Posted on by Judy

Company B is running at nearly 95% capacity utilization of its current supply chain from end-to-end. The supply chain director wants to make significant changes to how the company inputs raw materials as part its supply chain and in its distribution avenues, as part of getting the company’s finished products to its suppliers and customers. Total cost for this improvement project will be $24.78M. Annual cost saving is estimated to be as follows: Raw material supplies saving amounting to 7% of it current cost of $111M annually. Inventory reduction costs savings of $7.1M the first year, $4.3M in the years to follow. Distributions cost savings in three regions: Region A, 10% of its total distribution costs amounting to $51M. Region B, 7% of its total distribution costs amounting to $47M. Region C, a straight line savings of $9.11M. Is there a business case for implementing this project? Explain and show how you arrived at your findings/conclusions.

While looking for justification whether investment project of $25.78 is worth , we need to look for total savings in cost across the organization . The investment will be considered justified if total savings across the organization work out more than $25.78 million invested.
The cost savings happen in following 4 avenues :
Savings in raw material supply cost
Savings in Inventory cost
Savings in distribution cost across three regions
Following are the details :
Savings in Raw material cost:
Savings amount = 7% of current $111 million = $ 7.7 million
Savings in inventory cost :
Total reduction in inventory cost in 2 years = $7.1 million + $4.3 million = $11.4 million
Distribution cost savings in three regions :
Savings in region A = 10% OF $51 million = $5.1 million
Savings in region B = 7% of $47 million = $3.29 million
Savings in region C = $ 9.11 million
Total savings across 3 regions = $5.1 + $3.29 + $9.11 million = $ 17.5 million
Thus, total savings in 3 areas namely Raw material , inventory and distribution cost
= $7.7 million + $11.4 million + $17.5 million
= $36.6 million
It is thus obvious that ,
Total savings of $36.6 million > Total cost of improvement project $24.78 million
It is therefore worth considering implementing this project
THERE IS A BUSINESS CASE FOR IMPLEMENTING THIS PROJECT
 
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