Case Study: Brunswick

Distribution Inc.
Foundations of Operations
Management
Professor: Neil Bishop

DONE BY:
Jennifer Fellinger

5.1 Situational Analysis

James Brunswick had been employed at a major freight company out in
Chicago. His experience mainly came from that senior logistics position that
he held within that leading distribution firm, and clearly it was all he needed
to form a company such as Brunswick Distribution Inc. Although he was not
alone in any of this, Frank Pulaski, Vice President of Operations, and Lew
Jackson, Vice President of Logistics, were right by his side the entire time,
since college, to be exact. James Brunswick acquired the idea for B.D.I.., so
with Frank, and Lew, in a shed at his grandmothers residence, plus a single
loan from the bank, they changed their lives forever.
Brunswick Distribution Inc. or B.D.I.., utilizes more than just a network of
manufacturers to implement resale strategies, getting products from
manufacturers to retailers on time, and efficiently. Simply put, they are
classified as single distributors. Their customer base spans from all over their
local environment, with a focus on quality and productivity. In and around the
city known as one of the agriculture capitals of the world, Moline, Illinois has
approximately 43,259 residents current to 2012 statistics.
Even without a strategic game plan, they dedicated themselves to their plan.
At first, they purchased two used vans for deliveries with the bank loan.
Business began to increase, and they completed their first relocation. With
the coverage of B.D.I.. increasing, they received an offer to distribute highend kitchen appliances for Kitchen-Aid, even signing the contract in 1992. A
milestone, to say the least, as it involved promoting exposure, and giving
them the opportunity to penetrate a wider range of potential consumers. The
location of Kitchen-Aid was 35 miles outside Moline, giving them a strategic
proximity advantage to their location.
By the end of 2000, B.D.I.. had almost tripled in capacity within their new
building, with an increase of 20,000 square feet. They were accumulating
clients, while other firms were shutting down regularly. The expansion of their
facility seemed too soon though, considering the market decrease
surrounding them, the focus should have been on an inventory system, as the
end result of their choice only put them in a difficult situation. On the other
hand, the capital used for the lease on the building could have essentially
been used for investing in the future, that way no financial strain would have
been acquired, and potentially could have eliminated all or most financial
strain. Some mistakes were made, and while few were miniscule, others had
the possibility of becoming detrimental.

Dropping low-end items, to focus solely on high-end inventory; income is

almost always beneficial, even if it wasnt much.

Other retailers may inquire about their products direct from manufacturers or
another distribution company if B.D.I.. loses competitive edge with their
financial resources.

With two distribution channels, and only two, a new strategy would be the
intelligent option.

Direct competition decreased over the past five years, and while Brunswick
assumed the market was going to bounce back, yet it still never has.

The orders are inconsistent with the market nowadays, as it does not pertain
to the data in the past. Although, this ever-changing market means their
dependence on previous historys data and its reliability is objectionable.

Manufacturer requires the customers orders in advance, yet with the way the
clients place their orders, expecting an approximate 60-90 day, and up to 120
days in advance, is too much. B.D.I.. is obligated to absorb/pick up the slack
of the cost.

In the past, B.D.I.. maintained a safety stock of 12 weeks of inventory with a

Q system and min/max levels at week 6 and 8; although, generally the target
turnover of inventory should be roughly between 8 and 10 weeks. As a result,
their strategy concerning inventory turnover must be enhanced to fit
accurate and efficient standards, and quickly, as they are losing opportunities
at an intense rate.

This unnecessary strain on B.D.I..s financials has been consistently

overbearing, commonly demand payment differently, leaving anything else
that is required to be acquired through alternative methods; however, due to
their situation, any quote will be a higher payment on anything they borrow. A
possible solution is to figure a common date between the retailers and
manufacturers
o Manufacturers: B.D.I.. have 30-60 days to pay.
o Retailers: Payment is due within 45-50 days.

The 15 day gap between each cut off time exists, leaving it to B.D.I.. to
exhaust their only option of the credit facility.

The budget must be a more cost-efficient structure, which is concentrated on

the manufacturers and the retailers, keeping B.D.I.. in the middle as the direct
link. A happy medium must be found that doesnt require B.D.I.. to pick up
the slack as it is an immense burden, and massive requirement on their
financials. Unless they find a stakeholder or other means they will wind up in
the same situation as their competition.

5.2 Problem Statement

What can James Brunswick, CEO of B.D.I.. do to increase the net earnings of
his company which have been declining over the past three years despite the
increase in sales during the past four years?

5.3 Financial Analysis

B.D.I.. (B.D.I..) finding itself with rising sales revenue averaging 8% average
annual increase but declining Net Income over the preceding three years
must decide between an overhaul of their existing operation by bringing in
new equipment and operating techniques or expanding into a new facility
offering greater opportunities for increased sales. When reaching a decision
James Brunswick must take a number of factors into consideration, not only
are the financial metrics important the current state of the marketplace must
be evaluated and B.D.I..s place within that market. With regional
competitors going out of business B.D.I.. has experienced a bump in sales but
James Brunswick realizes this is temporary and would likely view these
companies closing as a warning of sorts to be conservative in his plans for
B.D.I.. Well aware of the financial position of his company Brunswick must
consider that laying out large amounts of cash does come with risk, especially
when these funds are borrowed. The following charts and statements will
show the possibilities and implications of the final decision Brunswick will
ultimately make.

5.3.1 DuPont Analysis

ROE
ROA
NPM
TATO

Curre
nt

New
Infrastruct
ure

Chan
ge

Basic
AR/A
S

Chan
ge

3.7%
3.2%
1.8%
109.6
%

2.8%
2.4%
2.3%
63.7%

Down
Down
UP
Down

7.0%
4.9%
3.3%
87.9%

UP
UP
UP
Down

Fully
Integrat
ed
AR/AS
4.4%
3.4%
2.2%
94.1%

Chan
ge

UP
UP
UP
Down

ROE (Return on Equity)

Used to measure the profitability of company when compared to the
investment into the company.
When looking at the outcomes after all inputs have been made in regards to
operations of B.D.I.., ROE analysis (fig. 5.3.1) shows that the Basic AR/AS
would provide the greatest increase in ROE while the new Infrastructure
would see a decline in ROE at least in the short term. With a growing
company it would be assumed that a higher ROE is preferable.
ROA (Return on Assets)
This metric is used to show the profitability of a company in relation to its
assets or how well the company the company uses its assets to generate
income.
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Using this metric we see that the New Infrastructure brings down the ratio
meaning that the B.D.I.. would see a reduction in their return on investment
(this would likely change over the long term) while an increase is shown with
both the Basic AR/AS (3.4%) and Fully Integrated AR/AS (4.9%) with the Fully
Integrated having a higher increase.
NPM (Net Profit Margin)
This metric is used to show how much of sales dollars a firm retains.
This metric is one that B.D.I.. will need to address as it is one of key issues
that James Brunswick is concerned with. With all options Net Profit Margin
see increases, with the Fully Integrated AR/AS with the greatest gain at 3.3%
with the Basic AR/AS at 2.2% and the New Infrastructure at 2.3%. With this
information it is important to also state that an increase in NPM is not always
an indicator of increased net income. Net Income will be addressed later in
this report.
TATO (Total Asset Turnover)
This metric is used to display the total sales generated per dollar of assets. A
firm such as B.D.I.. that carries high end, high margin products a lower asset
turnover can be expected.
When looking at the asset turnover changes when implementing each of the
options an across the board drop in ratio is observed, with the New
Infrastructure leading the pack dropping from 109.6% to 63.7% followed by
the Fully Integrated AR/AS (109.6%-87.9%) and the Basic AR/AS (109.6%94.1%) This metric will be important to consider once again as it would
measure the growth of revenue and sales.

5.3.2 Operational Measures

Current

Current
Ratio
Inventor
y Turns
WC to
Sales
Fixed
Asset
Turnove
r

Chang
e

2.6

New
Infrastructur
e
3.88

Chang
e

Fully
Integrate
d AR/AS

Chang
e

UP

Basi
c
AR/
AS
2.68

UP

2.63

UP

3.2

3.3

UP

3.1

DOWN

3.1

DOWN

31.6%

65.5%

UP

DOWN

30.9%

DOWN

56.3%

103.6%

UP

31.6
%
78.1
%

UP

105.5%

UP

Current Ratio
Is a metric that measures a company's ability to pay short-term obligations.

This metric is an important aspect of the decision making process, with

regional competitors closing up shop and concerns regarding B.D.I. is often
cash poor positioning. All of the options that are being considered require an
increase in debt that would likely require an increase in sales or reduction in
expenses to accommodate. With all options it shows that an increase can be
met (fig 5.3.2) with the New Infrastructure increasing the assets of the
company and increasing the new cash coming in, the greatest increase is
seen here with a new ratio of 3.88.
Inventory Turns
This metric is used to show the number of times turns per year.
James Brunswick expresses a desire to have an inventory turn ideally at 8
with a target of 10. Currently the company is seeing a turnover of 3.2 turns.
A low ratio that the company is experiencing is indicative of excess inventory
brought on by low sales. When analysing the changes in each option only
the new infrastructure provides an increase although marginal and not to the
degree that Brunswick desires. It appears that despite a projected increase in
sales at the new facility the increase in cost of goods sold plays a significant
factor. Both AR/AS options see a reduction in inventory turns to 3.1, this
would be likely caused again by the increase in cost of goods.
WC to Sales (Working Capital to Sales)
This metric shows how efficiently a company uses it working capital to
generate sales.
Using this metric B.D.I.. sees only the New Infrastructure yielding positive
results with Working Capital increasing to 65.5% compared to the 30.9% and
31.6% for the Fully Integrated AR/AS and Basic AR/AS respectively.
Fixed Asset Turnover
This metric is used to show how well investments into the companies fixed
assets translate into increases in net sales by comparing net Plant, Property
and Equipment to the costs of goods sold.
With a large outlay of funds to finance any of the options a higher turnover on
the investment of equipment and facility are a large consideration. With all
options producing positive results The Fully Integrated AR/AS offers an
increase to 105.5% with the new infrastructure increasing to 103.6% and the
Basic AR/AS increasing to 87.1%.
The Income Statement
Current
projection

New
Infrastructu

Basic AR/AS

Fully
Integrated
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Net Income
Change

588,000

re
826,000
238,000

714,000
126,000

AR/AS
1,071,000
483,000

When addressing B.D.I..s needs Net Income is the bottom line. Regardless of
all other matters a net income is the end goal. By inputting the data into
Exhibit 2 calculator the results show that the Fully Integrated system provides
the highest net income increase.

Summary
As stated above, the ultimate goal for the firm is increasing the net income of
the business, also taken into consideration when deciding which direction to
move an analysis of the markets climate as well as an analysis of the
businesses positioning financially and within the market. Although the New
Infrastructure option presented by Frank Pulaski presents some definite
benefits the risk of taking on a financial commitment that the new
infrastructure presents (12 million dollars and 20 years.) could leave B.D.I.. in
a situation that is too cash poor to function in the event a change in the
market occurs. By taking a route that streamlines the existing business
model B.D.I.. is positioning themselves to be more efficient and with the
potential to expand at a later date if the opportunity arises.

5.3.3 Qualitative Analysis

What are the affects that either option will have on the firm in the long run?
Which option is seemingly better for the firm?
While Lew has proposed he thinks streamlining the system is a better option,
Franks suggestion is to invest in a new infrastructure.
Current Breakdown
Inventory
The system is not automated to take orders, and as the current time it
only works through two channels: phone and fax. They need to upgrade
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their system so that they are readily available when the time comes to
deal with a larger scale of demand.
Some points are as follows:
Uncertainty regarding future sales.
Dependable delivery/short delivery time
Not enough space with low grade inventory planning they have now,
need better inventory system in their warehouse.
Diversity in products
High inventory as last minute modifications due to retailers orders.
Currently BDI is seeing an inventory turnover rate of 3.2 turns. With the
option to implement a new infrastructure derives a low inventory ratio of
3.1 turns, it seems the other option is a better solution, yet an even lower
ratio is produced when the calculations for the implementation of a new
inventory system is complete.
Drivers Facilities
When a customer creates an order, Brunswick then purchases the products
from the manufacturers, storing them in their own warehouse. This system
was working fine when BDI was only dealing with low end products; however,
theyve recently blossomed into dealing with only high end products.
Currently he is trying to decide whether a larger warehouse is more
beneficial, in comparison to an updated inventory system.
With an entirely new facility, this can create more space for expansion, and
still implement the newer system, with a possibility to use more than two
channels of communication, such as an internet-based ordering system.
Sourcing
Nothing is outsourced.
Transportation
From the warehouse to the retailer, BDI as the distributor is responsible for
that shipment. So what happens if neither the manufacturers, nor the
retailers, want to be the one to handle the shipments? It is just another
situation that falls in Brunswicks lap.
Information
The information they have is limited, these information problems tend to
lead to situations and have a negative effect on BDI. These problems can
lead to delays in delivery as well As various penalties, for if their historical
data is this unreliable as the market continues to shift so many ways since
BDI opened, they will never be able to correctly forecast what may or may
not happen. Relying on past data to predict future sales tends to lose its
credibility because this market is never the same.
Basic level - Full implementation
Lews Plan
Franks Plan
$8.8 million for fully integrated
$2 million property
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system
Operating and training costs of
$0.8 million per year
Saving them in shipping and in
labor, approximately $2,505,120

This option also increase liabilities,

and adds more stress if theres still
a lack of space in warehouse.

Both basic and full systems would

actually end up decreasing net
income approximately 4-7 million
dollars for BDI.

$10 million for plant and

equipment
Savings of $5,100,000 end result
would end up increase profits each
year, yet cost BDI approximately
$13,716,340
This option is better for BDI in the
longr run and nothing would need
to be done in the future, because
they would be prepared for high
demand, increase in capacity
requirements and such.
This choice will decrease net
income as well by approximately
$8 million, due to more cost of
goods sold, which is not even a
bad thing.

Each Alternatives Issues

Lew Jackson and a Better
Frank Pulaski and a New
Inventory System
Infrastructure
New inventory system is mandatory. New facility will yield an increase to
Unnecessary
items
must
be
65.5% working capital, compared to
managed,
the
Un30.9% and 31.6% in previous
organization=Negativity
situations.

Deliveries at the current time, are As for transporting the goods, truck
not being handled in an orderly
availability based upon location of
fashion, yet with better system,
new facility, give feedback to client
they
can
potentially
decrease
on their own delivery times, with the
delivery time from 5 days, down to
option
to
view
the
schedule,
2 days.
minimizing risk of complaints.

Materials and inventory cost would Maintain an integrated facility with

increase by 6%.
more space than what they need
right now, but this will be better for
the future.
What if sales increase, and demand increase? Are they going to attempt to
maintain a small warehouse or just have to relocate in the future? With the
opportunity to centrally locate themselves, as well as move to a superior,
as well as an improved facility, isnt that the more productive option, one
including future planning as well?
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5.3.4 Environmental Scanning Analysis

Strengths, Weaknesses, Opportunity, Threats (S.W.O.T)
A S.W.O.T analysis is a point form compilation of strengths, weaknesses,
opportunities and threats facing an organization. A S.W.O.T. analysis is used
to help an organization understand itself.
A S.W.O.T analysis helps an organization develop a vision and strategy for
future development. A S.W.O.T. analysis looks at internal and external factors
and provides information on organizations strengths and weaknesses in
relation to opportunity and threats.

Strengths:
Four Years good growth
(internal)
Determination (internal)
Experience (internal)
Agreement with Kitchen Aid
(external)
Increased size of Facility
(30,000 ) (internal)
Sixty mile delivery radius
(internal)
Well-kept financials (internal)
Stable Government (external)
Understands their core
competency (internal)
Opportunity:
Competitors closing
Room for growth
Update ordering system
(Interbased)
Areas to add value
More low end (high volume)
Offer early payment discounts
Reduce stock Introduce JIT
Reduce turn over time
Mid-West looking for

Weakness:
Small fleet of delivery trucks
(internal)
Rampant uncontrolled growth
(internal)
Old fashioned ordering
methods (internal)
Loan payments (internal)
Debt collection (internal)
Manufacturers lead time
required (60 120) Days
(external)
Lack of finances (internal)

Threats:
New competition
Net earnings decline
Inventory demand
change
Loss of existing clients
Payments from clients
Exhausted finances
Retailers ordering direct
Change in market
Change in economy
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alternatives (New customers)

Financing available from
Chicago (11%)
New technology
Internet based business
potential
Establish a competitive
advantage

5.3.5 Political, Economic, Social, and Technological

Analysis
Pest analysis is concerned with the external influences on business, the
acronyms stands for the Political, Economic, Social, and Technological, issues
that could affect the restructuring and streamlining of B.D.I..
Political
Federal, State policies towards small business could impact B.D.I..
strategic plans growth positively or negatively in terms of incentives or
exemptions in taxation.
Municipal By laws regarding the property tax, and zoning could affect
B.D.I.. plan to expand their business.
Employment/unemployment laws and how it affects companys
hiring/firing policies and procedures.
Competition regulation and how it helps or hinders B.D.I.. competitive
edge in technology
Environmental Law and how it impacts companys profitability i.e.
Carbon tax.
Economics:
Economic growth helps B.D.I.. expand their business and make dent
into new territory to increase their profitability.
Economic recession will affect B.D.I.. in an unpredictable ways as
business slows down impacts their bottom line.
Tax relief or exemptions will help B.D.I.. during the tough times as it
makes up the lost businesss income.
Social:
Social responsibility improves companys images by involving local
community activities i.e. sporting events and cultural festivals.
Consumer attitude and opinions will help B.D.I.. improve customer
service skills and increase profitability.
Advertising and publicity will open B.D.I.. new market and position
B.D.I.. better place for future expansion.
14

Technological:
Investment in Information Technology will enhance B.D.I.. capability in
distribution to have competitive edge against their competitors.
Integrated order fulfilment system will speed up companys
communication system so they can improve their order cycle, delivery
time, and cut cost.
Technological obsolescence i.e. the need of upgrading systems to keep
up with changes to optimise processes efficiency and reduce turn over
time.

5.4 Alternatives
1 Maintain current operational structure.
James Brunswick could opt to make no changes to the distribution company
and its operational structure.
Advantages:
Current structure is known and no further training required.
The company could be able to keep all their employees.
No further debt could be accumulated by expanding to a larger
warehouse.
Disadvantages:
The company could continue to see a decrease in net earnings.
If the recession continues the company may see a decline in
sales.
By remaining idle in making decisions the door may be left open
for competitors to move into their market
2 Use Frank Pulaskis recommendation to serve more customers
Frank Pulaskis recommendation is invest in a new infrastructure. He wants to
expand the company by building larger storage facilities. Larger facilities
would enable the company to increase annual sales which should result in
higher net earnings.
Advantages:
The company could increase sales and potentially net earnings.
The company could become a leader in the distribution business.
The company could become a global contender in the distribution
business.
Disadvantages:
The expansion to larger warehouses could strain the companys
financial budget.
15

If operating costs are not maintained the company could lose

money on a larger scale.
If the recession continues the company could face bankruptcy if
they are not able to ride it out.

3 Use Lewis Jacksons recommendation to use a cost efficient

distribution system
Lewis Jacksons recommendation is to streamline the order fulfillment system.
He wants to utilize a cost efficient distribution system. He wants to improve
with the inventory control department to keep only products that are needed
and dispose of those that are not needed. By doing so the existing customers
will be better and more efficiently served.
Advantages:
The company will remain a stable distributor in the distribution
business.
The company will maintain the respect they have of their existing
customers.
Operating costs should decrease if tighter control is implemented
with the inventory control department.
Disadvantages:
The company may not be able to compete with larger companies.
The company may not be able to survive the recession with only
a smaller number of retailers to sell to.
The initial cost to implement the system could strain the
company financially.

5.5 Recommendations and Action Plan

Our recommendation is to choose Alternative 3:
Lewis Jacksons recommendation is to streamline the order
fulfillment system. He wants to utilize a cost efficient distribution
system. He wants to improve with the inventory control department
to keep only products that are needed and dispose of those that are
not needed. By doing so the existing customers will be better and
more efficiently served.
Lewis Jackson wants to implement a fully integrated center with automated
systems, improved handling equipment, information technology which is
specifically designed for the distribution business. The new system would
equip the company with an automatic storage and retrieval system. All these
improvements could be done using the existing warehouse facilities which
would eliminate the cost of a new warehouse.
Action Plan
Research

1
Week
X

1
Month

3
Month

6
Month

1
Year

2
Year

4
Year
16

5
Year

AS/RS
options
AS/RS
decision and
order
Arrange
financing
Delivery and
installation
of equipment
Training and
implementati
on
Evaluation of
process
Debt retired

X
X

X
X

The initial cost of the fully integrated system would be 8 million dollars but
the company would amortize this over a five-year period. This would
eliminate a large investment up front and not put a financial strain on the
company. The operating costs would be $.0.8 million dollars yearly and this
cost would be considered fixed expenses. This system would have a large
cost savings for the company.
A fully integrated system would save the company 16 percent in direct
shipping and labor expenses. All savings the company makes would be
divided equally between shipping and labor expenses. The company could
opt to finance this over a five-year debt plan at a rate of 10 percent.
This option works because there are large savings to be made from
more efficient handling of orders and improved warehouse communication.
There would also be a savings on shipping costs. This option is also a safer
choice because of initial cost layout. During a recession this is an important
factor.

5.7 Concluding Comments

B.D.I.. and its founder James Brunswick are facing an issue of declining net
income despite rising sales coupled with changes in the market place
including competition closing their doors and consumers changing their
buying methods. With competition closing their doors and changing buying
methods James Brunswick must take care in making the final decision on
which avenue to proceed, would expansion lead to potential failure, would the
status quo be the best measure or would stream lining lead to better
operations? With market uncertainty it would be advantageous to simply
make the company run smoother and more efficient. By expanding the
17

business Brunswick faces the possibility of taking on too much debt and
ultimately have the business fail due to lack of cash flow, with the status quo
a continuation of shrinking net income could cause the business to fail. A
streamlined, although does require a financial commitment, offers an
opportunity for B.D.I.. to reduce costs while becoming a more efficient
operation while still leaving the option for expansion at a later date. The
former Prime Minister of India Jawharlal Nehru once stated Obviously, the
highest type of efficiency is that which can utilize existing material to the best
advantage. Using that logic it would be in the best interests of B.D.I.. to use
their existing facility and improve on this already successful business. With
an efficient system there is to stop B.D.I.. from being a greater success.

18