Results of the analysis of the Cooper Processing Company case (Bowersox et al., 2013).
In order to get the data to calculate the ROA, we need to get all the necessary data. The detailed cost for the retail and foodservice channels.
For the employees cost, the retail have 40 employees and the food service 10. Considering 5.000.000,00 USD the values are:
Employee_Retail: 4.000.000,00 USD Employee_Foodservice: 1.000.000,00 USD
The calculation of the sales promotion cost, we consider that 100% of all the cost are considered in the retail channel:
Promotion_Retail: 8.000.000,00 USD Promotion_Foodservice: 0,00 USD
The cost of the order processing for each channel is proportional to the number of orders of each channels, considering 70% to the retail channel and 30% to the food services:
Order_Retail = 7.000.000,00 USD Order_Foodservice = 3.000.000,00 USD
The cost of delivery expenses depends on the quantity of deliveries. For the case, 80% of the deliveries expenses are to retail channel and 20% are to food service channel:
Delivery_Retail = 8.000.000,00 USD Delivery_Foodservice = 2.000.000,00 USD
The cost of packaging will be higher to the retail channel because the channel of food service the food is delivered direct to consumption. 80% of the packaging cost are to retail channel and 20% are to foodservice channel:
Pack_Retail = 4.000.000,00 USD Pack_Foodservice = 1.000.000 USD
100% of the costs of labeling are referred to the retail channel, that is:
Label_Retail = 2.000.000,00 USD Label_Foodservice = 0,00 USD
The overall direct cost for each channel is the sum of the following items: employees, sales promotions, order processing, delivery expenses, packaging and labeling. The results are:
Direct_cost_Retail = 33.000.000,00 USD
Direct_cost_Foodservice = 7.000.000,00 USD
The cost of inventory is fixed to 20% for each channel, considering the same cost of warehousing and management. The results of inventory costs are:
Inventory_Retail = 800.000,00 USD Inventory_Foodservice = 1.200.000,00 USD
The company finances part of the sales in order to benefit sales. The cost of financing is calculated in 10%, the same value for the two channels. The results of financing costs are:
Financing_Retail = 300.000,00 USD Financing_Foodservice = 100.000,00 USD
The calculation of the total cost is using the Direct Cost, the Inventory Cost and the Financing Cost.
TotalCost_Retail = 46.475.000,00 USD TotalCost_Foodservice = 10.925.000,00 USD
The company has 100.000.000,00 USD in sales each year. 60% of the sales are to the retail channel and 40% are to the food service retail:
Sales_Retail = 60.000.000,00 USD Sales_Foodservice = 40.0000.000,00 USD
How profitable is each channel?
The answer of the question is calculating the ratio between the net income before interest and taxes and the sales registered. That is the Return on Sales or ROS
The ROS for the Retail channel is = (60.000.000,00 - 46.475.000,00 USD) / 60.000.000,00 USD
ROS_Retail = 23%
The ROS for the Food service channel is = (40.000.000,00 USD - 10.925.000,00 USD) / 40.000.000,00 USD
ROS_Foodservice = 73%
With the previous two results, the more profitable channel is the food service.
The calculation of ROA or Return on Assets needs for the calculation all the assets the company has in its balance sheet. For the study case of The Cooper Processing Company, the only asset mentioned is the labeling machine with a value in books of 10.000.000,00 USD. The value of this machine is not enough to make a calculation of the ROA for each channel.
For the calculation of the ROA for each channel is necessary to sources of information:
- The values in books in the current time of all the equipment of the company, trucks and mobile equipment, warehouse, land and any other asset which contribute to the production, sale or delivery process.
- The usage of each asset to each channel. The usage of each channel could be calculated using methods-engineering tools. The usage is a value from 0% to 100% that is multiplied to the value of the asset.
Once we have a value of all the assets and the usage for every channel, the ROA could be calculated.
Making a comparison of the two channels, the difference in profitability of the two channels is very important. The use of more resources to the Retail Channel make that channel less profitable.
One recommendation for the Retail Channel is the reduction of orders and the processing of the order with higher in value, for example, is preferable for the company to manage ten orders of 1.000.000,00 USD than 100 orders of 100.000,00 USD. This strategy reduces the employees requirements, the cost or order processing, the delivery expenses, packaging and labeling.
Working with orders of high value is possible, the gross sales for the retail channels reduce, but the total costs would reduce at a higher speed, as a consequence, the profitability and return on sales may be higher.
The cost on sale promotions could be improved using a direct selling strategy, contacting the potential clients in a direct way and not using traditional media advertising which is less effective. Is not a good recommendation to reduce the sale promotions but to use the money in an intelligent way.
Reference List
Bowersox, Donald J.; Closs, David J.; Cooper, M. Bixby and Bowersox, John C (2013). Supply Chain Logistics Management. Fourth Edition. New York, NY: McGraw-Hill Irwin
