Dakota office Products

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Professor Robert S. Kaplan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as

endorsements, sources of primary data, or illustrations of effective or ineffective management.

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ROBERT S . KAPLAN

Dakota Office Products

John Malone, General Manager of Dakota Office Products (DOP) was concerned about the

financial results for calendar year 2000. Despite a sales increase from the prior year, the company had

just suffered the first loss in its history (see summary income statement in Exhibit 1).

Dakota Office Products was a regional distributor of office supplies to institutions and commercial

businesses. It offered a comprehensive product line ranging from simple writing implements (such as

pens, pencils, and markers) and fasteners to specialty paper for modern high-speed copiers and

printers. DOP had an excellent reputation for customer service and responsiveness.

DOP operated several distribution centers in which personnel unloaded truckload shipments of

products from manufacturers, and moved the cartons into designated storage locations until

customers requested the items. Each day, after customer orders had been received, DOP personnel

drove forklift trucks around the warehouse to accumulate the cartons of items and prepared them for

shipment.

Typically, DOP shipped products to its customers using commercial truckers. Recently, DOP had

attracted new business by offering a "desk top" option by delivering the packages of supplies

directly to individual locations at the customer's site. Dakota operated a small fleet of trucks and

assigned warehouse personnel as drivers to make the desktop deliveries. Dakota charged a small

price premium (up to an additional 2% markup) for the convenience and savings such direct delivery

orders provided to customers. The company believed that the added price for this service could

improve margins in its highly competitive office supplies distribution business.

DOP ordered supplies from many different manufacturers. It priced products to its end-use

customers by first marking up the purchased product cost by about 15% to cover the cost of

warehousing, distribution, and freight. Then it added another markup to cover the approximate cost

for general and selling expenses, plus an allowance for profit. The markups were determined at the

start of each year, based on actual expenses in prior years and general industry and competitive

trends. Actual prices to customers were adjusted based on long-term relationships and competitive

situations, but were generally independent of the specific level of service provided to that customer,

except for desk top deliveries.

Dakota had introduced electronic data interchange (EDI) in 1999, and a new internet site in 2000,

which allowed customer orders to arrive automatically so that clerks would not have to enter

customer and order data manually. Several customers had switched to this electronic service because

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of the convenience to them. Yet Dakota's costs continued to rise. Malone was concerned that even

after introducing innovations such as desktop delivery and electronic order entry, the company could

not earn a profit. He wondered about what actions he should take to regain profitability.

Distribution Center: Activity Analysis

Malone turned to his controller, Melissa Dunhill and director of operations, Tim Cunningham for

help. Tim suggested:

If we can figure out, without going overboard of course, what exactly goes on in the distribution

centers, maybe we can get a clearer picture about what it costs to serve our various customers.

Melissa and Tim went into the field to get more specific information. They visited one of Dakota's

distribution facilities. Site manager Wilbur Smith confirmed, "All we do is store the cartons, process

the orders, and ship them to customers." With Wilbur's help, Melissa and Tim identified four

primary activities done at the distribution center--process cartons in and out of the facility, the new

desk top delivery service, order handling, and data entry.

Wilbur described some details of these activities.

The