Supplies Mate, Office Supplies Distributor Case

Situation:

Supplies Mate (SM), a distributor of office supplies in Central London, has experienced declining profitability over the past five years.
Question:

How can the distributor address this profitability trend?
Suggested Frameworks:

Profitability model with emphasis on understanding fixed vs. variable operating costs.


Key Facts (to be shared as the case progresses):
Company
· Profitability has slipped from 12% to 8% over the past five years
· Revenues have grown by 15% over the past five years
· SM distributes from one central warehouse in downtown London that it has owned for 20 years
· SM has built a reputation for customer service, “Personal on-time delivery and support every time.”

Customers
· Large businesses (60%), medium-sized business (20%), small businesses (20%)
· Many of the medium-sized and most of the small business accounts were acquired recently and are located on the perimeter of the city (not to be given unless asked for specifically).

Competitors
· Fragmented industry
· Client is one of the largest and most successful distributors
· Category killer OfficeMax has just entered the market, but the client’s revenues have grown due to its focus on customer service

Products
· Sells a full-line of office supplies (e.g., paper, pens, toner), “All your office supply needs. “

Order Fulfillment
· Most orders take over the phone and processed by data entry specialists, some large customers transmit order electronically
· Orders appear on terminals as individual line items, several line items may comprise an order
· Stock pickers take an order, pick all the items and send the completed order to packaging, staging and distribution
· Trucks are stocked each morning with deliveries for that day
· Company-employed drivers deliver to clients

Costs
· Industry standard costs as office supplies are commodities
· Typical fix costs are property, plant and equipment, technology infrastructure and some portion of labor are utilities
· Typical variable costs are supplies, labor, fuel, etc.
· Cost are comparable to competitors using the same data entry and order picking methods
· Sixty percent of order fulfillment costs are fixed
Good Conclusions:

Conclusions will address cost problems. The order picking system and delivery systems can be rationalized to lower costs. Orders can be grouped and picked simultaneously by one picker or some kind of “assembly line” picking system can be proposed. Alternative delivery systems (i.e., Federal Express or the like) can be proposed, but likely at the expense of personal customer service. All these options are possible, but would likely lead to minimal cost reductions.

Excellent Conclusions:

Conclusion will recognize this as a revenue problem. The company has been growing revenue by adding unprofitable accounts. Many of the newly acquired small and medium-sized accounts have the same order fulfillment and customer service costs as larger accounts, but do not generate an adequate volume and are therefore, unprofitable to service under the existing business model. Additionally, smaller businesses often make a large number of smaller orders. Rationalizing the client list or offering a reduced level of service to small and medium-sized clients can yield immediate gains in profitability. Candidates should offer creative solutions to servicing smaller clients profitably.