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

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 1950s
 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 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. Not considering the impact of outsourcing on other functions and areas of risk such as environmental and regulatory factors. Not casting one s net widely enough for potential providers of the service, and thus missing good candidates. Not considering the full impact of an outsourcing agreement on a company s financial condition.

Information Information

External Market Internal Finances

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

Deal Structuring

Deal Structuring

Best outsourcing model

y 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) y 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 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

Best Pricing model

Pricing Model Fixed Price Advantages a) Any risks associated with Project delays and costs are incurred by outsourcing partner. b) Relatively Quick and easy to implement a) Out sourcing partner will try to reduce the costs over time Disadvantages Fixed Price 9.3 million/Quarter (i.e. 37.2 million annually). This is much higher than current spending of $ 30 Million

Cost-plus

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 Model Advantages Disadvantages Cost will be 0.75 million*55 = 41.25 million*4 equals 167 million Cost will be 37.2 million*0.4 =14.88 + 5*4 = 34.88 million (assuming 0.05 increase in EPS based on revenue growth and operating cost cuts) Cost will 14.88+ 3*4 = 26.88 million if only 0.03 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, b) outsourcing cost will still be 4.88 million higher compared current spending, but better than just having a fixed price

Best Pricing model

Pricing Model Advantages Disadvantages Cost will be 0.75 million*55 = 41.25 million*4 equals 167 million 167*0.4+5*4=86.8 million This is a highly expensive option even after share holder value incentive clause Transaction Initial investment is nil, payments based can be made as and when company pricing generates value with annual share holder value 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
y 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 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. Though company can cut operating costs with supply chain outsourcing, top line growth is not guaranteed by this move

Thank you