The case team reports are to be posted to the blog by WEDNESDAY 27TH 20:00 PM.
The report should be based on the method we used in class: Lists of (1)facts, (2)Problems, and (3)recommendations.
During the class of thursday 28th, we will discuss and solve the case.
Good Weekend,
Ramon Prat
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Asta Ramberg
Skage Grønneberg
Juan Manuel Ruiz
Benjamin Defrere
Juan Carande
Technology, Productivity and Change Management
April 2005
“Nutribest Inc. Company Under Pressure”
Facts
- Nutribest is an agribusiness multinational that in 1999 entered the European market through the acquisition of several French companies, currently owning and operating three of these plants.
- The company manufactures animal feeds, focusing on superior design and performance of its product and by capturing margins above the stagnant levels of the sector (a strategy that has proven successful in Eastern Europe and South Asia), selling around 12000 tons of feed per month.
- The feed business in Europe is mature, and profitability has decreased in the sector during the last year.
- Their economy of scale system releases local businesses from costs and functions that are centralize in the Nutribest headquarters, making the local companies commercial and manufacturing centres.
- The reduction of costs combined with superior field productivity of their products has improved the financial performance in acquired firms, with France as an exception, which has generated losses over the last 2 years.
- The new CEO wants to keep the prices to maintain the mark-ups.
- The sales team is unmotivated by the decreasing sales, and the bad experiences increasing resistance to enter new accounts.
- The cost of the raw materials counts for 60% – 80% of the selling price on the volume based costing system.
- To develop an excellent feed/weight gain ratio the R&D department focuses on specifying the nutritional needs of animals and the most optimal composition of the diets.
- The company has been using a standard system of volume based costing to allocate their indirect cost, but are considering changing to the ABS system, which links the costs to activities instead of volume.
- The standard system has produced an incorrect allocation of the indirect costs, resulting in misleading information of product cost and pricing strategy, driving the company to accented price tension and stagnant margins for some products.
- The company uses solid accounting procedures, internally and externally audited, which are supported by a new ERP system.
- The average manufacturing batch for dealer customers is 4 tons, and 24 tons for industrial customers.
- The new analyses shows that in total terms the dealer line, although it only accounts for 30% of the volume sold, requires 67% of the total activity.
- The time driven activity costing system shows that all the products in the industrial line are generating revenue, while the opposite is happening to the dealer line.
Core Problem
- Dealer line cost level is too high in comparison to the overall percentage of sales and profits that it contributes, due to the expensive and time consuming activities linked to this line (line set-up and adjustment, warehouse and inventory management, expedition of goods, visits to customers, commercial support, production scheduling, and invoicing and managing credits).
Secondary Problems
- Sales promotions and visits generate high costs and expenses without increasing the company’s sales.
- Dealer customer purchases are many and small in quantity, increasing the amount of post-sales activities and costs, generating losses in this line.
- Volume based costing system is not adequate since it is misleading for the price setting strategy.
Recommendations
- Company should focus on a fewer number of dealer customers that represent a higher sales amount.
- Cut costs on dealer line manufacturing and post-sale activities, reducing time and resources established for it. Some possibilities are the following:
o Create an Internet page or intranet and/or a toll free helpdesk, to which dealer customers have unlimited access, providing them with information, ordering placement system, post-sale service and technical and commercial support. This way they can reduce the time and costs generated by customer visits and personal commercial support.
o Dealer customers could be responsible for the expedition of goods, reducing the costs for Nutribest and possibly cutting down the prices of the products.
- Offering dealer customers discounts per volume of purchase, lowering the product price as the volume of the purchase increases significantly.
- Create a supply chain which involves wholesalers that could take over all the post-sale activities, decreasing the costs assumed by Nutribest.
- Outsourcing the expedition of goods.
- Close or sell the dealer line since it is only generating losses for the company.
Conclusion
We consider that there are two possible choices that Nutribest could adopt to stop the losses that are being generated by the dealer line. The first option is to either sell or close the dealer line, concentrating their business and activities on the profitable industrial line. The second option consists of establishing a supply chain that involves wholesalers that will assume the costs and activities related to the dealer line, reducing costs throughout the different stages of the process.
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