Executive Summary

JOSH Denims imposed a policy change requiring RDS to undertake retail distribution reducing
its profit margins from 37%, when retail distribution was handled by local distributors, to 5%.
Since margin of at least 30% is desired from the JOSH account to justify the Opportunity Cost,
three options have been suggested viz. renegotiating contract for higher remuneration after 8
months, continuing operations as-is and terminating the JOSH account. These options are
evaluated against criteria of justifiability of opportunity cost, loss/gain of new business learnings
and effects on RDS reputation, and the first option of renegotiating contract after 8 months is
recommended.

Word Count: 100

Table of Contents
Sr. No.

Title

Page Number

1.

Situation Analysis

2.

Problem Statement

3.

Options

4.

Criteria For Evaluation

5.

Evaluation of Options

6.

The Recommendation

7.

Action Plan

8.

Exhibit 1a

9.

Exhibit 1b

10.

Exhibit 2

Situation Analysis
Logistics Solutions has always had a focused approach towards C&FA with not much expertise
in allied activities like warehousing and transportation. Its agencies have depended on
outsourcing for these facilities and this policy served the business well for more than 100 years
due to which they have not been developed at Logistics Solutions. JOSH Denims, Logistics
Solutions first customer in the Readymade Garments sector, has imposed a policy change
requiring Logistics Solutions Raj Distribution Services (RDS) to provide direct retail
distribution outside Ahmedabad. This would require RDS to provide transport, labour and
customer service facilities in retail localities, the absence of which is posing problems in
effective execution of the C&FA activities for this new product.
Before this policy was imposed, RDS earned a 37% margin from the JOSH account (Exhibit 1aH2). The new policy to be implemented from July onwards puts the entire distribution
responsibility on RDS with no extra remuneration. The Distribution costs then are estimated to
be Rs 16800 (Exhibit 1b-Note) and accordingly, the margin of RDS may fall to about 5%
(Exhibit2J2). Thus, the new policy guidelines majorly cut into the RDS profits.
With the new policy in place, the 2500 product cases will need to be repackaged by RDS into
approximately 3600 cartons according to custom requirements of the retailers. This can be done
in Logistics Solutions Ahmedabad warehouse before the goods are transported to the retail
districts. The two packers in the warehouse may be entrusted with this task. In Exhibit 2, it is
assumed that no extra manpower will be required and Rs 3000, hitherto paid by JOSH and which
will be paid by RDS from July, will be sufficient for this task. If these assumptions are wrong
and more resources are required, profit margins of RDS may further reduce.
The outstation transport cost of Rs 34000 to deliver the cartons to the retail districts will still be
borne by JOSH, but the costs incurred in the retail districts, approximated to Rs 16800
(Exhibit2-H2), will be borne by RDS. It is possible that this cost is higher than anticipated as
RDS does not have the required transport, credit collection and customer service networks in the
remote retail locations and hence may end up spending more than Rs 16800. This requirement
also forces Logistics Solutions to venture into allied activities, thus weakening their focused
C&FA approach.

JOSH is the first and the only customer of RDS in the Readymade Garments field and hence
business with JOSH is a good learning opportunity for RDS. It is also proving to be a good
training ground for the newest members of Logistics Solutions, who are in-charge of this
account. Furthermore, Logistics Solutions could leverage the experience with this account for
future growth since they would have built a distribution network in the retail localities for this
account. Lastly, JOSH is also a good marketing platform for RDS to attract new customers due to
the prestige associated with it. Thus, while the policy change is clearly detrimental to the profit
margins of RDS in the short run, in the long run, relationship with JOSH may prove to be
fruitful.
Problem Statement
JOSH Denims imposed a policy change in its C&FA activities requiring RDS to undertake
complete product distribution from factory to retail. This may reduce the profit margins of RDS
to 5% or lower (Exhibit2-J2) when the desired margin from JOSH, to justify its opportunity cost,
is about 30% (Exhibit 1a-H2), assuming that the typical margin from an agency is 30%.

Options
1) Negotiate a higher remuneration of at least Rs 81000/month when the contract is
renegotiated after 8 months to obtain a margin of 30% based on the probable cost of
Rs 56900 (Exhibit 2). Till then, continue with lower profit margins.
2) Do not renegotiate and continue as-is with the stipulations proposed by JOSH even after
8 months.
3) Give up the JOSH Denims agency.
Criteria
In descending order of priority:
a) The opportunity cost of an agency should be justified by the returns. Assuming that a
typical agency, requiring resources similar to that required by JOSH, earns revenues of
Rs 60000/month with a margin percentage of 30%, the resources employed in the JOSH
account should provide comparable returns.
b) The business learnings obtained about the new field of readymade garments should
continue.
c) Market reputation and prestige of Logistics Solutions should be maintained.
2

Evaluation of Options
Option1
a) Revenues = Rs 81000 (after re-negotiations)
Cost of operations = Rs 56900 [Exhibit2-Sum(B2:H2)]
Margin = Rs 24100
Margin Percentage = 24100/81000*100 = 30%.
With the new policy imposed by JOSH, its total savings on distribution is Rs 2,40,000
[Exhibit-1b: (B2-C2)]. It is reasonable to expect a part of the savings to be transferred to
RDS. Also, 30% margin on Rs 81000 is good enough to justify the opportunity cost of
expending resources for the JOSH account.
b) As RDS will continue working with JOSH, its learnings in Readymade Garments will
continue.
c) Being associated with JOSH is a prestigious affair in the market and hence, prestige and
reputation of RDS will improve.
Option2
a) Margin Percentage = 5% (Exhibit2-J2)
5% margin does not justify putting in resources worth Rs 56900 for JOSH.
b) Learnings in readymade garments will continue.
c) The prestige and reputation of Logistics Solutions will be maintained.
Option3
a) It can be assumed that the resources saved by terminating JOSH account are put into a
typical agency giving 30% margins, thus satisfying this criterion.
b) C&FA learnings in Readymade Garments will stop.
c) Reputation of Logistics Solutions may suffer due to termination of a prestigious account.
3

Recommendation
Option1 satisfies all criteria and hence should be adopted.

Action Plan
1) Continue to operate with JOSH at lower profit margins for the next 8 months.
2) Facilitate sector learning and personnel training along with distribution network creation
in the retail locations during this time.
3) Negotiate higher remuneration of at least Rs 81000/month during review of contract 8
months later.

Word Count: 997

Exhibit 1a: Monthly Revenues and Expenses Before Policy Change

1. Item
A Remuneration
B Warehousing
C Manpower (5 people)

2. Amount (Rs)
60000
-12000
-18000

D
E
F
G
H

Local Transport
Electricity
Computer expense per month [1]
Net Profit Before Tax
Margin Percentage (G2/A2*100)
[1]

-3600
-1000
-3000
22400
37.33 %

Depreciating by Diminishing Balance Method by Rs 3000 per month.

Exhibit 1b: Product Landing Price at Various Stages

1. Item
A Total Sales
B Retailer Landing Price (A2 - 0.2*A2)[1]
C Distributor Landing Price (B2 - 0.1*B2) [2]

2. Amount (Rs)
30,00,000
24,00,000
21,60,000

[1]

Retailer Landing Price (RLP) = Price at which Retailer buys the goods.
Since Average Retailer Margin = 20% of sales, RLP = 80% of Sales Value

[2]

Distributor Landing Price (DLP) = Price at which Distributor buys the goods.
Given that Distributor Discount = 10% of RLP, DLP = 90% of RLP

Note: Distributor margin = 24 lakh - 21.6 lakh = 240000. Assuming that Distribution Cost is
7 % of margin, amount spent by Distributors in all their activities like Transport,
Credit Management, Query Handling, etc. = 0.07*240000 = 16800.

Exhibit 2: Probable Monthly Revenues and Expenses After Policy Change

1. Item
2. Amount (Rs)
A Remuneration
60000
B Warehousing
-12000
C Manpower (5 people)
-18000

D
E
F
G
H
I
J

Local Transport
Electricity
Computer expense per month [1]
Repackaging [2]
Local Distribution and Management [3]
Net Profit Before Tax
Margin Percentage (I2/A2*100)

-3600
-1000
-2500
-3000
-16800
3100
5.17 %

[1]

Depreciation per month reduces as depreciation is highest at the beginning and reduces over time.

[2]

Total Repackaging cost is Rs 3000 hitherto paid by JOSH as given in Case Exhibit 5.

[3]

Taken from Exhibit 1b-Note.