DB Toys- Case Study

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

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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

Executive Summary

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

About DB Toys

Stages of DB Supply Chain

Source: DB Toys HBR Case study

Value chain

Source: DB Toys HBR Case study

Inflection –Outsourcing Pyramid

A New Standard In The Performance

Source: DB Toys HBR Case study

Inflection– Value Proposition

Less Cost

Lowered costs in total. Changing fixed costs to Variable costs based on Variable pricing

Out sourcing an activity which is not the firms core competency

Toys Market

Supply Chain

Helping executive management to focus on the bottom line

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.

DB Toys -Supply Chain Out sourcing Risks

Best outsourcing modelArea 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 modelPricing Model

Advantages Disadvantages

Fixed Price

 a) Any risks associated with Project delays and costs are incurred by outsourcing partner.b) Relatively Quick and easy to implement

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) 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 vendorc) Outsourcing partner may not choose to strategic improvements due to prohibitive costs

Best Pricing modelPricing Model

Advantages Disadvantages

Transaction Based

Clients with minimal cash flow prefer this option as no upfront payment is required

Cost will be 0.75 million*55 = 41.25 million*4 equals 167 million

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

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

Best Pricing modelPricing Model

Advantages Disadvantages

Transaction based pricing with annual share holder value incentive clause

Initial investment is nil, payments can be made as and when company generates value

Cost will be 0.75 million*55 = 41.25 million*4 equals 167 million167*0.4+5*4=86.8 million

This is a highly expensive option even after share holder value incentive clause

In short fixed price model, with annual share holder incentive clauseseems to be most suitable contract which could cost less than the current IT spending of 30 million in Supply chain services

Additional RecommendationsAnnual 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