•Charge for “pick-pack” = $ 734.000 = $ 1.05

310.000*2.5*0.9

• Charge for Desk Top Delivery = $ 250.000 = $ 29.41

8500

- Freight out is charged based on actual rates

- Cost of inventory financing is 13% of average inventory
balance
- Inactive inventory will be charged 1.5% / month after 9
month
Q2. Using your new costing system, calculate distribution
services costs for “ customer A” & “ customer B”

Activity Based Cost Analysis

Customer
Activity Cost Driver Customer B
A
Storage Number of Cartons 350 700
Requisition Handling Number of Requisitions 364 790
Basic Warehouse Stock
Number of Requisition Lines 910 2500
Delivery
Number of Pick and Req.
Pick Pack 910 2500
Lines
Data Entry Number of Requisition Lines 910 2500
Number of Desktop
Desk Top Delivery 0 26
Deliveries
 Activity Based Cost Analysis
Activity Based Activity Based
Activity Current
Customer A Customer B
Storage $1,550.50 $3,101.00
Requisition Handling $2,114.84 $4,589.90
Basic Warehouse Stock Delivery $891.80 $790.00
Pick Pack $955.50 $2,625.00
Data Entry $718.90 $1,975.00
Desk Top Delivery $0.00 $764.66
Subtotal ABC $10,250 $6,231.54 $13,845.56
Freight $3,500 $2,250 $7,500
Cost of Capital $2,350 $1,950 $6,500
Total $16,100 $10,432 $27,846
 Activity Based Cost Analysis

Activity Current Customer A Customer B

Sales $79,320 $79,320 $79,320

Product Cost $50,000 $50,000 $50,000

Distribution/Services (32.2%) $16,100 ---- ----
ABC ---- $10,432 $27,846

Return on Sales ($) $13,220 $18,888 $1,474

Return on Sales (%) 16.7% 23.4% 1.9%
Q3.What inference do you draw about the profitability of
these two customers?
Company A costs Allied less money to service, they are
also a much smaller source of potential growth for the
company. Company B on the other hand utilizes far more
services and has the potential to earn Allied much greater
revenue. With the information we have from the new ABC
costing scheme we now know that Allied should be charging
far more for the services rendered to company B, and less
for the services used by company A. Current information
shows that company B utilizes $11.746 more in service
costs than we were previously charging them, while
company A is utilizing ($5.668) less.
Q4 : should TFC implement the SBP (Service Based
Pricing) pricing system?
>>>Yes
TFC should implement SBP pricing system
because it’s not fair amount for the customer
who does not put too many thing in their
inventory and constantly request small
shipment with the customer who stock a lot of
inventory and no constant shipments get charge
the same service fees.