DVD4less.com is one of the many new firms that have a presence on the Web. It manages to sell its DVD players for $200 less than all of its high-end competitors, thereby creating its competitive advantage. Company receives 112,000 orders for DVD players annually. Each DVD players sells for $500 of which is $200 is retained as gross profit. Last year, it filled 97% of all orders correctly. Of the orders filled incorrectly, DVD4less.com estimates that 20% of the customers cancel the order and the remainder will accept a second shipment, which results in a re-handling cost of $20 per order. To maintain customer good will, the firm gives a $35 invoice reduction for all units re-handled.
DVD4less.com pays $1,950,000 annually for the transportation of its material and delivery of its products. Its warehousing costs average$1,460,000 annually for the storage of its materials. DVD4less.com has $30 million of debt outstanding at an annual interest rate of 10%. The total cost for all selling and general administrative expenses (other operating costs) comes to $75,000 and $50,000 is held in cash at all times.
The company has an average inventory of $5 million. This large inventory is partially attributed to its purchasing policy and also its inventory management system. The inventory carrying cost rate is estimated at $25% of the average inventory value per year. Its account receivable averages $250,000 throughout the year primarily due to sales to medium-sized retailers. The Company has a large fixed asset based value of $64 million.
DVD4less.com has explored a variety of option to improve its correct order fill rate and interested in lowering its average inventory to improve its overall profit ability. Many 3rd party logistics providers bid for the contract; in the end, it is awarded to Basielo Logistics for an annual cost of $500,000.( this is classified as other operating cost) . By outsourcing, company managers to save$760,000 in warehousing expenses, reduces its average inventory by 30%, and now meets its 99% correct order fill rate. All other costs remain the same. The tax rate is 40%.
As the supply chain management analyst at DVD4less.com
Calculate the net saving of the outsourcing of the warehousing and inventory management Basielo Logistics.
Develop a strategic profit model of both the old system and the modified system of reflecting the required adjustments. DVD4less.com's net worth is $30 million.