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Chapter 4

Q. 4.1

An online retailer of home furnishings purchases furniture from different manufacturers. The furniture is shipped to the company headquarters in Vancouver, Canada, where it is stored until sold. The furniture is then shipped to the customer using the company’s truck fleet. The activities, their costs, and the cost of best practices for the different activities are listed as follows

Activity Cost Cost of Best Competitor
Purchasing $5,000,000 $6,000,000
Shipping to Vancouver 3,000,000 2,000,000
Receiving 500,000 600,000
Warehousing 2,000,000 2,000,000
Website maintenance 800,000 600,000
Order processing $4,000,000 4,500,000
Shipping to customer 3,000,000 2,000,000

What activities are potential sources of cost savings?


Verified Solution

Three of the activities are not on the value chain. Shipping to Vancouver, receiving those products, and warehousing do not add value to the customer. Those activities could be replaced by having manufacturers ship directly to the customer. Therefore, the activity of shipping to the customer using its own fleet should be re-examined. Purchasing and order processing appear to be operating efficiently when compared to the cost of the best competitor, but website maintenance is a potential source of cost
savings either through improvement or outsourcing.