Question
1. The customer has received your pricing and requested / demanded at discount 2. The customer also expected you to manage the inventory in a
1. The customer has received your pricing and requested / demanded at discount
2. The customer also expected you to manage the inventory in a VMI system
3. The quantity discounting will reduce your profit from $2.49 per unit to $1.74 per unit. The customer's forecast shows projected annual sales of 1,100,000 with an error of + 10%.
You reach out to your internal departments with the Inventory Management request.
Here is the response:
1. Your engineering department has sent you a list of equipment including office equipment for your new team members at $250,000.00
2. Your HR department has sent the new headcount costs to you at $449,000 annually. Training to onboard this team is set at $57,600. This includes the expected fall out (attrition) rate from training and the associated rehire costs.
3. Your requests for data on 11 remote office locations has been returned from an outside real estate firm at $39,600.00. This includes data hook-ups back to the main office.
4. Travel from your remote office locations to the customer's sites is estimated at $129,000.00. This estimate is based upon each location only being visited and audited 2 times per year.
5. Implementation and setup costs including travel are estimated at $250,000.00.
Is this project going to generate any profit in the first year?
What is the expected profit / loss at the end of the year?
What is the payback period in months / do they expand beyond the 1yr contract?
What is your recommendation, to accept or not accept the offer? Why?
What effect does the +10% demand forecast error have on your recommendations?
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