Analysis of Allied office Products

Analysis of Allied Office Products

Objective:

The purpose of this report is to analyze the profit deterioration experienced by Allied Office Product's Total Forms Control (TFC) division and to make recommendations for improved performance.

This report is based on the assumption that competitive forces in the specialized services provided by Allied Office Products' TFC program are relatively neutral and that these services are truly differentiated from those of competitors in the paper industry.

Executive Summary:

Allied Office Products has experienced deterioration in profit in the TFC division. This is likely the result of an imbalanced approach to applying fees for service.

The TFC division provides a wide range of special services for its clients. These services are not currently allocated back to the customer based on use. Rather, they are aggregated from expenses realized in a prior year and applied to all customers based on a flat % fee relative to the product price. This has contributed to inequitable fee distribution causing some customers to disproportionately compensate for the services they require and others to become unprofitable.

Allied Office Products needs to explore alternatives for allocating service costs based on actual use, rather than allowing low use customers to subsidize high use customers. Activity-Based Costing methodology should be considered as a go-forward means for allocating service expenses.

Description of the Current System:

Allied Office Products is a paper company specializing in business forms and specialty products (writing paper, envelops, greeting cards, etc) with 13 locations and 10 distribution centers. The exact management and centralized/decentralized structure is unknown based on the information available in the case.

During the late ‘80s, the paper industry was in a period of slow growth and innovation. In an effort to differentiate itself from competitors, Allied Office Products developed a strategy to expand into inventory management to provide value added service to its customer base. Allied created a program called "Total Forms Control" (TFC) – which included warehousing and distribution of forms, inventory control and robust customer management reporting - targeted toward its corporate clients.

"We know what you need…the right product at the right place at the right time."

By 1992, Allied was projected to have $900 million in sales - $60 million coming from TFC. Allied created a company acting as a profit center to manage TFC accounts. Forms manufacturing operated as a separate profit center, transferring product