REV: APRIL 26, 2005
ROBERT S. KAPLAN
Midwest Office Products
John Malone, general manager of Midwest Office Products (MOP) was concerned about the financial results for calendar year 2003. Despite a sales increase from the prior year, the company had just suffered the first loss in its history (see summary income statement in Exhibit 1). Midwest Office Products was a regional distributor of office supplies to institutions and commercial businesses. It offered a comprehensive product line ranging from simple writing implements (such as pens, pencils, and markers) and fasteners to specialty paper for modern highspeed copiers and printers. MOP had an excellent reputation for ...view middle of the document...
Recently, MOP had introduced a desktop delivery option in which Midwest personnel personally delivered supplies directly to individual locations at the customer’s site. Midwest had leased four trucks and hired four drivers for the desktop delivery service. Midwest charged a price premium (up to an additional 5% markup) for the convenience and savings such direct delivery orders provided to customers. The company believed that the desktop delivery option would improve margins and create more loyal customers in its highly competitive office supplies distribution business. Midwest had introduced electronic data interchange (EDI) in 1999, and a new internet site in 2000, which allowed customer orders to arrive automatically so that clerks would not have to enter data
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Midwest Office Products
manually. Several customers had switched to this electronic service because of the convenience to them. Yet Midwest’s costs continued to rise. Malone was concerned that even after introducing innovations such as desktop delivery and electronic order entry, the company could not earn a profit. He wondered about what actions he should take to regain profitability.
Distribution Center: Activity Analysis
Malone turned to his controller, Melissa Dunhill and director of operations, Tim Cunningham for help. Tim suggested: If we can figure out, without going overboard of course, what exactly goes on in our distribution center, maybe we can get a clearer picture about what it costs to process orders and serve our customers. Distribution center manager, Wilbur Smith, spoke with Melissa and Tim about the operations at the center: All we do is store the cartons, process the orders, and get them ready to ship to customers, either by commercial freight or using the desktop delivery option. Wilbur described some details of these activities: The amount of warehouse space we need and the people to move cartons in and out of storage and get them ready for shipment just depends on the number of cartons. All items have about the same inventory turnover...