Dakota Office Products Analysis

Background
• Regional distributor of office supplies to institutions sand commercial businesses
• Comprehensive product line
• Excellent reputation
• Several distribution centers

Process
• Old:
• After customer orders received, orders were accumulated within the warehouses and prepared for shipment
• Used commercial truckers to deliver

• New Option:
• “Desk Top Deliveries”
• Delivered products directly to locations
• Small fleet of trucks
• 2% upcharge on products

Pricing of Products
• Markup purchased cost by 15%
• Then add markup to cover cost for selling expenses, and allowance for profit
• Determined at start of each year based on prior year expenses and competition

• Actual prices to customers depended on long-term relationships and competitive situations

Systems
• Electronic Data Interchange (EDI) 2 years prior, new internet site in 2000
• Allowed customers to order online – clerks wouldn’t have to manually enter in.
• Many customers took advantage because of convenience

Issue
• Year 2000: operated at a loss
• Even though increase in sales, there was a loss
• First time in history
• Costs continued to rise even after introducing new innovations – online ordering and Desktop Delivery

• Start: Look at distribution centers and understand the process and what goes on

Warehouse Activities
• 4 primary activities

Process cartons in and out of facility
• Dependent on number of cartons that go in and out of the facility

Desktop Delivery Service
• Pain for warehouse – have had to add extra people to handle

Order handling
Data Entry
• Manual: Validate customer and then key in line by line
• Time depends on how many items ordered

• Electronic: just a validity check
• Time is same for every order

2000 Stats:
• 80,000 cartons shipped
• 75,000 commercial freight
• 5,000 Desktop Delivery
• 2,000 deliveries

• Personnel at capacity
• Data Entry:
• 16,000 manual orders
• 150,000 total line items

• 8,000 EDI (online) orders

Results of Project Team:
• Distribution Centers:
• 90% processed cartons
• 10% Desktop Delivery

• Data Team:
Activity

Data Entry
Operators Time

Set up manual customer order

2, 000 hours

Enter individual order lines in an order

7,500 hours

Validate an EDI/internet order
TOTAL

500 hours
10,000 hours

Customer Profitability
Description

Customer A

Customer B

Sales Generated

$100,000

$100,000

Overall Markup

21.1%

22.4% (Desktop Delivery)

Type of orders
Bill Payment

Few large orders, ½ arrived electronically
Pays w/in 30 days

Many smaller orders;
most manual orders
90+ days to pay

Ave. A/R Balance

$9,000

$30,000

Assignment Questions:
1. Why was Dakota’s existing pricing system inadequate for its current operating environment?
2. Develop an activity-based cost system for Dakota Office
Products (DOP) based on Year 2000 data. Calculate the activity cost-driver rate for each DOP activity in 2000.
3. Using your answers to Question 2, calculate the profitability of Customer A and Customer B.
4. What explains any differences in profitability between the two customers?
5. What are the limitations, if any, to the estimates of the profitability of the two customers?
6. Is there any additional information you would like to have to explain the relative profitability of the two customers?

Assignment Questions (cont’d)
7. Assume that Dakota applies the analysis done in Question 3 to its entire customer base. How could such information help the Dakota managers increase company profits?
8. Suppose that a major customer switched from placing all its orders manually to placing all its orders over the internet site. How should this affect the activity cost driver rates calculated in Question 2? How would the switch affect
Dakota’s profitability?

Assignment

Write a paper
First: Summary of the situation
Then answer the questions
NO page limit!

• For those presenting:
• Presentation should include:
• Summary of the case
• Answer to the questions in detail