R & D Electronics Company Harvard Case Solution & Analysis

New profitability of each customer

In order to facilitate better analysis of the profitability of new customer, a new advanced costing technique had been adopted by the management to properly allocate warehousing and shipping costs to wide range of activities required by the customers. In a new strategy, the warehousing and shipping process has been sub-divided into two main sub processes namely facility & inventory holding cost and pulling & shipping cost. Further, appropriate cost drivers were identified in order to allocate costs to a wide range of sub processes to facilitate better cost allocation to a wide range of customers.

The results of revised customer analysis in Appendix 2 shows that General Motors is a loss making customer for the company which reports a loss of $32,135 whereas in accordance with the existing strategy, it was the most important customer which reported a profit of $450,225. General Motors reported a loss because it suffered the increased cost of special product handling which turned the profit into loss.

Further, Harrington and Chery Motors reported a profit of $374,547 and $50,994 respectively; whereas they were previously reporting a profit of 205,170 and 55,890 respectively. Among three of them, Harrington accounted the increased profits whereas it was previously reporting reduced profit in accordance with the existing strategy. Additionally, there was not a big difference in the profits of Chery Motors.

Implications of dropping unprofitable customers

New strategy helps the company to appropriately recognize cost to wide a range of customers, which helped the company to determine the profitable and non-profitable customer. Further, the results of our analysis in Appendix 2 shows that General Motors is a loss making customer but the company shall not consider to drop such a customer because it contributes around 7% to the total revenue so it is very important for the company to retain such a customer. If the company retains this customer, then R & D can also get additional contracts from the reference of General Motors. Further, additional sales will provide an opportunity for the company to move towards economies of scale, which will reduce the cost substantially and will provide an opportunity for the company to charge a low price as comnpared to their competitors.

Further, the company can also consider to charge additional amount for providing special services of repacking or delivery in order to compensate additional cost against additional revenue.

Strategies in order to improve profits

R & D is currently reporting low profit margins, so it will be beneficial for the company to move towards continuous cost reduction and improved quality, which will benefit the company to deliver high quality products at low cost.

Different strategies can be adopted by R & D in order to improve its production process and report low cost, some of these include the following:

(a)    Just in Time (JIT)

JIT approach will reduce the inventory holding cost because the supplier will deliver the raw material when it is required by the company and will smooth the workflow of the company. Further, it will also eliminate the possibility of damage and obsolesce.

Apart from its advantages, JIT has some drawbacks as well that the company may depend on few or even single supplier, which will increase the dependency on them. Further, JIT also requires strengthening strong relations with the suppliers so that they can deliver quality raw material on time.

(b)   Value Chain Analysis

In order to achieve a competitive advantage, it will be beneficial for the company to determine the value generating activities, which are most valuable to the customers; so that the organization can focus on such activities in order to satisfy their needs and reduce cost, while increasing profitability. These are divided into five primary activities and they are as follows:

(a)    Inbound Logistics: It includes receiving and warehousing of raw material. R & D Electronics can perform an early inspection of raw material, which will be essential to eliminate defects at an early stage. Further, Economic Order Quantity (EOQ) can be adopted in order to reduce the inventory storage cost.

Operations: It includes transforming the raw material into finished goods. The company can adopt a culture of minimum defects. The company can hire trained labor in order to eliminate the number of defects.....................................

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