Logistics-1 There Are a Number

Logistics-1 There are a number of crucial financial points to consider when attempting to gauge the financial impact of *****'s increasing its order fill rates from 92 to 98%. The increase will allow the organization to earn more revenues and profits, yet will also escalate the amount of costs associated with doing so. It is crucial to note that the majority of the subsequent calculations are based on the fact that Colleen's methods of increasing her fill rate to 98% actually works. In the real world, of course, there are no guarantees.

For the sake of this exercise, however, the author will assume that the three measures Colleen is implementing to boost her fill rate -- investing in a new stock locater system for her warehouses, increasing inventories 10%, and contracting with a new carrier (Novack, need the date) -- will produce that desired effect.

Altogether, these three measures will increase Colleen's total costs $1, 920,000, including a million of which is dedicated to the locater system, $670,000 of which is going to the inventory, and $250,000 of which is going to a new carrier, adding to existing transportation costs and allowing customers free shipping "for all orders over £45" (No author, no date). The increase in filling orders, however, will allow for the company to fill an additional 30,000 orders.

The additional revenue from doing will total $4.5 million dollars -- at an average profit per order of $90 *****'s profits will increase $2.7 million dollars. Therefore, Colleen will profit $780,000 from implementing these three measures, which is the amount of her additional profits minus her additional costs. Also, it is worth noting that she will only be losing 1,500 customers per year as opposed to losing 6,000 customers per year due to cancelled orders.

Whereas with the 92% fill rate she was paying $510,000 on re-handling costs alone, with the 98% fill rate she is only spending $127, 500 on re-handling costs. Thus, Colleen's adjustments should allow for her company to profit an additional three-quarters of a million dollars, which is not a poor margin of profit when one considers the amounts of money she is seeing and utilizing in her business. Her modifications increase her return on investment (ROI) by "increasing net profit through & #8230;productive improvements" (Armstrong, 2013).

Although the stated goals of Colleen's business are to control costs as well as to operate at a high level of service, it becomes apparent from looking at the business models from her old system and her new system that she is going to have to sacrifice part of the latter in order to assist with the former.

Specifically, the prudent logistics analyst realizes that despite the fact that Colleen was able to increase her profits by adjusting her transportation service, purchasing a new locator system for the warehouse and increasing inventory (all measures which undoubtedly benefit customers and the levels of service they receive), there are still other things she can do to reduce costs. When one considers that the aforementioned modifications to Colleen's system have certainly benefited the customer, it becomes apparent that it is only solid business sense to make adjustments that will benefit *****.

The principle area in which the company can decrease costs is by changing its policy in regards to re-handled orders. Again, it is noteworthy to mention the fact that the number of these orders has been substantially decreased -- from 40,000 to 10,000 orders per year -- meaning Colleen is only losing 1,500 customers as opposed to 6,000 on an annual basis. However, ***** should certainly revise its re-handling policy in light of the boons its 98% fill rate are giving customers.

Ideally, the company will want to modify the numbers that its 8,500 customers who need an order reshipped will receive. In the old model, those numbers include a $15 re-handle charge to the company on a per order basis. Additionally, Colleen decreases the invoice value of re-handled orders by $30 -- which substantially cuts into her profit per order of $90. Currently, those two figures total $45, which is too high in light of the recent changes Colleen provided for the customer and to her company. Those numbers should be reduced by $15, or by 33%.

Virtually any combination of reducing these numbers is sure to suffice. However, it will probably be most advantageous for Colleen to decrease the amount of the invoice value to $20, instead of $30, on re-handled orders. That way her profit for such orders will be $70 (as opposed to just $60 under the old model). Simultaneously, she should also.