CASE SUMMARY
Allied Office Products was a corporation in business forms and specialty paper products, such as writing paper, envelopes, note cards, and greeting cards. In 1988, the company had expanded into business forms inventory management services that Allied believed it could offer value-added service to differentiate it from other business forms manufacturers. The forms manufacturing business was mature by 1988, and all competitors were seeking ways to generate sales growth.
Allied embarked on a campaign to enroll its corporate clients in a program which it called “Total Forms Control” (TFC) and Allied had established a separate company within the business forms division to handle these accounts. The services provided under TFC included warehousing and distribution of forms as well as inventory control and forms usage reporting. Allied used a sophisticated computer systems network to monitor a client’s forms inventory, forms usage, and ordering activities. They provided this information to their clients via comprehensive yet simple-to-read management reports.
Allied operated its forms manufacturing and TFC activities as separated profit centers. The transfer of product to TFC was at arm’s length with the transfer price set at fair market value. Although the company encouraged internal sourcing for customer orders, TFC sales people had the option of outsourcing product if necessary.
The clients who participated in the forms management program were charged a service fee to cover the cost of warehousing and distribution based on the standard charges of 32,2%, regardless of the specific level of service provided to that clients. The sales force then marked up the cost of products and services by an average of 20%.
PROBLEMS
General Manager John Malone believes that charges should have nothing to do with the cost of product. Allied should charge their clients