EXHIBIT 'l The Value Chain Concept-

EXHIBIT 'l The Value Chain Concept-TFC
The Industry Chain
Clients who participated in the forms management program kept a-n tory of forms at one of Allied's 10 distribution centers. The forms were
uted to the client as needed. The client was charged a service fee to cost ofwarehousing and distribution based on a percentage ofthe cost d
of the product for that month, regardless of the specifrc level of service to that client.
If a TFC client made use of anv of the distribution services, they posed to be charged a price for the forms which was high enough to allow additional 32.2 percent of product cost to cover warehousing and di expenses, the cost ofcapital tied up in inventory and freight expense. Thi centage was determined based on actual 1990 financial data so that on gregate basis, in total, all expenses were covered (see Exhibit 2). The sales then marked up the cost ofproduct and services by 20 percent, on av shown in Exhibits 3 and 4, prices for individual accounts could vary standard formula.
Understanding Customer Profitability
With TFC profitability suffering in October 1992, General Manager John one began to question the appropriateness ofthe distribution charges.
"The Business Forms Division in 1988 earned a 20 percent Return vestment (ROI). But returns have been dropping for several years. TFC i jected to earn an ROI of only 6 percent for 1992. Something tells me are not managing this business very welMt seems to me that the services needs closer scrutiny. I believe we should charge our clients services they use. It doesn't seem fair that if two clients buy the same ofproduct from us, but one keeps a lot ofinventory at our distribution and is constantly requesting small shipments and the other hardly at all, both should pay the same service fees."
John looked through his records and found two accounts of similar si counts A and B, which were handled by different sales people. Accounts A