DB Toys- Case Study

JP Nagar Bangalore Group

Amritha George –ePGP-02-007
Krishna Praveen –ePGP –02 –035
Raghavendra Gandhi Rakethla –ePGP-02-055
Executive Summary
DB Toys is a second tier toys based in Massachusetts with sales in more than 15
countries. In 2000 DB toys recorded net sales of 1.5 billion , down from 1.7
billion in 1999
Company was losing its market share and its total annual sale was dropping at a
fast rate. IT department was spending $30 million on supply chain which was
half of IT budget. This was way above industry standards. Company was
looking for a way to reduce its supply chain costs by outsourcing its supply
chain activities to Inflection which is supply chain consulting and service
company
About DB Toys
 Company founded in early 1950’s

 With its attractive line of action figures and other lucrative add-ons company
grew rapidly in early 1950 and 1960s

 In 1984, company cut production costs rapidly by relocating its production

plants to overseas locations

 In 2000, US economic downturn hit the company hard. Especially the action
figure toy market which was DB toys’ forte
Stages of DB Supply Chain

Source: DB Toys HBR Case study

Value chain

Source: DB Toys HBR Case study

Inflection –Outsourcing Pyramid

Source: DB Toys HBR Case study

A New Standard In The Performance
Inflection– Value Proposition
Lowered costs in total. Changing fixed costs to Variable costs
based on Variable pricing

Less Cost

Out sourcing an activity which is not the firms core

competency

Toys Market

Helping executive management to focus on the bottom

line

Supply Chain
DB Toys -Supply Chain Out sourcing Risks
Risk Type Details

Definition of Goals Not clearly defining goals and objectives before starting the
outsourcing process. 

Information Making the decision to outsource without complete

information on internal costs and processes.
Information Not considering the impact of outsourcing on other functions
and areas of risk such as environmental and regulatory
factors. 
External Market Not casting one’s net widely enough for potential providers of
the service, and thus missing good candidates.
Internal Finances Not considering the full impact of an outsourcing agreement
on a company’s financial condition.
DB Toys -Supply Chain Out sourcing Risks
Risk Type Details

Deal Structuring Not establishing an outsource relationship that has

sufficient flexibility to deal with business
fluctuations..

Deal Structuring Lack of incentives for provider continuous

improvement.

Deal Structuring Initiating an agreement with a service provider that

limits flexibility in the future.
Best outsourcing model
Area of weakness of DB Toys is in Supply chain support
where 60% of the expenses are spent, where as Industry
average is only 25% (Exhibit 10)
Therefore immediate benefit can be seen in Business
application outsourcing , where Inflection can bring in
efficiencies and thus reduce IT spending by 20% each year
Business process outsourcing is a risky investment as it
requires almost equal investment of $ 28 million per year
(against current spending of $ 30 million) and financial
impact of the improvements remains to be tested such as
less order time, less inventory etc
Best Pricing model
Pricing Advantages Disadvantages
Model
Fixed Price  a) Any risks associated with Fixed Price 9.3 million/Quarter
Project delays and costs are (i.e. 37.2 million annually). This is
incurred by outsourcing partner. much higher than current
b) Relatively Quick and easy to spending of $ 30 Million
implement

Cost-plus a) Out sourcing partner will try to
reduce the costs over time
a)Fixed Price 9.3 million/Quarter
(i.e. 37.2 million annually). This is
much higher than current
spending of $ 30 Million. There will
be annual reduction of 2% .
b)Base fees will fluctuate with
annual cost incurred by the vendor
c) Outsourcing partner may not
choose to strategic improvements
due to prohibitive costs
Best Pricing model
Pricing Advantages Disadvantages
Model
Transaction Clients with minimal cash flow Cost will be 0.75 million*55 = 41.25
Based prefer this option as no upfront million*4 equals 167 million
payment is required
Fixed Price a)Incentive to perform will be Cost will be 37.2 million*0.4 =14.88
with annual higher, + 5*4 = 34.88 million
share b) outsourcing cost will still be (assuming 0.05 increase in EPS
holder 4.88 million higher compared based on revenue growth and
value current spending, but better than operating cost cuts)
incentive just having a fixed price Cost will 14.88+ 3*4 = 26.88 million
clause if only 0.03 increase in EPS is
taken in to consideration
Best Pricing model
Pricing Advantages Disadvantages
Model
Transaction Initial investment is nil, payments Cost will be 0.75 million*55 = 41.25
based can be made as and when company million*4 equals 167 million
pricing generates value 167*0.4+5*4=86.8 million
with annual
share This is a highly expensive option
holder even after share holder value
value incentive clause
incentive
clause

In short fixed price model, with annual share holder incentive clause
seems to be most suitable contract which could cost less than the
current IT spending of 30 million in Supply chain services
Additional Recommendations
Annual share holder value incentive clause should be
done only if revenue increases more than current value of
2%. That only if EPS increases more than 0.02 should the
additional 4 million be awarded
DB Toys should invite Tender applications from other
vendors to understand the market and to assess the
accuracy of its specifications
DB toys seems to be in wrong market as Action figures
toys is losing market share rapidly. Though company can
cut operating costs with supply chain outsourcing, top
line growth is not guaranteed by this move
Thank you