Gemini Logistics (GL) offers packaging and shipping solutions to small and medium-sized companies in the greater metropolitan New York City region that do not have scale economies to do in-house packaging and shipping, and yet have special requirements preventing them from utilizing UPS pack/ship services. GL runs a fleet of trucks in the NYC area collecting parcels and next-daydelivery pouches. The GL warehouse is near the Newark, New Jersey, airport, which is used for shipping all GL packages. GL negotiates bulk discount rates with FedEx, UPS, and DHL for the final delivery of GL packages to end customers of GL clients. For example, an online seller of used DVDs receives domestic orders for DVDs. This online seller has GL pick up, package, label, and ship the DVD to the end user.
GL has three operating divisions (profit centers): Domestic Parcel, Domestic Pouch (next-daydelivery), and International. Each operating division serves a different customer set and hence has its own direct sales organization. However, all three divisions share the same common resources of its Newark warehouse and the GL truck fleet.
Currently, GL uses bar coding to uniquely identify, label, and track shipments through GL's system and the carrier (UPS, FedEx, or DHL). Radio-frequency identification (RFID) is starting to substitute for bar coding technology. RFID involves a small electronic tag the size of a postage stamp that emits radio waves to transfer data between a reader and the tag attached to the item being shipped. Each item being shipped will have its own unique identifying number, allowing GL more accurate packaging, labeling, and shipping. UPS, FedEx, and DHL already deploy RFID tagging. Each tag costs $0.09 per shipped package.
GL estimates that a fully deployed RFID system in its warehouse will allow each division to generate additional net operating margins by allowing the GL division to raise its shipping fees, attract new customers wanting this new technology, and lower its operating costs from shipping errors and lower handling costs in the warehouse. The following table presents estimates of the additional net operating margin and the total number of shipments in the three divisions if RFID technology is deployed by GL.

In other words, the international division currently has net operating margins of $4.8 million, and this will rise by 7 percent if RFID is adopted. Net operating margin is shipping fees received by the GL division less all direct costs incurred by the division (such as labor costs of employees assigned to the division and payment to the carriers [UPS, FedEx, DHL]), but excludes the allocation of any common shared resources (such as the cost of the truck fleet, warehousing costs, corporate offices, marketing, etc.).
In addition to the RFID tags required on each package, a fully functional RFID system requires RF readers, middleware to filter RFID data, upgrades to GL's enterprise warehouse management systems and networks, and other IT hardware. GL estimates the additional annual fixed cost of a RFID system (not including the cost of the individual tags) to be $450,000.
Each GL division (Domestic Parcel, Domestic Pouch, and International) is a profit center and is evaluated (and rewarded) based on net operating margin less its allocated cost of all shared common resources such as the truck fleet, warehousing costs, and the costs of the RFID technology (if adopted). All shared common costs (including the total cost of the RFID system) are allocated based on the number of packages shipped by the division.
Required:
a. The chief information technology officer of GL proposes that GL adopts RFID and that each of the divisions pay its share of the technology using GL's usual method for allocating shared common costs. Each division can choose to opt in or opt out of the RFID system. Will all three divisions of GL be in favor of the new RFID technology? Support your answer with an analysis of the costs and benefits of RFID for each of the three divisions.
b. If one or two of the divisions decide to opt out of the RFID system, will the remaining division(s) continue to pursue the RFID system? Again, support your answer with an analysis of the costs and benefits of RFID to the division(s) that favored the RFID system in part (a).
c. Suppose senior management makes the decision to adopt RFID rather than allowing the three divisions to choose to opt in or opt out, would senior management adopt RFID (assuming they want to maximize firm value)? Support your answer with an analysis of the costs and benefits of RFID to GL.
d. Gemini Logistics has the policy of decentralizing decision making to the three operating divisions and then rewarding the divisions based on their operating results (after charging the divisions for all the direct and indirect costs incurred by the divisions). Discuss some possible reasons most firms have the policy of charging their operating divisions for common shared resources (such as the RFID system) and the problems such a policy can create.
e. Write a short memo describing what, if any, changes you recommend to GL regarding its policy of charging divisions for their share of common shared resources.

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Domestic Parcel Domestic Pouch International Current net operating margin before RFID Percentage of additional net $7,300,000 $4,800,000 $5,600,000 operating margin from RFID Total number of shipments (after RFID) 7% 3% 5% 608,333 96,000 700,000