DB Toys _E-PGP_02_007,035,055

DB Toys- Case Study

JP Nagar Bangalore Group y Amritha George ePGP-02-007 y Krishna Praveen ePGP 02 035 y Raghavendra Gandhi Rakethla ePGP-02-055 .

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 . In 2000 DB toys recorded net sales of 1.5 billion .Executive Summary DB Toys is a second tier toys based in Massachusetts with sales in more than 15 countries. This was way above industry standards. IT department was spending $30 million on supply chain which was half of IT budget.7 billion in 1999 Company was losing its market share and its total annual sale was dropping at a fast rate. down from 1.

company cut production costs rapidly by relocating its production plants to overseas locations  In 2000. US economic downturn hit the company hard.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. 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 .

Not considering the full impact of an outsourcing agreement on a company s financial condition. and thus missing good candidates. Not casting one s net widely enough for potential providers of the service. Information Information External Market Internal Finances . Not considering the impact of outsourcing on other functions and areas of risk such as environmental and regulatory factors.DB Toys -Supply Chain Out sourcing Risks Risk Type Definition of Goals Details Not clearly defining goals and objectives before starting the outsourcing process. Making the decision to outsource without complete information on internal costs and processes.

Lack of incentives for provider continuous improvement. Initiating an agreement with a service provider that limits flexibility in the future. Deal Structuring Deal Structuring .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..

where as Industry average is only 25% (Exhibit 10) y Therefore immediate benefit can be seen in Business application outsourcing .Best outsourcing model y Area of weakness of DB Toys is in Supply chain support where 60% of the expenses are spent. where Inflection can bring in efficiencies and thus reduce IT spending by 20% each year y 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 .

e.3 million/Quarter (i.2 million annually).Best Pricing model Pricing Model Fixed Price Advantages a) Any risks associated with Project delays and costs are incurred by outsourcing partner. 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 . This is much higher than current spending of $ 30 Million Cost-plus a)Fixed Price 9.2 million annually). This is much higher than current spending of $ 30 Million.3 million/Quarter (i. There will be annual reduction of 2% . 37. 37. b) Relatively Quick and easy to implement a) Out sourcing partner will try to reduce the costs over time Disadvantages Fixed Price 9.e.

88+ 3*4 = 26. b) outsourcing cost will still be 4.88 + 5*4 = 34.88 million higher compared current spending.2 million*0.88 million (assuming 0.25 million*4 equals 167 million Cost will be 37.Best Pricing model Pricing Model Advantages Disadvantages Cost will be 0.75 million*55 = 41.4 =14.03 increase in EPS is taken in to consideration Transaction Clients with minimal cash flow Based prefer this option as no upfront payment is required Fixed Price with annual share holder value incentive clause a)Incentive to perform will be higher.88 million if only 0.05 increase in EPS based on revenue growth and operating cost cuts) Cost will 14. but better than just having a fixed price .

Best Pricing model Pricing Model Advantages Disadvantages Cost will be 0.25 million*4 equals 167 million 167*0. payments based can be made as and when company pricing generates value with annual share holder value incentive clause In short fixed price model.8 million This is a highly expensive option even after share holder value incentive clause Transaction Initial investment is nil. 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 .4+5*4=86.75 million*55 = 41.

Though company can cut operating costs with supply chain outsourcing.02 should the additional 4 million be awarded y DB Toys should invite Tender applications from other vendors to understand the market and to assess the accuracy of its specifications y DB toys seems to be in wrong market as Action figures toys is losing market share rapidly. That only if EPS increases more than 0.Additional Recommendations y Annual share holder value incentive clause should be done only if revenue increases more than current value of 2%. top line growth is not guaranteed by this move .

Thank you .

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