Case: Brunswick Distribution, Inc. Alex Brunswick, CEO of Brunswick Distribution, Inc. (BDI), looked out his office window at another sweltering day and wondered what could have gone wrong at his company. He had just finished reviewing his company's recent financial performance and noticed something that worried him. BDI had experienced a period of robust growth over the last 4 years "What could be going wrong?" he thought to himself. "Our sales have been growing at an average rate of 8 percent over the last 4 years but we still appear to be worse off than before." He sat back in his chair with a heavy sigh and continued reviewing the report on his desk. Sales had risen consistently over the past 4 years but the future was uncertain. Alex Brunswick was aware that part of the past growth had largely been the result of a few competitors in the region going out of business, a situation that was unlikely to continue Net earnings, however, had been declining for the last 3 years and were expected to decline next year Brunswick was determined to turn his company around within the next 3 years. He sat back from his desk and buzzed his personal assistant: "Gabrielle, could you ask Marianna and Bradley to come up?" Background The distribution business, in its simplest form, involves the purchase of inventory from a variety of manufacturers and its resale to retailers. Over the last 3 to 5 years, demands orn inventory changed considerably; neither manufacturers nor retailers want to handle inventory, leaving distributors to pick up the slack. In addition, an increased tendency of retailers to order directly from manufacturers placed further strain on the profitability of distributorships in general. After humble beginnings in a shed behind the house of Brunswick's grandmother, the company moved to a 10,000-square-foot leased facility. Ten years ago, BDI began distributing high-end appliance products to supplement its low-margin products. BDI distributing high-end appliance products to supplement its low-margin products. BDI entered into an agreement with KitchenHelper Corp., a large manufacturer of high-end kitchen appliances, located 35 miles from Moline, Illinois, to distribute KitchenHelper appliances to customers in the region. Over the years BDI enjoyed steady growth and expanded its area of coverage. Currently, Brunswick was covering an area with a radius of 200 miles from the company's main facility. Given the rapid growth, BDI purchased the leased facility and made additions to bring its capacity to 30,000 square feet. The demise of several of its competitors resulted in the acquisition of new retailer customers and some new product lines. Traditional ordering in the retailer-distributor-manufacturer chain took place via fax or telephone. Brunswick considered implementing an Internet based ordering system but was unsure of the potential operational and marketing benefits that it could provide Concerns Market Direct competition from distributors increased over the past 5 years. As a result, the most successful distributors adopted a value-added strategy to remain competitive. Retailers want dependable delivery to support sales promotions and promises to customers. They also want the freedom to hold sales promotions at any time as competitive conditions with only short notice to distributors. They also want the opportunity to choose from a wide variety of appliances. Nonetheless, many orders are won on the basis of price and lost on the basis of delivery problems dictate and Financial Manufacturers commonly demand payment in 30 to 45 days and provide no financing considerations. Retailers, on the other hand, pay in 50 to 60 days. This difference often leaves BDI in a cash-poor situation that puts an unnecessary strain on its current operating loan. The company's borrowing capacity has almost been exhausted. Any additional financing will have to be sought from alternative sources. Given BDI's financial situation, any additional financing will be issued at a higher charge than the company's existing debt. Operations Inventory turnover also presented a problem for the past 5 years. In the past 2 years however, a significant downturn in turnover occurred. This trend seems likely to continue rders from retailers come in as their customers near completion of construction or renovations. Even though historical information provided a good benchmark of future sales the changing market lessened the reliability of the information. The changes also affect BDI's ordering. Manufacturers require projections 60, 90, and 120 days out to budget their production. Sometimes penalties are assessed when BDI changes an order after it is placed with a manufacturer Strategic Issues As Marianna and Bradley walked into Brunswick's office, he was still pondering the report. Grab a seat," he grunted. They knew they were going to have a long day. Brunswik quickly briefed them on why he had summoned them, and they all immediately dove into a spirited discussion. Brunswick pointed out that BDI would need to be properly structured to deal with the recession and the reality of today's market. "We need to be well-positioned for growth as the market stabilizes," he said. To meet this challenge, BDI must evaluate a number of alternative options. Some of the possible options might include expanding current systems and, when necessary, developing new systems that interface with suppliers customers, and commercial transportation resources to gain total asset visibility. Before making any investment decision, Brunswick reminded them that BDI would have to evaluate any new capital requirements, as well as the expected contribution to the company's bottom line and market share, that any option might provide. Exhibit 1shows the income statement for the current year Exhibit1 Company Income Statement ($000's) Revenue 33,074 Revenue 33,074 Cost of Goods Sold Shipping costs 8,931 Direct materials 5,963 Direct labor and other 6,726 Total 21,620 Gross Profit 11,454 Operating Expenses Selling expenses 2,232 Fixed expenses 2,641 Depreciation 1,794 Total 6,667 Earnings before Interest and Taxes 4,787 Interest expense 838 Earnings before Taxes 3,949 Taxes @ 35% 1,382 Net Income 2,567 Investing in New Infrastructure Bradley Pulaski, vice president of operations, said, "Since Associated Business Distribution Corp. ceased operations 4 years ago, we have been inundated with phone calls and emai from potential customers across the Midwest looking for an alternative to ABD's services These requests come not only from former ABD customers, but also from potential customers that have not dealt with either ABD or us in the past. We cannot adequately service this market from our current warehouse because the customers do not want to wait for lengthy deliveries. We are currently servicing some customers in that region; however, I do not think we can keep them much longer because of delayed deliveries. To take advantage of this opportunity, we would have to construct a new storage facility to complement our already strained resources and forward position inventory to shorten our delivery times to customers on short notice. We are challenged by an inadequate infrastructure far too small for our requirements. We only have the Moline warehouse at this time." The addition of new facilities would provide BDI with an opportunity for increased penetration in key industrial markets in the upper Midwest where the company has had a limited presence The financing resources for this option would be a challenge, given that BDI was approaching its credit limit with its principal bank. Additional financing from larger banks in Chicago, however, was not ruled out. It would be expensive (with current interest rates for long-term loans starting at 11 percent). According to Bradley, this option would cost $2 million for property and $10 million for plant and equipment. The new warehouse facilities would be depreciated over 20 years. The 20-year loan would be repaid with a single balloon ayment at the end of the loan. With the additional infrastructure, BDI would be able to increase its annual sales by $4,426,000. In addition, delivery lead times to customers in the region would be reduced from 5 days to 2 days, which would be very competitive. Because of the added warehouse capacity, BDI could also increase the number of brands and models of appliances to better serve the retailers needs for more variety. However, certain categories in the costs of goods sold would also increase. Total annual shipping costs, which include supplier deliveries to the warehouse as well as deliveries to the customer, would increase by S955,000. Annual materials costs (for the sold appliances) and labor costs would each increase by 6 percent. Total assets would increase from $30,170,000 to $43,551,000 This increase takes into account changes to inventory investment, which would become $7,200,000, accounts receivable, property, and plant and equipment. Streamlining the Distribution System Marianna Jackson, the vice president of logistics, stated, "I believe there is an opportunity to capitalize on the void left by our fallen rivals by utilizing a cost-efficient distribution system We do not need a new facility; we can continue to serve the customers in the Midwest as best we can. However, what we do need is an efficient distribution system. We are holdinga considerable amount of stock that has not moved simply because of our inefficient inventory systems. One of our top priorities is working diligently with the inventory control department to keep what we need and dispose of what we do not need. This approach will allow us to use the space recovered from the unneeded items for automated warehouse equipment that will enable us to become more efficient. Everything we do and every dollar we spend affects our customers. We need to keep our prices competitive. Our cost of operations is our customers' cost. Our goal is to enable customers to spend their resources on readiness and the tools of their trade, not logistics. This option will not help us much with product variety or delivery speed; however, it will increase our on-time delivery performance and improve our flexibility to respond to changes in retailer orders to support their sales programs." The option of having an integrated center, comprised of sophisticated automation systems advanced materials handling equipment, and specially developed information technology would provide BDI with both the versatility and capacity to offer improved products and services to Brunswick's customers. The system would support real-time ordering, logistics planning and scheduling, and after-sales service. When an order is received through a call center at Brunswick's offices in Moline, it will be forwarded to a logistics center for processing. The customer is given a delivery date based on truck availability. Orders would be grouped by destination so that trucks could be efficiently loaded to maximize the truck capacity. The order would then be scheduled for delivery and the customer notified of the estimated arrival. This new information technology would improve BDI's reliability in delivering the products when promised. The system also includes an automatic storage and retrieval system (AS/RS). The AS/RS selects a customer order and moves it to a dock for loading on a truck headed for the customer's location. The capital costs for this system would be $7 million, which would be depreciated over a 10-year period. The operating costs, including training, would run at S0.5 million each year. These costs would be Case: Brunswick Distribution, Inc. Alex Brunswick, CEO of Brunswick Distribution, Inc. (BDI), looked out his office window at another sweltering day and wondered what could have gone wrong at his company. He had just finished reviewing his company's recent financial performance and noticed something that worried him. BDI had experienced a period of robust growth over the last 4 years "What could be going wrong?" he thought to himself. "Our sales have been growing at an average rate of 8 percent over the last 4 years but we still appear to be worse off than before." He sat back in his chair with a heavy sigh and continued reviewing the report on his desk. Sales had risen consistently over the past 4 years but the future was uncertain. Alex Brunswick was aware that part of the past growth had largely been the result of a few competitors in the region going out of business, a situation that was unlikely to continue Net earnings, however, had been declining for the last 3 years and were expected to decline next year Brunswick was determined to turn his company around within the next 3 years. He sat back from his desk and buzzed his personal assistant: "Gabrielle, could you ask Marianna and Bradley to come up?" Background The distribution business, in its simplest form, involves the purchase of inventory from a variety of manufacturers and its resale to retailers. Over the last 3 to 5 years, demands orn inventory changed considerably; neither manufacturers nor retailers want to handle inventory, leaving distributors to pick up the slack. In addition, an increased tendency of retailers to order directly from manufacturers placed further strain on the profitability of distributorships in general. After humble beginnings in a shed behind the house of Brunswick's grandmother, the company moved to a 10,000-square-foot leased facility. Ten years ago, BDI began distributing high-end appliance products to supplement its low-margin products. BDI distributing high-end appliance products to supplement its low-margin products. BDI entered into an agreement with KitchenHelper Corp., a large manufacturer of high-end kitchen appliances, located 35 miles from Moline, Illinois, to distribute KitchenHelper appliances to customers in the region. Over the years BDI enjoyed steady growth and expanded its area of coverage. Currently, Brunswick was covering an area with a radius of 200 miles from the company's main facility. Given the rapid growth, BDI purchased the leased facility and made additions to bring its capacity to 30,000 square feet. The demise of several of its competitors resulted in the acquisition of new retailer customers and some new product lines. Traditional ordering in the retailer-distributor-manufacturer chain took place via fax or telephone. Brunswick considered implementing an Internet based ordering system but was unsure of the potential operational and marketing benefits that it could provide Concerns Market Direct competition from distributors increased over the past 5 years. As a result, the most successful distributors adopted a value-added strategy to remain competitive. Retailers want dependable delivery to support sales promotions and promises to customers. They also want the freedom to hold sales promotions at any time as competitive conditions with only short notice to distributors. They also want the opportunity to choose from a wide variety of appliances. Nonetheless, many orders are won on the basis of price and lost on the basis of delivery problems dictate and Financial Manufacturers commonly demand payment in 30 to 45 days and provide no financing considerations. Retailers, on the other hand, pay in 50 to 60 days. This difference often leaves BDI in a cash-poor situation that puts an unnecessary strain on its current operating loan. The company's borrowing capacity has almost been exhausted. Any additional financing will have to be sought from alternative sources. Given BDI's financial situation, any additional financing will be issued at a higher charge than the company's existing debt. Operations Inventory turnover also presented a problem for the past 5 years. In the past 2 years however, a significant downturn in turnover occurred. This trend seems likely to continue rders from retailers come in as their customers near completion of construction or renovations. Even though historical information provided a good benchmark of future sales the changing market lessened the reliability of the information. The changes also affect BDI's ordering. Manufacturers require projections 60, 90, and 120 days out to budget their production. Sometimes penalties are assessed when BDI changes an order after it is placed with a manufacturer Strategic Issues As Marianna and Bradley walked into Brunswick's office, he was still pondering the report. Grab a seat," he grunted. They knew they were going to have a long day. Brunswik quickly briefed them on why he had summoned them, and they all immediately dove into a spirited discussion. Brunswick pointed out that BDI would need to be properly structured to deal with the recession and the reality of today's market. "We need to be well-positioned for growth as the market stabilizes," he said. To meet this challenge, BDI must evaluate a number of alternative options. Some of the possible options might include expanding current systems and, when necessary, developing new systems that interface with suppliers customers, and commercial transportation resources to gain total asset visibility. Before making any investment decision, Brunswick reminded them that BDI would have to evaluate any new capital requirements, as well as the expected contribution to the company's bottom line and market share, that any option might provide. Exhibit 1shows the income statement for the current year Exhibit1 Company Income Statement ($000's) Revenue 33,074 Revenue 33,074 Cost of Goods Sold Shipping costs 8,931 Direct materials 5,963 Direct labor and other 6,726 Total 21,620 Gross Profit 11,454 Operating Expenses Selling expenses 2,232 Fixed expenses 2,641 Depreciation 1,794 Total 6,667 Earnings before Interest and Taxes 4,787 Interest expense 838 Earnings before Taxes 3,949 Taxes @ 35% 1,382 Net Income 2,567 Investing in New Infrastructure Bradley Pulaski, vice president of operations, said, "Since Associated Business Distribution Corp. ceased operations 4 years ago, we have been inundated with phone calls and emai from potential customers across the Midwest looking for an alternative to ABD's services These requests come not only from former ABD customers, but also from potential customers that have not dealt with either ABD or us in the past. We cannot adequately service this market from our current warehouse because the customers do not want to wait for lengthy deliveries. We are currently servicing some customers in that region; however, I do not think we can keep them much longer because of delayed deliveries. To take advantage of this opportunity, we would have to construct a new storage facility to complement our already strained resources and forward position inventory to shorten our delivery times to customers on short notice. We are challenged by an inadequate infrastructure far too small for our requirements. We only have the Moline warehouse at this time." The addition of new facilities would provide BDI with an opportunity for increased penetration in key industrial markets in the upper Midwest where the company has had a limited presence The financing resources for this option would be a challenge, given that BDI was approaching its credit limit with its principal bank. Additional financing from larger banks in Chicago, however, was not ruled out. It would be expensive (with current interest rates for long-term loans starting at 11 percent). According to Bradley, this option would cost $2 million for property and $10 million for plant and equipment. The new warehouse facilities would be depreciated over 20 years. The 20-year loan would be repaid with a single balloon ayment at the end of the loan. With the additional infrastructure, BDI would be able to increase its annual sales by $4,426,000. In addition, delivery lead times to customers in the region would be reduced from 5 days to 2 days, which would be very competitive. Because of the added warehouse capacity, BDI could also increase the number of brands and models of appliances to better serve the retailers needs for more variety. However, certain categories in the costs of goods sold would also increase. Total annual shipping costs, which include supplier deliveries to the warehouse as well as deliveries to the customer, would increase by S955,000. Annual materials costs (for the sold appliances) and labor costs would each increase by 6 percent. Total assets would increase from $30,170,000 to $43,551,000 This increase takes into account changes to inventory investment, which would become $7,200,000, accounts receivable, property, and plant and equipment. Streamlining the Distribution System Marianna Jackson, the vice president of logistics, stated, "I believe there is an opportunity to capitalize on the void left by our fallen rivals by utilizing a cost-efficient distribution system We do not need a new facility; we can continue to serve the customers in the Midwest as best we can. However, what we do need is an efficient distribution system. We are holdinga considerable amount of stock that has not moved simply because of our inefficient inventory systems. One of our top priorities is working diligently with the inventory control department to keep what we need and dispose of what we do not need. This approach will allow us to use the space recovered from the unneeded items for automated warehouse equipment that will enable us to become more efficient. Everything we do and every dollar we spend affects our customers. We need to keep our prices competitive. Our cost of operations is our customers' cost. Our goal is to enable customers to spend their resources on readiness and the tools of their trade, not logistics. This option will not help us much with product variety or delivery speed; however, it will increase our on-time delivery performance and improve our flexibility to respond to changes in retailer orders to support their sales programs." The option of having an integrated center, comprised of sophisticated automation systems advanced materials handling equipment, and specially developed information technology would provide BDI with both the versatility and capacity to offer improved products and services to Brunswick's customers. The system would support real-time ordering, logistics planning and scheduling, and after-sales service. When an order is received through a call center at Brunswick's offices in Moline, it will be forwarded to a logistics center for processing. The customer is given a delivery date based on truck availability. Orders would be grouped by destination so that trucks could be efficiently loaded to maximize the truck capacity. The order would then be scheduled for delivery and the customer notified of the estimated arrival. This new information technology would improve BDI's reliability in delivering the products when promised. The system also includes an automatic storage and retrieval system (AS/RS). The AS/RS selects a customer order and moves it to a dock for loading on a truck headed for the customer's location. The capital costs for this system would be $7 million, which would be depreciated over a 10-year period. The operating costs, including training, would run at S0.5 million each year. These costs would be