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DB Toys: Company Introduction

DB Toys was a second Tier toy manufacturer from Massachusetts DB Toys had sales in 15 countries In 2000 DB Toys recorded net sales of $ 1.5 billion down from $1.7 billion in 1999 DB Toys was founded by Dave Bibb in 1950 Due to new entrants in the toy market with super low manufacturing cost reduced the profit margin and competitiveness of DB Toys In 1984 Mike Dow became CEO of DB Toys and he cut production costs dramatically with relocating manufacturing to overseas By 1988 DB Toys has re-captured its market share But due to 2000 economic downturn it started losing its market in US and Overseas where it was deriving 30% of the total sales DB Toys current CEO is Liz Jackson. DB Toys now has 4% of sales ad IT budget and around $30 million spend only on Supply Chain activities.

Inflection Consulting : Company Introduction


Inflection is a leading consulting firm with nearly $ 10 billion revenue Inflection has consulting practices for strategy, IT, Human Resource and outsourcing Technology Infrastructure services included: Infrastructure Outsourcing Platform migration Managed Hosting Business Application Business Process Business Transformation Outsourcing Supply Chain Practices Offered leading supply chain practices with more than 17000 personnel

Supply Chain Overview


Any manufacturer would require to manage purchase orders, vendors, product flow and delivery dates 3 types of applications which supports this: Supplier Relationship Management (SRM) Supply Chain optimization Management (SCM) Customer Relationship Management (CRM)

Outsourcing
Overview Major Trend in business North American outsourcing market is more than $ 100 Billion World wide business is expected to be at $234 Billion by 2005 Significant factor in business Outsourcing has following characteristics Significant commitment for customer and vendor Long term contracts Ongoing communication and coordination required A dedicated account team from the vendor Benefits of Outsourcing Firms can outsource non-core competencies Lowering costs Changing Fixed costs to variable costs Reallocating capital to other investment with higher returns Helping management on bottom line.

Outsourcing contracts and Pricing


Typical outsourcing contract might be for longer years Customer and Vendor enter into a SLA (Service Level Agreement) Both parties are contractually bound by the original agreement Customer tend to keep it for shorter duration to avoid lock-in There are 3 pricing models commonly used: Fixed-Price Cost-Plus Transaction-Based Each firm should choose their pricing model carefully Oversight and performance metrics are often required of pricing variability is allowed As part of the contract the service provider might get performance based bonus on the customers EPS

DB Toys Business Case


DB Toys was presented with 2 options by Inflection Business Application Outsourcing Business Process Outsourcing Option 1: Business Application Outsourcing Inflection has huge IT experience and can improve the efficiency of DB Toys' supply chain process The labor shift could result in 20% cost reduction in $30 million spend now Proposal was for 7 year contract and up-front fee of $ 6million to cover the costs Full Transition was expected in 4 weeks Option 2: Business Process Outsourcing Application Design-build-Run model Inflection would revamp the existing SCM systems and take over operations and support Cost: $ 6 million up-front, $25 million every year with 12% increase till 9 years

Pricing Model
Inflection offered 3 pricing model to DB Toys: Fixed-Pricing Model: Option 1: $9.3 Million per Quarter Option 2: $11.7 Million per Quarter Cost-Plus: Base price as same as above The efficiency gain is expected to be 2% which can be shared by DB Toys and Inflections Transaction-Based: Based on number of purchase orders Option 1: $ 55 per purchase order Option 2: $ 62 per purchase order DB Toys and Inflections also agreed on the annual shareholder value incentive clause

Conclusion
DB Toys should take the final decision based on: Value proposition Inflection brings to DB Toys Estimated impact on inventory reduction, operating cost improvement and potential top-line growth Improved Customer satisfaction What is the Cost Saving Which Pricing model to choose Strategic Risk on outsourcing for each options