2. Develop a cost system for SCE (Saharis Central Europe) based on Year 2012 data.
a. Identify major activities. (Hint: The major activities in any distribution center are warehousing, shipping, order processing, and administration). Subdivide these major categories into more detailed activities if necessary to improve the accuracy of the cost system.
b. Calculate the cost-driver rate for each activity identified in 2a.
Overhead Cost Analysis Petr could retrieve revenue and cost of goods sold per customer using income statement data (see Exhibit 2 and 3). The challenge was to how to assign overhead costs related to warehouse personnel, warehouse depreciation and equipment, shipping, call center support, marketing, technology, and administration. Petr collected additional information in the following areas. Warehousing The main warehouse processes were receiving, inspecting, storing, picking, packaging, and preparing customer orders for shipment. The warehouse featured robots, conveyor belts, and other automated equipment to deliver ordered items from shelves to packaging staff, although some items still had to be picked up manually. A warehouse supervisor commented as follows: Most of what we do is managing "loads." Each manual pickup or each container being transported automatically from the shelves to the packaging area is one load. Multiple smaller items can fit into one load, e.g., multiple items of the same SKU' or different SKUs that are on nearby shelves. Most orders have multiple loads as customer maximize order size to reduce shipping costs. We can typically fit each order into one package for shipping but sometimes it is more than one package, especially if it is passed on to our second day delivery guysthey rather move two regular size packages than one big one. If you think in terms of costs, the more loads we have, the busier we are, and the more people I have to hire and schedule. Over the last couple of years the number has been increasing steadily. The total number of items and loads processed in 2012 was 18 and 11 million, respectively. The warehouse supervisor suggested that his staff was busy processing loads most of the time; the average downtime was only around 10% and could not be reduced much further. Small increases in loads could be accommodated but sizeable increases meant additional hiring. In contrast, only about 60% of the warehouse space and equipment capacity was utilized because SCE built in slack for future growth. The goal was to reach an industry standard of about 80% within a year or two. Shipping Packaged items were shipped either by standard postal service or by internal second day service in case of qualifying orders by Elite Team customers. In total, 5 million packages were shipped in 2012, of which 2 million went by postal service. SCE negotiated discounted postage rates that varied slightly depending on size and weight but were about the same for most packages. The remaining 3 million packages were shipped internally through 2.5 million deliveries. Delivery vans operated by SCE were underutilized when travelling to other than the most popular destinations Managers estimated that they could accommodate 50% more deliveries with the same van fleet if they could increase the demand in some areas. Call Center Petr struggled to learn about call center operations. Ana Navrtilov, the department manager was not very cooperative. She expressed her frustrations: I do not think our work is appreciated very much. We are squeezed in the smallest facility they could find and there are budget cuts every year. I am sure they would outsource us to India if only they could... It is very stressful to handle calls all day long with almost no downtime. Employee turnover is very high... In the end, Ana helped Petr collect 2012 data on call center processes. They identified three main activities. The first one accounted for 30% of call center capacity and involved phone order set up including the recording of customer name, address, shipping and payment preferences, explaining of return policies, etc. In total, the call center processed 1.2 million phone orders. The second activity accounted for 40% of call center capacity and involved processing of SKU choices, which included looking up item codes, verifying availability, explaining product features, refining choices (e.g. item size or color), recommending alternative products in case of stock-outs, etc. The amount of work associated with this activity reflected the number of SKUs, i.e., no additional work was necessary when customers ordered multiple items of the same SKU. In total, 2.4 million SKUs were processed over the phone. The third activity, general inquiries, accounted for the remaining 30% of the call center's capacity. It resulted in no new orders and included for example advising of customers not yet ready to make a purchase or processing of returns. In total, there were about 500,000 such calls. Other Expenses Finally, Petr combed through expenses related to technology, marketing and selling, and general administration. He was not quite sure yet which expense subcategories would be relevant for his customer profitability analysis. Nevertheless, he identified the following 2012 expenses as potentially important: content licensing fees (12 million); website Exhibit 1 Actual and Forecasted Growth Actual Results 2010 2011 Forecasts 2014 2012 2013 2015 Sales (in thousands) 110,000 160,000 250,000 350,000 450,000 550,000 100,000 Number of customers Elite Team Subscribers Users 140,000 12,000 150,000 200,000 20,000 157,000 280,000 25,000 170,000 370,000 450,000 30,000 35,000 180,000 190,000 140,000 Marketing of Elite Team Program (in thousands) 5,000 4,000 3,000 2,000 1,000 1,000 Exhibit 2 2012 Average Annual Gross Margin per Customer (in ) User Subscriber Team Elite 400 500 800 20 25 20 Product Sales Service Sales (Shipping & Handling) Service Sales (Membership Programs) Cost of Goods Sold Gross Margin 0 0 108 328 390 640 92 135 288 Exhibit 3 2012 Income Statement (in thousands) Product Sales Service Sales Cost of Goods Sold 232,800 29,240 187,296 Gross Margin 74,744 Salaries & Benefits of Warehouse Staff 9,600 Depreciation of Warehouse and Equipment Postal Service Shipping Internal Delivery Related Expenses Call Center Expenses Technology Marketing and Selling General and Administrative 11,000 9,800 18,000 5,400 17,000 6,000 13,000 Operating Income -15,056 Exhibit 4 2012 Annual Service Usage per Representative Customer User Subscriber Team Elite Number of items ordered 15 60 70 12 20 40 10 20 20 10 10 16 Number of loads in the warehouse Number of packages Number of deliveries by postal service by internal second day service Number of phone orders Number of SKUs on phone orders 10 0 8 0 10 8 8 2 0 15 4 0 Overhead Cost Analysis Petr could retrieve revenue and cost of goods sold per customer using income statement data (see Exhibit 2 and 3). The challenge was to how to assign overhead costs related to warehouse personnel, warehouse depreciation and equipment, shipping, call center support, marketing, technology, and administration. Petr collected additional information in the following areas. Warehousing The main warehouse processes were receiving, inspecting, storing, picking, packaging, and preparing customer orders for shipment. The warehouse featured robots, conveyor belts, and other automated equipment to deliver ordered items from shelves to packaging staff, although some items still had to be picked up manually. A warehouse supervisor commented as follows: Most of what we do is managing "loads." Each manual pickup or each container being transported automatically from the shelves to the packaging area is one load. Multiple smaller items can fit into one load, e.g., multiple items of the same SKU' or different SKUs that are on nearby shelves. Most orders have multiple loads as customer maximize order size to reduce shipping costs. We can typically fit each order into one package for shipping but sometimes it is more than one package, especially if it is passed on to our second day delivery guysthey rather move two regular size packages than one big one. If you think in terms of costs, the more loads we have, the busier we are, and the more people I have to hire and schedule. Over the last couple of years the number has been increasing steadily. The total number of items and loads processed in 2012 was 18 and 11 million, respectively. The warehouse supervisor suggested that his staff was busy processing loads most of the time; the average downtime was only around 10% and could not be reduced much further. Small increases in loads could be accommodated but sizeable increases meant additional hiring. In contrast, only about 60% of the warehouse space and equipment capacity was utilized because SCE built in slack for future growth. The goal was to reach an industry standard of about 80% within a year or two. Shipping Packaged items were shipped either by standard postal service or by internal second day service in case of qualifying orders by Elite Team customers. In total, 5 million packages were shipped in 2012, of which 2 million went by postal service. SCE negotiated discounted postage rates that varied slightly depending on size and weight but were about the same for most packages. The remaining 3 million packages were shipped internally through 2.5 million deliveries. Delivery vans operated by SCE were underutilized when travelling to other than the most popular destinations Managers estimated that they could accommodate 50% more deliveries with the same van fleet if they could increase the demand in some areas. Call Center Petr struggled to learn about call center operations. Ana Navrtilov, the department manager was not very cooperative. She expressed her frustrations: I do not think our work is appreciated very much. We are squeezed in the smallest facility they could find and there are budget cuts every year. I am sure they would outsource us to India if only they could... It is very stressful to handle calls all day long with almost no downtime. Employee turnover is very high... In the end, Ana helped Petr collect 2012 data on call center processes. They identified three main activities. The first one accounted for 30% of call center capacity and involved phone order set up including the recording of customer name, address, shipping and payment preferences, explaining of return policies, etc. In total, the call center processed 1.2 million phone orders. The second activity accounted for 40% of call center capacity and involved processing of SKU choices, which included looking up item codes, verifying availability, explaining product features, refining choices (e.g. item size or color), recommending alternative products in case of stock-outs, etc. The amount of work associated with this activity reflected the number of SKUs, i.e., no additional work was necessary when customers ordered multiple items of the same SKU. In total, 2.4 million SKUs were processed over the phone. The third activity, general inquiries, accounted for the remaining 30% of the call center's capacity. It resulted in no new orders and included for example advising of customers not yet ready to make a purchase or processing of returns. In total, there were about 500,000 such calls. Other Expenses Finally, Petr combed through expenses related to technology, marketing and selling, and general administration. He was not quite sure yet which expense subcategories would be relevant for his customer profitability analysis. Nevertheless, he identified the following 2012 expenses as potentially important: content licensing fees (12 million); website Exhibit 1 Actual and Forecasted Growth Actual Results 2010 2011 Forecasts 2014 2012 2013 2015 Sales (in thousands) 110,000 160,000 250,000 350,000 450,000 550,000 100,000 Number of customers Elite Team Subscribers Users 140,000 12,000 150,000 200,000 20,000 157,000 280,000 25,000 170,000 370,000 450,000 30,000 35,000 180,000 190,000 140,000 Marketing of Elite Team Program (in thousands) 5,000 4,000 3,000 2,000 1,000 1,000 Exhibit 2 2012 Average Annual Gross Margin per Customer (in ) User Subscriber Team Elite 400 500 800 20 25 20 Product Sales Service Sales (Shipping & Handling) Service Sales (Membership Programs) Cost of Goods Sold Gross Margin 0 0 108 328 390 640 92 135 288 Exhibit 3 2012 Income Statement (in thousands) Product Sales Service Sales Cost of Goods Sold 232,800 29,240 187,296 Gross Margin 74,744 Salaries & Benefits of Warehouse Staff 9,600 Depreciation of Warehouse and Equipment Postal Service Shipping Internal Delivery Related Expenses Call Center Expenses Technology Marketing and Selling General and Administrative 11,000 9,800 18,000 5,400 17,000 6,000 13,000 Operating Income -15,056 Exhibit 4 2012 Annual Service Usage per Representative Customer User Subscriber Team Elite Number of items ordered 15 60 70 12 20 40 10 20 20 10 10 16 Number of loads in the warehouse Number of packages Number of deliveries by postal service by internal second day service Number of phone orders Number of SKUs on phone orders 10 0 8 0 10 8 8 2 0 15 4 0
