You are the lead project manager for an outdoor sporting goods distribution company called Elite Sports Distribution (ESD) that has annual sales totally $270 million. Your company has ambitious plans and has 3 major initiatives cited below. The C-level executives believe that our distribution process must be improved. Of these initiatives, ESD will select one of these projects by the end of the year, only giving 6 months to complete the project selected. The 3 projects are listed below.

Project #1 - Improve Shipping time

Currently, 30% of your annual revenue comes from e-commerce direct from the ESD website, but we have found sales stalling this past year. Several high-ranking executives in the company believe that the reason sales have stalled was due to our speed to ship for in stock items. It is believed by many in the company that we must compete with Amazon on service. Currently it takes us and average of 3 days before we have an items ready to ship via parcel courier such as UPS or FedEx Ground. A survey was done and if we improve the speed and can ship 100% of our in-stock items in the same day, our sales would increase by 20% annually for e-commerce shipments. Some work has been done, that it will cost us about $4,000,000 up front to improve from 3 days to 0 days (0 days meaning ship same day) to upgrade warehouse shipping systems and add automation to prepare items for shipping that quickly. Some like this idea except for the fact it only focuses in our 30% of our business being e-commerce direct but that we need to focus on improving all of our sales segments.

Project #2 - Add a New Distribution Center

Currently we ship 100% of our volume from our 1 single distribution Center in Atlanta, GA. 30% of our sales are from e-commerce direct from the EDS website, the other 70% are wholesale and 3rd party resellers of our product that we ship direct to the locations they provide. While the facility has worked well, we would need to expand it in the next few years to keep up with demand. However, many high-ranking executives believe that we should add 2nd distribution center on the west coast to service the customers on a quicker basis. If we added a new facility in Reno, NV, we would be able to get to 50% of our customers on the west coast 2-3 days faster. There are buildings available that we could be in by January 1 of next year. It would cost of $2,000,000 up front and incremental lease cost of $25,000 per month on a 5-year lease. There is no incremental operational cost since volume increases and cost structures are the same as Atlanta, GA. Based on a customer survey, it is believed that the improved service would increase sales by 10% annually if we added this new west coast distribution center.

Project #3 - Outsource All Distribution Services

We have a proposal for a globally respected major 3rd Party logistics provider that has given an amazing proposal to let them take over all the logistics of distribution. Their proposal states that they can be up and running on January 1 and we will not miss a single shipment, it's almost too good to be true from an operational standpoint. Their offer requires us to spread our inventory to 4 distribution centers around the country but does not require us to carry any more inventory that we currently do today. They have offered us $1,000,000 cash up front for any expenses we may have in shutting down our operation and moving inventory into their control. Our analysis shows that would cover all our 1-time expenses with no money left. After the analysis they provided, we would reduce our logistics cost equal to 3% of sales, AND, they would ship same day plus shorter in-transit time resulting in sales increase for all our revenue by 9%. There is one caveat to this agreement, their contract would require that we allow "Assignment of this contract to another 3rd party without the consent of EDS", meaning that if they bought, sold or company splits off, the service they are providing could be transferred to another company without our approval. While the opportunity to outsource maybe attractive, some members of the executive team fear we give up too much control of our business and could bankrupt the company if a new company would take over and service declines.

Your assignment:

1) Using BOTH the Financial NPV (Use 5 years) and the Payback period, evaluate the best project from a financial standpoint. ESD desired Rate of Return is 15%. Target profit margin is 15%. All your financial work must be shown (can be copied/pasted from Excel). If you feel any financial data is missing, you may add data, you must note which data and how you came up with that data.

(ESD desired Rate of Return is 15%. Also assume a profit margin of 15% (if you have not assumed something different). This means $270,000,000 * 20% = $54,000,000 total sales increase. Profit margin would be $54,000,000 * 15% = $8,100,000, which is you case flow each year.

For NPV, If have not already made a years assumption, use 5 years.)