Case $1$: Supply Chain Management at EcoTech Electronics

EcoTech Electronics $($EE$)$ is a manufacturer of environmentally friendly consumer

electronics and gadgets. The company is headquartered in Green Valley, California, and

distributes its products worldwide. Recently, a supply chain expert was appointed as the

Chief Operations Officer $($COO$)$ of EE$,$ bringing a fresh perspective to the supply chain

operations. The company's costs in this area have been on the rise, prompting concerns

from the management. EE's annual sales reached $$150,000,000$ for the first time since its

inception, and the management believes that while some of the increased supply chain

costs may be due to higher sales, there are other underlying factors that need attention.

The management is particularly concerned about the direct impact of supply chain costs

on the company's bottom line.

EE supplies its products through three main distribution channels: online retail $($direct to

consumers$),$ third$-$party retailers, and international distributors. Each channel operates as

an independent profit center with full financial responsibilities for their income

statements and balance sheets. Online retail accounts for the largest percent of total

sales, followed by third party retail and international distributors. The cost of goods sold

accounts for $35\%$ of sales, and all three channels appear to be profitable, contributing

equally to EE's overall performance as per the company$’$s cost accountant.

The order fulfillment process at EE involves four key areas:

$1.$ Order Processing: $$12,000,000$

$2.$ Packaging: $$9,000,000$

$3.$ Labeling: $$3,000,000$

$4.$ Delivery: $$35,000,000$

$5.$ Total Supply Chain$-$Related Costs: $$59,000,000$

The average order fulfillment time is currently $4$ days. All orders are processed through a

central location and shipped from distribution centers located across the country. Online

retail and third$-$party retail orders shipped unlabeled while international distributors

often require customized labeling to comply with different regulatory requirements. To

meet these needs, the company invested in a labeling machine with a historical value of

$$8,000,000,$ which is typically depreciated on a straight$-$line basis over $5$ years.

EE has a consistent discount policy for all three channels, with net payments due in $30$

days. Online retail adheres to this policy, while third$-$party retailers tend to pay within $20$

days, and international distributors sometimes take up to $45$ days. The cost accountant

reports that all sales are made on credit, and cash sales or C$.$O$.$D$.$ sales are rare, so they

can be disregarded for analysis.

In the current fiscal year, EE received a total of $3,500$ orders: $1,100$ from online retail,

$2,100$ from third$-$party retailers, and $300$ from international distributors. Each order

corresponds to a delivery that is typically completed within the $4-$day fulfillment cycle.

The company's practice has been to allocate logistics$-$related costs to its three channels

based on their relative percentage of sales volume. The orders were shipped as shown in

Table $1–$ Activity Summary by Distribution Channel. Packaging costs were the same

regardless the order size.

EE maintains inventory safety stock to ensure it meets its promised delivery times,

estimated at an average of $100$ days for online retail, $70$ days for third$-$party retailers,

and $50$ days for international distributors. The cost accountant estimates that carrying

costs, including the cost of capital, amount to approximately $12\%$ of the total average

annual inventory. The company's cost of capital for both borrowing and lending is

estimated at $8\%.$

EE$’$s currently has accounts with $13$ third$-$party retailers. Table $2$ provides a sales

summary and logistics volume $($orders$,$ packages$)$ by account.

The COO emphasizes the company's commitment to providing excellent customer

service, particularly in maintaining a $4-$day fulfillment cycle. However, the board of

directors is beginning to question whether this strategy is generating enough value to

justify its cost.

Management has tasked you, as a supply chain expert, with the following

questions:

$1.$ Analyze the current cost allocation methods used by EE$.$ What potential

changes can you recommend to make the system more efficient and

accurate?

$2.$ Determine the profitability level and return on investment for each

distribution channel under the current cost allocations and the

recommended changes.

$3.$ Provide recommendations regarding the company's policy of offering all

customers the same service level $(4-$day fulfillment cycle$).$

Table $1–$ Activity Summary by Distribution Channel

Channel Name Sales Orders Packages

Online Retail $$80,000,0001,1002,000$

Third$-$Party Retail $$45,000,0002,1002,500$

International Distributors $$25,000,000300700$

Table $2–$ Activity Summary by Third$-$Party Retail

Retailer Name Sales Orders Packages

Gadgets and I $$3,000,0002530$

All Things Tech $$6,000,0006090$

Tech at Home $$2,50$