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Humber College *
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3403
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Industrial Engineering
Date
Feb 20, 2024
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docx
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Uploaded by CoachIbis4024
The current cost allocation methods used by EE can be improved by implementing a more accurate and transparent cost allocation system. This can be achieved by identifying the specific costs associated with each distribution channel and allocating them accordingly. For example, the packaging costs can be allocated based on the size of the order, while the labeling costs can be allocated based on the regulatory requirements of each international distributor. Additionally, the carrying costs of the safety stock can be allocated based on the average inventory levels for each distribution channel.
The profitability level and return on investment for each distribution channel can be determined by calculating the total costs and revenues associated with each channel. This calculation should include all costs associated with each channel, such as order processing, packaging, labeling, delivery, and carrying costs. Additionally, the return on investment can be calculated by subtracting the total costs from the total revenues and dividing by the total costs. This calculation will provide a clear picture of the profitability level and return on investment for each
distribution channel.
The company's policy of offering the same service level to all customers should be reviewed and revised. This policy may not be generating enough value to justify the cost, as the board of directors has indicated. The company should consider offering different service levels to different customers, such as a faster service level for customers who are willing to pay a higher price. This would allow
the company to generate more revenue and profit, while still providing excellent customer service. In summary, the current cost allocation methods used by EE can be improved by implementing a more accurate and transparent cost allocation system. This system should include all costs associated with each distribution channel, such as order processing, packaging, labeling, delivery, and carrying costs. Additionally, the company's policy of offering the same service level to all customers should be reviewed and revised, as it may not be generating enough value to justify the cost. By implementing these changes, EE can become more efficient and accurate in its cost allocation, and generate more
profit and return on investment for each distribution channel. Final answer: In conclusion, EE's current cost allocation methods can be improved by implementing a more accurate and transparent cost allocation system, which includes all costs associated with each distribution channel, such as order processing, packaging, labeling, delivery, and carrying costs. Additionally, the company's policy of offering the same service level to all customers should be reviewed and revised, as it may not be generating enough value to justify the cost. By implementing these changes, EE can become more efficient and accurate in its cost allocation, and generate more profit and return on investment for each distribution channel.
2) The case of EcoTech Electronics (EE) presents a complex supply chain scenario with multiple distribution channels and varying cost structures. Based on the information provided, here are some recommendations regarding the company's policy of offering the same service level (4-day fulfillment cycle) to all customers:
Analysis of Current Situation:
1. Cost Structure:
EE's total supply chain-related costs are $59 million, a significant portion of its operations.
The order fulfillment process is a major cost driver, including order processing, packaging, labeling, and delivery.
2. Distribution Channels:
The channels contribute differently to sales but are treated equally in terms of fulfillment service level.
Online retail has a higher safety stock (100 days) compared to third-party retailers (70 days) and international distributors (50 days), impacting inventory carrying costs.
3. Payment Terms and Cash Flow:
Different payment terms with channels affect cash flow; international distributors sometimes take longer than the net 30 days.
This disparity can strain the company’s working capital requirements.
Recommendations:
Explanation:
1. Differentiated Service Levels:
Assess the need for a uniform 4-day fulfillment cycle across all channels. Faster fulfillment cycles typically incur higher costs. Consider extending the cycle for channels or products with less time sensitivity. For instance, products sold through third-party retailers might not require as rapid a turnaround as direct online sales.
2. Cost Allocation Based on Service Utilization:
Reevaluate the method of allocating logistics costs. Allocation based on sales volume may not accurately reflect the cost incurred by each channel.
Consider activity-based costing to allocate costs more precisely based on each channel's actual use of logistics services.
3. Inventory Management:
Analyze the high safety stock levels, especially for online retail. A 100-day safety
stock is substantial and can tie up capital unnecessarily.
Implement inventory optimization strategies, such as just-in-time (JIT) inventory, to reduce carrying costs and improve cash flow.
4. Evaluate Labeling Costs and Processes:
Given the high cost of labeling ($53 million), investigate opportunities for cost reduction, especially for channels not requiring customized labeling.
Explore technology solutions or process improvements to make labeling more efficient.
5. Review Payment Terms and Cash Flow Management:
Address the disparity in payment terms between channels to improve cash flow.
Consider incentives for early payment or renegotiate terms with third-party retailers and international distributors to align more closely with the 30-day policy.
6. Customer Service and Value Analysis:
Conduct a customer value analysis to determine if the 4-day fulfillment cycle is a
significant factor in customer satisfaction and retention.
If the rapid fulfillment does not substantially enhance customer value, consider more cost-effective alternatives.
7. Strategic Partnerships with Third-Party Retailers:
Develop closer relationships with third-party retailers to improve efficiency and possibly extend payment terms.
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8. Continuous Improvement and Monitoring:
Regularly review and adjust the supply chain strategy to align with market changes and company objectives.
Use key performance indicators (KPIs) to monitor the effectiveness of any changes implemented.
In summary, while maintaining a high level of customer service is crucial, EcoTech Electronics should consider a more nuanced approach to fulfillment and supply chain management that aligns costs with the value provided to each customer segment and distribution channel.