Case Assignment

CASE 13.2

Paper2Go.com

Colleen Starky never thought she would be able to sell paper products to consumers on the

Internet. However, after five years in business Paper2Go.com has reached $75 million in revenue.

Paper2Go specializes in shipping paper-related products to consumers, including diapers, paper

towels, and facial tissue from numerous suppliers. Because these items have a low margin, Colleen

knows she needs to control costs and at the same time have high service levels.

Paper2Go receives 500,000 orders annually with an average revenue per order of $150 and

an average profit per order of $90. Paper2Go’s current order fill rate is 92 percent. Colleen

estimates that of the orders not filled correctly or completely, 15 percent of the customers cancel

their orders and 85 percent will accept a reshipment of the correct/ unfilled items. This rehandling

costs Paper2Go $15 per order and is only applicable on the reshipped orders. In an effort to retain

customers, Paper2Go reduces the invoice value of rehandled orders by $30.

Paper2Go pays $2,500,000 for transportation, both inbound to and outbound from its

warehouses. Its warehousing costs are $1,950,000 annually. Paper2Go has $40 million of debt at

an annual interest rate of 12 percent. Other operating costs are $1 million per year and Paper2Go

maintains $100,000 in cash at all times.

Paper2Go has an average inventory of $6.7 million. This level of inventory is necessary to

help fill consumer orders correctly the first time. The inventory carrying cost rate is 30 percent of

the average inventory value per year. Its accounts receivable averages $350,000 per year.

Paper2Go owns three warehouses that are valued in total at $85.7 million. The net worth of

Paper2Go is $45 million.

Colleen has decided that a 92 percent order fill rate is not acceptable in the market and lost

customers and rehandled orders are negatively affecting profits. She has decided to invest $1

million in a new stock locater system for the warehouses, increase inventories by 10 percent, and

increase the on-time delivery of inbound shipments by contracting with a new carrier. This carrier

upgrade will increase total transportation costs by 10 percent. Colleen hopes these changes will

increase the order fill rate to 98 percent. Paper2Go faces a current tax rate of 35%.

CASE QUESTIONS

1. You are the logistics analyst at Paper2Go.com and have been asked to do the

following:

a. Calculate the financial impact of increasing order fill rates to 98 percent from 92

percent.

b. Develop a strategic profit model of both the old system and the modified system

that reflects the suggested adjustments.

CASE 13.2

References

1. Langley; C. John Langley; Robert A. Novack; Brian Gibson; John J. Coyle (2016)

Supply Chain Management (12th Edition). Publisher: Cengage South-Western

2. Need one more authored reference.