THE CASE AND THE DATA: A company operating as a Fulfilment Centre (FC) has just closed its financial year. With the financial reports in, the management is thinking of optimizing the combination of internal costs and service levels for the next fiscal year. For the year that just ended, the company received 500,000 orders with an average value per order of $146 and an average cost of goods sold of $94 per order. The fill rate was 84%. 18 percent of the orders not filled correctly or completely were cancelled by customers, while the balance of the orders not filled correctly initially were reshipped with the correct items/quantities (these are called rectified orders). The rectified orders had a rehandling cost of $20 per order. To appease customers, invoice values of reshipped order were reduced by $30 per order. For the year, the company paid $2,550,000 for transportation, covering both inbound to and outbound from its warehouses, while the total warehousing operating costs were $1,950,000. Other operating and logistics costs and expenses were $1 million in the past year, during which, the company had a debt constant at $40 million with an interest rate of 11 percent per year. The average inventory for the past year was $6.7 million (with a holding cost rate of 30%), and by policy the company maintains $100,000 in cash at all times. The accounts receivable averaged $350,000, and the current value of the companys three warehouses (inclusive of fixtures, furniture, and equipment), net of depreciation, is $85.7 million. The company has a net worth of $45 million (this value is taken from the Financial Statements, it cannot be calculated with the information available to the SC&L managers, and you may assume this value to be correct and to remain unchanged from the previous year to the year of the PLAN). The company pays tax on EBIT less interest (which means Gross Margin minus Total Operating Costs minus Interest). The management realizes that a 84% fill rate is not competitive, as it leads to loss of revenue and cost increases. They decided to develop a PLAN destined to add at least 7 percent to the order fill rate. The potential key elements considered for the PLAN are: A. increase inventory by 11% - this would reduce and even eliminate shortages of items at the time of fulfilling orders, thus adding 2.5% to the fill rate. This item of the PLAN can be fully funded and implemented. B. terminate the contracts with some of the transportation companies and hire carriers that are more reliable; while this would increase transportation costs by 11%, it would reduce or eliminate the number of packages which, in the past, were shipped correctly by the company but, subsequently, were lost or damaged during transportation. This potential feature of the plan would add 2% to the fill rate. This item of the PLAN must be assessed versus the quality improvement idea (see below), because the company cannot fund and implement both of these initiatives. C. improve the productivity of the various picking and packaging processes in the warehouse which would require an investment of $1109894 in new equipment (financed by an increase of the total Debt position of the company) and will add $171546 to the annual warehousing operating costs; this would reduce or eliminate situations of items not delivered in the past simply because their picking and packaging took too long and they were not ready to load at the time of the scheduled delivery (thus, transportation vehicles had to depart without such items). This item of the PLAN would add 2.5% to the fill rate and can be fully funded and implemented. Page 3 of 64 D. introduce a comprehensive quality improvement program including recurring training and continual updates of tools and devices of the poka-yoke type, as well as better packaging materials and techniques; this would require an investment of $416506 financed by an increase of the total Debt position of the company, and would involve a total annual budget of $383503 in additional operating costs compared to the previous year. This quality improvement option would add 3% to the last years fill rate. This item of the PLAN must be assessed versus the revision of the transportation arrangements idea the company can fund and implement only one of these two initiatives. Further details regarding the PLAN: All values recorded in the recently ended year not specifically mentioned for changes in this PLAN would remain unchanged (for example, there is no mention of a change in the number of orders, or the rehandling cost per order, etc.) Initiatives A. and C. are definitely part of the PLAN. However, for the third item of the PLAN, given budgetary constraints, the company will have to choose between the initiative of revising the transportation arrangements and the project regarding quality improvement, based on a comparison of the financial performance yielded (expressed in duPont indicators). THE ASSIGNMENT 1. Build a Strategic Profit Model [65%] a. Calculate the financial impact of increasing order fill rates by adding at least 7 percentage points to 84%. Provide comparisons of relevant amounts of operating costs and balance sheet items corresponding to the two levels of fill rates: last year and the PLAN year. Start with the number of orders and then identify all the applicable revenue/cost values, and end with the net income after tax for the past year and, respectively, for the PLAN in each of the two alternatives for the PLAN [A + C + B] or [A + C + D]. The company had a tax rate of 35%. For consistency, use the same tax rate for the projected model for next year. b. Develop a strategic profit model that shows in an easy to understand graphical format the comparison between the situation of the recently ended financial year and the results of the adjustments in each of the two alternatives for the PLAN [A + C + B] or [A + C + D] (use the teaching/learning materials posted on Moodle). All calculations must be performed in the spreadsheet so that formulas are visible. 2. What are duPonts ROA values for the recently closed year and the projected duPonts ROA values for the PLAN in each of the two alternatives for the PLAN [A + C + B] or [A + C + D] calculations must be performed in the spreadsheet so that both the formulas and the results are visible [15%]. 3. What are the duPonts Multiplier values for the recently closed year and the projected duPonts Multiplier values for the PLAN in each of the two alternatives for the PLAN [A + C Page 4 of 64 + B] or [A + C + D calculations must be performed in the spreadsheet so that both the formulas and the results are visible [15%] 4. In your role as the Executive VP of Operations, Supply Chain and Logistics of the company, do you approve this PLAN? If you do, which of the two alternatives would you retain for implementation? Explain your decision [5%]