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Question: Brunswick Distribution, Inc. Alex Brunswick. CEO of

Brunswick Distribution, Inc. Alex Brunswick. CEO of Brunswick Distribution. Inc. (801), looked out his office
window at another sweltering day and wondered what could have gone wrong at his company. He just
nished reviewing his Company"s recent nancial performance and noticed something that worried him.
BDI had experienced a period of robust growth met tie last 4 years. "What could be going wrong?" he
thought to himself. "Our sales have been growing at an average rate of 8 percent over the last 4 years but
we still appear to be worse off than before." He sat back in his chair with a heavy sigh and continued
renewing the report on his desk. Sales had risen consistently over the past 4 years but the future was
uncertain. Alex Brunswick was aware that part of the past growth had largely been the result of a few
competitors in the region going out of business, a situation that was unlikely to continue. Net earnings.
however, had been decking for the last 3 years and were expected to decline next year. Brunswick was
determined to turn his company around within the next 3 years. He sat back from his desk and buzzed his
personal assistant "Cana. could you ask Marianna and Bradley to come up?"
Background
The distribution business. in its simplest norm. involves the purchase of arm-ory from a rarefy of
manufacturers and its resale to retailers. Over the last 2 to 5 years. demands on inventory Changed
considerable: neither manufacturers nor retailers want to handle inventory, leaving distributors to pick up
the sleet In addition. an increased tendency of retailers to order directly from manufacturers placed further
strain on the pro tability of distributorships In general.
After humble beginnings in a shed behind Brunswick"s grandmother"s house. the company moved to a
10,000 square-fax leased Willy. Ten years ago BDI began distributing high-end appliance products to
supplement its Icor margin products. BIN entered Into an agreement with KitchenHelper. Corp.. a large
manufacturer of high-end kitchen appliances, located 35 miles from Moline. lllinois. to distribute
KitchenHalper appliances to customers in the region. Over the years BDI enjoyed steady growth and
expanded its area of coverage. Current*, Brunswick was covering an area with a radius of 200 miles from
the company"s man facility. Chen the rapid growth, BCf purchased the leased teaity and made additions to
ding its capacity to 30.000 square feet. The demise of several of its competitors resulted in the acquisition
of new retailer customers and some new product lines traditional ordering in the retailer-distributor-
manufacturer chain took place via fax or phone. Brunswick considered implementing an internet-based
ordering system out was unsure of the potential operational and marketing bene ts that it mil provide.
Concerns Market Direct competition from distributors increased over the past 5 years. As a result, the most
successful distributors adopted a value-added strategy in order to remain competitive. Retailers want
dependable delivery to support sales promotions and promises to customers. They also want the freedom
to hold sal% promotions at any tine as competitive conditions dictate and with only short notice to
distributers They also want the opportunity to choose from a wide variety of appetencies. Nonetheless,
many orders are won on the basis of price and lost on the basis of delivery problems.
Financial
Manufacturers commonly demand payment in 30 to 45 days and provide no nancing considerations
Retailers, on the other hand. pay In 50 to 60 days. This difference often leaves BDI in a cash-poor situation
that puts an unnecessary stain on its current operating loan. The company"s borrowing capacity has
almost been exhausted My additional nancing will have to be sought from alternative sources Given
almost been exhausted. My additional nancing will have to be sought from alternative sources. Given
BDI"s nancial situation, any acriitanal nancing will be issued at a higher charge than the company"s
existing debt
Operations
Inventory turnover also presented a problem tor the past 5 years. In tee past two years. however, a
signi cant downturn in turnover occurred. This trend seems lately to continue. Orders from retailers come
in as their customers near completion of construction or renovations. Even though historical information
provided a good benchmark of future sales, the changing market lessened the reliability of the information.
The changes also affect BDI"s ordering. Manufacturers rogue projection 60.90. and 120 days out in order
to budget their prediction Sometimes penalties are assessed when WI changes an order after it is Placed
with a manufacturer.
Strategic Issues
As Marianna and Bradley walked into Brunswick"s (dice, he was still pondering the report "Grab a seat" he
grunted. They knew they were going to have a long day. Brunswick quickly briefed them on why he had
summoned them and they all immediately dived into a spirited discussion. Brunswick pointed out that BDI
would need to be property structured to deal with the recession and the reality of today"s market "We
need to be well-positioned for growth as the market stabilizes: he said. in order to meet this challenge. Bra
must evaluate a number of alternative options Some of the possible Wars might include expanding current
systems and, when necessary. developing new systems that interface with supplies, customers, and
commercial transportation resources to gain total asset viability. Before making any investment decision.
Brunswick reminded them that 801 would have to evaluate any new capital requirements, as well as the
expected contribution to the company"s bottom line and market share, that any option might provide.
Exhibit 1 shows the income statement for the currant year.
Investing in New Infrastructure
Bradley Pulaski. vice president of operation, said-Since Associated Business Distribution, Cap., ceased
operation 4 years ago, we have been inundated with phone calls and e-mails from potential customers
across the Midwest looking for an alternative to ABD"s services. These requests come not only from former
MD customers but also from potential customers that have rot dean with either MD of us in the past. We
cannot adequately service this market from our current warehouse because the customers do not want to
wan for lengthy deliveries. We are currently servicing some customers in that region, however. I do not
think we can keep them nosh longer because of delayed deliveries. In order to take advantage of this
opportunity, we would have to construct a new storage facility to complement our already strained
resources and "forward position" inventory to shorten Our delivery times to customers on short notice. We
are challenged le) an inadequate infrastructure far too small for our requirements. We only have the Maine
warehouse at this time." The addition of new facilities would provide BDI with an opportunity for increased
penetration in key industrial markets in the upper Midwest where the company has had a Meted presence.
Company income statement
Revenue
Cost of Coeds Sad
33.074
Shippng costs
8.93t
Direct materials
5,963
Direct labor and other
6,726
Total
21,620
Gross Pro t
11.454
operating Expenses
Selling expenses
2,232
Fixed expenses
2,641
Depreciation
_1,794
Total
6,667
Earrings before Interest and Taxes
4.787
Interest expense
 p
838
Earnings before Taxes
3,949
Taxes@ 35%
1,382
Net Income
2,567
The nancing resources for this option must be a challenge, given that BOI was approaching as credit limit
with its principal bank. Additional nancing from larger banks in Chicago, however, was not ruled out. It
would be expensive (with current interest rates for long -term loans starting at 11 per-cent). According to
Bradley. this option would cost $2 million for property and $10 million for plant and equipment. The new
warehouse facilities would be depreciated over 20 years. The 20-year loan mud be repaid with a single
balloon payment at the end of the loan. WM the additional infrastructure. 801 would be able to increase its
annual sates by $4,426,000. In addition. delivery lead times to customers in the region would be reduced
from 5 days to 2 days, which would be very competitive. Because of the added warehouse why, BD! could
also increase the number of brands and models of appliances to better serve the retailers" needs for more
variety. However, certain categories in the costs of goods sad would also increase. Total annual ship-ping
costs, which include suppler deliveries to the warehouse as well as deliveries to the customer. would
increase by $955,000. Annual materials costs (for the sold appliances) and labor costs would each increase
by 6 per cent. Total assets would increase from $30.170.000 to $43,551.000. This increase takes into
account changes to inventory investment, which would become $7.203.000, accounts receivable, properly,
and plant and equipment.
Streamlining the Distribution System
Marianna Jackson. the vice president Of logistics, stated. 1 believe there is an opportunity to capitalize on
the void left by our talon rivals by utilizing a cost-efficient distribution system. We do not need a new
facility: we can continue to serve the customers in the Midwest as best as we Can. However, what we do
need is an efficient distribution system. We are holding a considerable amount of stock that has not moved
simply because of our inefficient inventory systems. One of our top priorities is waiting diligently with the
inventory control department to keep what we need and dispose of what we do not need. This approach
will allow us to use the space recovered from the unneeded items for automated warehouse equipment
that will enable us to become more efficient. Everything we do and every dollar we spend affects ox
customers. We need to keep our prices competitive. Our cost of operations is our customers" cost. Our
goal s to enable customers to spend their resources on readiness and the tools of their bade, not logistics
This option will not help us nth with product variety Or delivery Speed: however. it will increase our on-
time delivery performance and :improve our exibility to respond to changes In retailer orders to support
their sales programs." The option of having an integrated center. comprised of sophisticated automation
systems. advanced materials handling equipment, and specially developed information technology. would
provide BDI with tah the versatility and capacity to offer improved products and service to Brunswick
customers. The system would support real time ordering, logistics panning at scheduling, and after- sales
service. When an order is received through a call center at Brunswick"s offices in Alen, it will be forwarded
to a logistics center for production4r is given a delivery date based on truck availability. Orders sold be
9%dined by destination so that trucks could be efficiently leaded to in-minty The truck capacity. The ado
would then be scheduled for delivery and the customer noti ed of the estimated arrival. Pm new
intonation technology would improve Bill"s reliability in delivering the products when promised. The
system also includes an automatic storage and retrieval system (AS/TIS). The AS/RS selects a customer
order and moves it to a dock for leading on a truck headed for the Brunswick location. The capital costs for
this system would be $7 and ton. which would be depreciated over a 10-year WOW. The operating costs,
including training, would run at $0.5 minion each year. These costs would be considered xed expenses by
Brunswick The improved system, however, would have tremendous cost savings. Marianna estimated that
the system would save up to 16 percent in shipping expenses and 16 percent in lain expenses annually.
Total assets would increase from $30.170,000 to 635,932,000 to nail for changes in accounts receivables
and equipment Aggregate Inventories would be only $4.500,000 because of the reduced need for safety
stock inventories. BD! could nance tiffs option using a 10-year Icon at a 10 percent rate of interest. The
ban would be repaid with a balloon payment at the end 01 the loan These savings would come from more
efficient handling of customers" orders by the call center, better panning and scheduling of shipments, and
improved communication with the warehouse and the customer, resulting n a dramatic reduction in the
shipping costs in the supply chain. Additional sayings would result from the reduction in personnel costs:
fewer operators would be required. Marianna Jackson thought that 801 could maintain its cur-rent level of
service with her option while becoming much more efficient.
The Decision
Alex Brunswick pondered the two options posed by Bradley and Marianna Bradley"s option enabled the
 rm to increase Its revenues by serving more customers. The capital outlay was sizable, however.
Marianna"s option focused on serving the rm"s existing customers more efficiently. The value d that
option was its dramatic reduction in costs; however, it was uncertain whether ea could had Onto its current
upper Midwest customers. Brunswick realized that he could not undertake both options, given the
company"s current nancial position. Brunswick Wes a 12 percent cost 04 capital as the as-count rate when
making nancial decisions. How will each option affect the rm"s operational and nancial performance
measures, which investors watch closely? Which supply chain design option would be better for the
company?

Expert Answer

Anonymous
answered this

Before I start to answer, it is imperative to point out that the question has way too many errors (sales is
spelt as sates, Cost of Goods sold is not spelt propoerly), and many other errors. Hence, it will be difficult to
provide the exact answer, though I shall try my best.

Consider the option suggested by Bradley-

The initial cash ow- $ 2 million + 10 million = $ 12 million

Cash ows in the years 1 to 20= ( 4,426,000 - 955,000- 6%* (5,936)- 6%* (6,726) + 0.35* Depreciation

note that Bradley feels that the labour and other direct costs will rise by 6%, and hence they must be
considered

in the cost bene t analysis.

Depreciation= assuming SLM, 12,000,000/20= 600,000. Tax shield= 0.35*600,000= 210,000

Therefore, Cash ows= ( 4,426,000 - 955,000- 6%* (5,936)- 6%* (6,726) + 210,000 = 3,680,240

Now, terminal Cash Flows= 0 (assuming that nothing is sold)

NPV of the option= Using a nancial calculator, BA 2 Plus-

n= 20, I/Y= 12 (cost of capital=12%), PMT= 3,680,240 FV= -12,000,000, Compute PV= 26,245,344

Option suggested by Marianna Jackson.

ICF= 7 Million

cash ows= 16% * ( selling and shipping savings)= 1,786 -500,000= -498,214

Clearly the option suggested by Marianna is not viable as the cash ows every year run into negatives.
Note: IT'S PRETTY CLEAR THAT THE QUESTION CONTAINS ERROR!! WILL NOT BE ABLE TO PROCEED.
Request you to post the right gures, as we spend a lot of time to bring the right solution to you.!

Marianna supply chain design is certainly a better choice, asit involves revamping the current structure to
reduce supply bottlenecks, and hence the inventory lead time!

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Brunswick Distribution, Inc. Alex Brunswick. CEO of Brunswick Distribution. Inc. (801), looked out his
office window at another sweltering day and wondered what could have gone wrong at his company.
He just nished reviewing his Company"s recent nancial performance and noticed something that
worried him. BDI had experienced a period of robust growth met tie last 4 years. "What...
See answer

Case: Brunswick Distribution, Inc. Alex Brunswick, CEO of Brunswick Distribution, Inc. (BDI), looked out
his office window at another sweltering day and wondered what could have gone wrong at his
company. He had just nished reviewing his company's recent nancial performance and noticed
something that worried him. BDI had experienced a period of robust growth over the last...
See answer

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