Brant Freezer Case PDF

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Summary

Writing a report for the Brant Freezer company, analyzing the the given data and giving recommendations...

Description

Logistics: Brant Freezer Company Prepared for:

Young Joaquin (J.Q) Brant, Brant Freezer Company Prepared by:

SCMT 310 | BA Students | School of Business | SAIT Polytechnic May 1, 2021

Case Study: Brant Freezer

Contents Introduction...................................................................................................................... 1 The Most and the Least Improvement Warehouses.........................................................2 Comparisons Between Brant Freezer Warehouses (Best)...............................................4 Comparisons Between Brant Freezer Warehouses (Worst).............................................5 Projected Warehousing Costs in the Last Six Months of 2017.........................................6 The Increase in Volume and the Cost of Inflation.............................................................8 Brant Freezer Company’s Strategic Profit Model (SPM)................................................10 10% Deduction in Warehouse Costs Effect in 2017’s ROA............................................11 Conclusion..................................................................................................................... 13 References..................................................................................................................... 14

Case Study: Brant Freezer

Introduction This report will analyze and compare the performance not only Brant Freezer’s warehouse located in Fargo, but also their public warehouses in Atlanta, Boston, Chicago, Denver, Los Angeles, Portland, and St. Louis. According to the 2016 figures and the actual figures for the first five months in 2017 for all warehouses, the warehouse that has the most improvement and the warehouse that has the poorest change in performance will be revealed relatively. We’re going to project the warehousing costs for each warehouse in the last six months of 2017, and the amount of inflation which is caused by the increase of unit shipped. This also includes the Strategic Profit Model for the company and the calculation change in ROA if warehousing costs decreased 10% from 2016 levels. Finally, we’re going to conclude the document with the contract cancellation for one of the warehouse based on its poor improvement, and discussion on any additional matter regarding warehousing costs or units shipped.

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Case Study: Brant Freezer

The Most and Least Improved Warehouses Warehouse costs play an important role in determining the company’s financial performance because the costs must be managed wisely in order to make profit. With the tables below, we’re going to evaluate each warehouses’ performance by using the number of units shipped and the warehouse costs in the first five months of 2016 and 2017. After that, we could be able to figure out the unit cost for all the warehouses based on the criterion of the lowest amount. Since we only have 2 time periods to analyze which are from January to May, and January to December, we decided to select the time frame starting from January until May 31 in both 2016 and 2017 because it happened at the same period of time, and the historical data is more precise than the projected data. We believe that the less change in cost, the better the business performance is. The following procedure will determine which warehouses have the most improvement and which ones have the poorest change in the first five months of 2016 and 2017. 1. Calculate the cost per unit in the first five months in both 2016 and 2017 for each location by dividing the warehouse costs by the unit shipped. For example: Atlanta unit cost in 2016 =

2016 ’ s warehouse costs 2016 ’ s unit shipped

=

$ 35,890 4080

 2016’s Atlanta unit cost = $8.80

2. Unit cost difference is computed by subtracting the unit cost in the first five months of 2016 by the unit cost in the first five months of 2017.



For instance: St. Louis unit cost in the first five months of 2016 is $9.97, and 2017’s unit cost is $9.07, so the difference in cost per unit is $(0.90)

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Case Study: Brant Freezer

The following table includes all the calculation for all eight warehouses in term of cost per unit and the difference in unit cost in 2016 and 2017.

3. Determine the percentage change in unit cost in the first five months between 2016 and 2017 by dividing the unit cost difference by 2016’s cost per unit. For example: Denver’s unit cost difference is $1.93, and 2016’s unit cost is $8.56, so the percentage change is figured based on the equation

Difference∈unit cost ∗100 2016' s unit cost

[ CITATION Ski17 \l 4105 ]  Denver’s percentage change is =

$ 1.93 ∗100 $ 8.56

= 22.54%

The percentage change in unit cost’s calculation and the performance ranking system will be placed as follow:

Percentage Changes

% changes in first 5 months of 2016 and 2017 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 2.93% 5.00% 0.00% -5.00% -10.00% -9.00% -15.00%

31.80% 22.53% 13.34% 3.01%

3.42%

3.60%

According to the performance ranking table and 3|PAG E

Warehouse Location

Case Study: Brant Freezer

the chart, the public warehouse in St. Louis has decreased their unit cost by 9 percent, and it has a huge effect not only to their budget, but also their business activities. On the other hands, the warehouse that has the highest increase in unit cost is Fargo with 31.8% escalation in terms of cost per unit. Overall, St. Louis has the most improvement amongst other locations, and Fargo shows the poorest change in performance.

Comparisons Between Brant Freezer Warehouses (Best) When dealing with multiple options, we believe that an effective way to judge performance in business is based on the least amount of average unit cost, and to compare those options amongst each other and establish a ranking system. Not only does this method require the need for a standard, but also a sampling of data in order to be as accurate as possible. Brant Freezer Company operates 8 warehouses spread throughout the United States of America. In order for us to depict which of these 8 warehouses is doing the best throughout the given period (2016-May 31, 2017), we had to find the best way to measure overall performance. This lead our team to choose cost/unit, as we found it to be the superior performance measure when comparing which warehouse did the best. A lower cost/unit is better in this case because we are dealing with holding costs. Tracking holding costs is a useful strategy when looking to save money and increase profits. Money tied up in holding costs is essentially being wasted, and leaning out the process will create efficiency and benefit the company.

Upon looking at the image above, it becomes evident that St. Louis does the best job for the Brant Freezer Company with an average cost/unit of $8.91. It can be speculated that St. Louis has a competitive advantage over the other warehouses, as it is located centrally in comparison with the other 7 warehouses.

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Case Study: Brant Freezer

Comparisons Between Brant Freezer Warehouses (Worst) When comparing like warehouses, there will be a ‘best’ in class and a ‘worst’ in class. Knowing which is the worst in class can generally add more value to a decision maker, then knowing which is best. This is because there is often more value that can be gained from improving the ‘weak link’ in contrast to improving the best in class. The Brant Freezer Company has been struggling with holding costs and J.Q. believes that their best option is to create waves by canceling a contract with one warehouse and awarding that contract to another warehouse within that city. After reviewing the average cost/unit in the table above, most would think Fargo would be the obvious choice to discard. However, like all major decisions, we believe there are more factors to look at before making a final decision. We chose to drop the 7th ranked Denver and this was due largely in part to other factors. Although Fargo was ranked worst in class, we decided to keep them on board because the Brant Freezer Company is based out of Fargo. This means the company has deep ties to the North Dakota city, and has invested more there in comparison to the other warehouse locations. Another reason we chose to drop Denver’s warehouse was due to the firm beliefs of the workers union. It is no secret that the warehouse was closed from March 4-19, 2016 because of a strike. Past performance is well known to be the best gauge when predicting future performances. We believe that given the circumstances, Denver is the weak link, and their contract must be released.

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Case Study: Brant Freezer

Projected Warehousing Costs in the Last Six Months of 2017 Since the first five months of 2017 was over, determining the warehousing costs is crucial for the last six months of 2017, so that the company is able to budget properly how much they’re going to expend in the remaining period in 2017. We assumed that the proportion of costs spending in the first five months of 2016 should be quite similar to the first half of 2017, and we believe the last six months of 2016 and 2017 will be closely related to each other. In order to calculate for the remaining of 2017, the following data categories would be used for the analyzing process are:   

Percentage of costs spent in the first five months of 2016 (Dividing the costs occurred in the first five months of 2016 by the total warehousing costs in 2016). Actual costs in the first five months of 2017. Projected total costs in 2017 (We’re going to recalculate the projected total costs in 2017 by the division of the actual costs in the first five months of 2017 to the percentage of costs occurred in the first five months of 2016, so now the recalculated projected total costs in 2017 is more accurate statistically based on the data set in 2016 than the original projected costs which was determined without the involvement of much data analysis).

Now, we could easily calculate the projected costs for the last six months of 2017 by subtracting the actual costs in the first five months of 2017 from the 2017‘s recalculated total projected cost. However, the results will give us the projected costs for the last seven months, but we’re only interested in the amount of warehousing costs in the last six months, so we have to multiply the number by 6/7 to accomplish the warehouses’ budget for the last six months of 2017. For instance: -

-

-

22.88% of Atlanta’s budget in 2016 is spent in the first five months. Instead of $178,000 for 2017’s total budget, the recalculated value of total projected costs is approximately $175,786 by dividing 2017’s actual five months costs of $40,228 to 22.88% of expending in the first five months in 2016. Subtracting the first five months’ actual costs of $40,228 from the 2017’s projected total costs of $175,786 will give us $135,558 which is the projected costs in the last seven months. Finally, multiplying $135,558 by 6/7 is approximately equal to $116,193, and that is the remaining budget in the last six months of 2017 for the Atlanta’s location.

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Case Study: Brant Freezer

The completed calculation for all eight warehouses in terms of projected warehousing costs in the last six months of 2017 will be displayed as follow:

Although we’re asked to determine only the warehousing costs for each location in the last six months in 2017, we’re able to figure out the projected unit shipped by implementing the same calculation technique as the last six months projected costs. On top of that, the cost per unit in the last six months was calculated as well, so J.Q. could have more data in depth in order to make any significant decisions sagely for his family firm. The following table will show the projected unit shipped in the last six months in 2017 as well as the cost per unit.

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Case Study: Brant Freezer

The Increase in Volume and the Cost of Inflation According to Brant Freezer Company, the amount budgeted for each warehouse in 2017 is greater than the 2016’s actual costs [CITATION Pau \l 1033 ], so there will be an increase in volume of units shipped. On top of that, the inflation is considered in this situation due to an upturn in cost per unit in 2017. The increase in volume of business is the difference between the total units shipped in 2017 and the total units shipped in 2016, and we would like to figure out the increase in monetary value of the difference in units shipped between 2016 and 2017 in order to provide in-depth data for the firm. Not only are we calculating the increase in volume, but we’re also aware of inflation cost which is one of the main aspect that affect the inventory costs, change in cost per unit, and borrowing amount [ CITATION Tim17 \l 1033 ]. The data categories that would be relevant for analyzing the increase in volume of units shipped as well as the cost of inflation are:     

Total units shipped in 2016 Projected units shipped in 2017 Cost per unit in 2016 (table in page 4) Cost per unit in the first five months of 2017 (table in page 2) Amount of inflation per unit cost (2017’s unit cost in the first five months subtract by 2016’s unit cost) The formulas, which will be included in the computation process, are:  Cost of volume difference =

2016 ’ s unit cost x (2017 ’ s projected units shipped – 2016 ’ stotal units shipped)  Inflation in 2017 =

2017 ’ s projected units shipped x Amount of inflation per unit cost . For example, Boston’s cost of volume difference and the amount of inflation in 2017 are:  

Cost of volume difference = $ 9.16 x(7920 – 6920) Inflation in 2017 = 7200 x $ 0.27 = $1,921.84

= $2,566

The finished calculation for all of the warehouses in term of cost of volume difference and the amount of inflation are as follows:

Case Study: Brant Freezer

Based on the table above, the more units shipped, the better the business performance is because it’s going to boost the business activities. We’ve recognized that the warehouse that has the most improvement in terms of volume business is St. Louis with the change approximately $18,195 in 2017. In contrast, Fargo’s volume has been declined considerably to the amount of $(130.25) which will add to the negativity in business activities, budgeting process, and overall performance in the last six months of 2017. The lower the inflation, the better the performance is. We’ve noticed that Boston has the least amount of inflation in 2017 which is $1,921, and followed by $2,541 of the warehouse in St. Louis. On the other hand, it has come to our attention that Atlanta’s inflation is the highest amongst other warehouses which is approximately $17,500, and Chicago is the second highest with the inflation of $15,246 due to an upsurge in the projected units shipped alongside with the unit cost in 2017.

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Case Study: Brant Freezer

Brant Freezer Company’s Strategic Profit Model (SPM) It’s apparent that the Brant Freezer Company has been suffering from financial losses due to the increase in warehousing cost. Although operational cost cannot be eliminated, it can still be minimized and monitored with the use of a Strategic Profit Model (SPM) due to the revenue it provides to the company. By utilizing this model, logistics managers can better allocate funds to secure financial longevity for the company. With the information provided within the case study (2016 Income Statement and Balance Sheet), we were able to extract relevant information, which we placed directly in the Strategic Profit Model (SPM). Using the simplicity of the model and the 2016 Income Statement, we calculated and determined the Net Profit Margin (NPM) by dividing Net Profit (NetP) by Sales ( 580,283 / 4,003,450 =0.144945734 x 100 =14.49%). The Net Profit Margin (NPM) of 14.49% is the percentage of each sales dollar that the Brant Freezer Company is able to recognize as profit.

For the lower portion of the Strategic Profit Model (SPM), we focused on extracting a majority of the information from the 2016 Balance Sheet, and a small portion (Sales) from the 2016 Income Statement. With this information, we were able to determine the Asset Turnover by dividing the Sales by Total Assets ( 4,003,450 /3,454,975 ) = 1.15874934 or = 1.16). The Asset Turnover ratio is a strong indicator of how well the Brant Freezer Company is distributing its assets to create revenue. With both the Net Profit Margin (0.144945734 or 14.49%) and the Asset Turnover (1.15874934 or 1.16) we were able to determine the Return on Assets (ROA) with multiplication. The Return on Assets (ROA) of 16.795574% or 16.8% means that with every dollar invested in the company 16.8% will be returned to the company as profit. 10 | P A G E

Case Study: Brant Freezer



To keep the calculations as accurate as possible, all the numbers were rounded after the Return on Assets (ROA) was determined.

10% Deduction in Warehouse Costs Effect in 2017’s ROA Prior to determining the 2017 Return on Asset, we were provided with additional information regarding the reduction in warehousing costs by 10%. All other information remained unchanged from the 2016 Income Statement.

With this new information, we began to manipulate the 2016 Income Statement by recalculating the warehouse costs to reflect the 10% decline. ( 735,982 x 0.1 = 73,598.20). Once determining what 10% of the warehousing cost would be ($73,598.20), we subtracted the amount from the 2016 warehousing cost to receive our new 2017 warehousing cost ( 735,982−73,598.20 = 662,383.80). By decreasing the warehouse cost, we must also decrease our total operating cost from $2,307,167 to $2,233,568.80. Also, we can re-evaluate our earnings before interest and taxes, and alter the numbers to reflect the previous change in total operating costs (2016 earnings before interest and taxes = $759,283, then 2017 earnings before interest and taxes = $832,881.20) Our calculations only affected the 2016 Income Statement, this means the only portion of the Strategic Profit Model (SPM) that needs to be altered is the top portion that relates directly to the Income Statement. Our Variable Expenses (VarEx) and Total Expenses (TotEx) have both decline from 2016, which also changes our Net Profit (NetP) and Net Profit Margin (NPM). Since our Asset Turnover remains unchanged, we multiplied our new Net Profit Margin (NPM) with the previous Asset Turnover (ATurn) (

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Case Study: Brant Freezer

16.33 % x 1.16 ) to receive our new Return on Assets (ROA) (18.9257809% or 18.93%)

Sales 4,003,450 G.M 3,066,450 NetP COGS

653,881.2

937,000 NPM

Var Ex 1,887,692.

8

TotEx

2,233,568.8

16.33%

Sales 4,003,450 ROA

Fix Ex

 

345,876

Tax+Int 179,000

ATurn

1.16

ATurn

1.16

To keep the calculations as accurate as possible, all the numbers were rounded after the Return on Assets (ROA) was determined. In an ideal scenario, the interest, taxes and net income could be substituted with the change in warehousing cost. With minimal information, we refrained from answering the question in great depth.

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18.93%

Case Study: Brant Freezer

Conclusion The manufacturing industry is constantly growing, and with the improvements in technology and innovation, strong manufacturing competitors are taking advantages and...