Why the supply chain costs seem skewed

Assignment Help Supply Chain Management

Reference no: EM13912679

Supply Chain Management at Dream Beauty

Company

Dream Beauty (DB) Company is a manufacturer of consumer beauty supplies and cosmet¬ics. Based out of Money City, Nevada, the company services its customers across the U.S. Recently, a supply chain expert was elected to the board of directors. With his insight into supply chain operations, heightened attention was turned toward that area. The costs in this area have been increasing, and management became very concerned about the issue. The company annual sales reached $130,000,000 for the first time since inception. Manage¬ment believed that some of the increase in supply chain costs may be attributed to addi-tional sales, but they were confident that other factors existed that needed to be addressed. The situation had management's full attention, especially since supply chain costs (and savings for that matter) flow directly to the bottom line.

DB supplies its products through three distinct channels: retail stores (direct), con¬venience stores, and mass merchants. Each channel is considered an independent profit center with full financial responsibilities for income statement and balance sheet. From DB sales, retail accounted for 50 percent, convenience stores for 30 percent, while mass merchants picked up the remaining sales. Cost of goods sold accounted for 40 percent of sales. All three channels seem to be profitable, and contribute equally to DB, according to the company's cost accountant.

The order fulfillment cycle at DB consists of four areas:

Cost Category	Total Cost
OniturProttaesing	410;01/0;000
.Packaging	Z1⁰⁰⁰,9⁰⁰
Labeling	2,990,000
Delivery	30,0000
Total Supply Ohaln-Related Costs	$50,000,000

The total order fulfillment avenges three days. All orders are processed through a cen¬tral location, and delivered from distribution centers located across the U.S. Usually retail and convenience store orders are shipped unlabeled on standard nonmixed pallets. Mass merchants, on the other hand, have placed a lot of pressure on DB and want the company to take an active role in helping them manage their inventory. To accommodate this chan-nel, DB has assumed some of the jobbers' functions in the store and started labeling; the orders for mass merchants. To accomplish that, the company recently purchased a labeling machine that can process labels at a speed of 30 labels/second The machine's historical value was determined to be $10,000,000. The company usually depreciates similar equip-ment on a straight-line basis over a period of five years.

The company has a discount policy for all three channels that it services. The net is due in 30 days. While this policy is explicitly stated on all DB's invoices, retail stores are the only ones that pay according to invoice terms. Mass merchants usually pay within 15 days, while convenience stores usually pay within 45 days. The company's cost accountant reported that all sales were sold on credit. Cash sales and C.O.D. sales were rare; therefore, they can be ignored for the purpose of this analysis. DB does not engage in any barter transactions.

The company received a total of 3,600 orders. Retail orders amounted to 1,000; con¬venience stores to 2,500; and mass merchants had 100 orders. Each order has a corre¬sponding delivery that is usually completed within the three-day fulfillment cycle. The company's practice has been to allocate logistics-related costs to its three channels based on their relative percentage of sales volume. The orders were shipped in 2,000 packages, with retail accounting for 800 packages, convenience stores for 1,100 packages, and mass merchants for 100 packages. Packaging cost is estimated to be the same regardless of size. To service these orders, the company has maintained an inventory safety stock so that it can meet the level of service that it promises its customers (the three-day fulfillment cycle). It is estimated that the company holds an average of 90 days' inventory for retail, 60 days' inventory for convenience stores, and 40 days' inventory for mass merchants. The company's cost accountant estimated the total carrying costs of inventory to be approxi¬mately 15 percent of total avenge annual inventory. These costs also include the cost of capital.

The company's customer base in convenience stores includes 13 different stores located in major U.S. cities. Table 1 provides a breakdown of sales per store, as well as the number of orders, and packages for each store.

Store Name	Sales	Orders	Packages
Love Your Style	S 5,000,000	300	50
Looking Good	S 1,500,000	75	10
Wild by Nature	S 3,000,000	200	100
Beautyss Bliss	$10,000,000	450	150
Cosmo Naturelle	S 3,500,000	60	30
Beautee Fatale	S 1,000,000	100	100
La Belle Femme	S 5,000,000	200	20
Le Beau Monsieur	S 2,500,000	320	200
Fruity Beauty	S 1,500,000	120	120
Tut Fruity	S 2,000,000	250	200
L'Air Du Jour	S 1,000,000	150	75
Make-up Galore	S 2,000,000	175	10
Nuttin' Homely	S 1,000,000	100	35

Historically, DB has offered its customers a level of service that is of the highest stan¬dards. One of the fulfillment managers has been quoted, "We do not discriminate between customers; our three-day fulfillment cycle in my opinion is becoming an industry bench¬mark, and I like it that way. I do not think that our strategy should change in that regard."

The board has some second thoughts about this strategy, and what type of value-added it is generating to the company.

On your first day, you get accustomed to your surroundings, and you become familiar with the computer system. On your second day, the vice president for supply chain (and your hiring manager) comes up to you. He proceeds to brief you on a high-level meeting that he just concluded with the top brass at the company. He states that management wants to know why supply chain costs seem skewed, as well as a full analysis of the three logistical channels that the company employs. Management would like you to answer the following questions.

1. Senior management wants to know why the supply chain costs seem skewed. Provide an explanation in logistical terms including an analysis of the total costs *use spread sheet*

2. The Board is interested in changing the current customer service policy. Outline what you would recommend as a new customer service policy. *use spread sheet*

3. Justify your recommendations. *use spread sheet*

Reference no: EM13912679

Questions Cloud

Production possibilities curve : Using a production possibilities curve, explain (using narrative and graphs) the opportunity cost principle. Please provide a “real-world” example where this principle would be applied in the public/healthcare/nonprofit sector.

Building manufacturing plants : Companies want to expand their business and improve their sales and profits. Instead of building manufacturing plants and installing new machineries, companies look to buy other companies and integrate them into their current business.They have $22 m..

Describe the interaction of the band members : Who - names of the band members and the instruments they play. Include singers and where - describe the place and the audience. Include the audience behavior.

What step in the proof fails if messages can be duplicated : Show that the relationship in Lemma 6. 19 also holds if mes sages can get lost in the channel pq, but not if messages can be duplicated. What step in the proof fails if messages can be duplicated?

Why the supply chain costs seem skewed : Senior management wants to know why the supply chain costs seem skewed. Provide an explanation in logistical terms including an analysis of the total costs *use spread sheet*

Depreciation expense : (b) the units-of-output method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. (Note: For DECLINING BALANCE ONLY, round the multiplier to four decimal places. Then round ..

Write paper on on utilitarianism : On Utilitarianism - Discuss pleasure (utility) as the final good of utilitarian ethics. Present Bentham's model of pleasures as quantifiable experiences, which differ only in 'amount' or 'quantity'. Contrast this view with the more elaborate posit..

Calculate the net present value of this investment : Tablerock Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method.

What modifications should be made to the echo algorithm : What modifications should be made to the echo algorithm? What modifications should be made to Finn's algorithm?

User Account

All Pages