KPG Grocers: Capital Budgeting Information Elicitation

FINC 495 Contemporary Issues in Finance Practice
Individual Case Study Instructions
Weeks 1-7
INSTRUCTIONS:
For the Weekly Individual Case Study, write a three to four-page (900 to 1,200 word) report and answer the case study questions as indicated by expressing your position. Keep in mind that for the Weekly Individual
Case Study you will want to
1. Read and examine the case thoroughly, highlight relevant facts, and underline key problems.
2. Focus your analysis. Identify two to five key problems. ...
3. Uncover potential solutions and/or changes needed. Review course readings, discussions, outside research, and your experience.
4. Select the best solution.
When answering Individual Case Study questions, you can showcase your ability to analyze a situation or business dilemma, identify the important issues, and develop sound conclusions that flow from your analysis. For this reason, it's important to use a logical framework for breaking down and analyzing the case. Therefore, the following template for analyzing a case study is a useful guide.
Preliminary Work
 Critical reading of the case
o Make notes and highlight the numbers and ideas that could be quoted.
o Provide a general description of the situation and its history.
o Name all the problems you are going to discuss in your report.
o Specify the theory used for the analysis.
o Present the assumptions that emerged during the analysis, if any.
Analysis of the Case
 Executive Summary of the Case
o Describe the purpose of the current case study.
o Provide a summary of the company.
o Briefly introduce the problems and issues found in the case study
o Discuss the theory you will be using in the analysis.
o Present the key findings
 Focusing the Analysis
o Single out as many problems as you can, and briefly mark their underlying issues. Then make a note of those responsible. In the report, you will use two to five of the problems, so you will have a selection to choose from.
o Describe the detected problems in more detail.
o Indicate their link to, and effect on, the general situation.
o Explain why the problems emerged and persist.
Table 1.0 An overview of a Case Analysis
Identify the main research problem
For example, the loss of brand identity is a problem faced by
Starbucks
Analyze the main underlying
causes of the existing problem
 When and why did Starbucks lose its brand identity?
 Were there certain changes in the company’s strategy before the problem occurred?
Establish the cause-and-effect relations between the various factors
Starbucks’ brand image – possible sources of influence:
 The inner vision of the company
 Advertising
 The design of the stores Formulate the best solutions to address the problem
 Paying more attention to advertising campaigns
 Reconsidering the vision and mission statements
 Improving the design of stores
 Findings. This is where you present in more detail the specific problems you discovered in the case study. In this section, you will:
o Present each problem you have singled out.
o Justify your inclusion of each problem by providing supporting evidence from the case study and by discussing relevant theory and what you have learned from your course content.
o Divide the section (and following sections) into subsections, one for each of your selected problems.
 Proposed Solutions
o List realistic and feasible solutions to the problems you outlined, in the order of importance.
o Specify your predicted results of such changes.
o Support your choice with reliable evidence (i.e., textbook readings, the experience of famous companies, and other sources of external research).
 Recommendations. This is the section of your analysis where you make your recommendations based on your research and conclusions. Here you will:
o Decide which solution best fits each of the issues you identified.
o Explain why you chose this solution and how it will effectively solve the problem.
o Be persuasive when you write this section so that you can drive your point home.
o Be sure to bring together theory and what you have learned throughout your course to support your recommendations.
o Define the strategies required to fulfill your proposed solution.
o Indicate the responsible people and the realistic terms for its implementation.
o Recommend the issues for further analysis and supervision.
 Implementation. In this section, you will provide information on how to implement the solutions you have recommended. You will:
o Provide an explanation of what must be done, who should take action, and when the solution should be carried out.
o Where relevant, you should provide an estimate of the cost of implementing the solution, including both the financial investment and the cost in terms of time.
 Conclusions. This is the section in which you summarize each issue or problem and present your argument for each chosen solution. Here you will:
o Present a summary of each problem you have identified.
o Present plausible solutions for each of the problems, keeping in mind that each problem will likely have more than one possible solution.
o Provide the pros and cons of each solution in a way that is practical.
KPG Grocers: Capital Budgeting Information Elicitation Case
Case
Author: Linda M. Lovata & Susan M. Murray
Online Pub Date: May 08, 2017 | Original Pub. Date: 2014
Subject: Budgeting, Management Accounting, Strategic Management & Planning
Level: | Type: Direct case | Length: 1002
Copyright: © 2014 IMA Educational Case Journal. All rights reserved.
Organization: KPG Grocers | Organization size: Large
Region: Northern America | State:
Industry: Retail trade, except of motor vehicles and motorcycles
Originally Published in:
Lovata, L. M. , & Murray, S. M. ( 2014). KPG Grocers: Capital budgeting information elicitation case. IMA Educational Case Journal, 7( 1), Article 1.
Publisher: Institute of Management Accountants
DOI: https://dx(dot)doi(dot)org/10.4135/9781526426543 | Online ISBN: 9781526426543
© 2014 IMA Educational Case Journal. All rights reserved.
This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2022 SAGE Publications Ltd. All Rights Reserved.
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https://dx(dot)doi(dot)org/10.4135/9781526426543
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Abstract
The KPG Grocers case study requires students to analyze a complex capital budgeting problem.
The case describes a grocery store investigating if they should open a new distribution center close to their Midwestern stores. The impetus for the move is to improve the company’s sustainability efforts, but freshness and service are also improved. Students are required to use capital budgeting to analyze the four alternatives. It’s appropriate for cost or managerial accounting classes at the undergraduate or graduate level. The case is enriched through the information elicitation process. The information elicitation methodology requires students to interview the vice president of distribution for the company to obtain the relevant facts then correspond via e-mail to gather additional information as required. The final deliverable is a presentation of the analysis and a recommendation to the vice president. This process requires students to develop core competencies often used in the workplace but seldom addressed in the classroom.
Case
Background
Chris Jones is the vice president of distribution for KPG Grocers, a large regional grocery store chain in the United States. The company started in Arizona, expanded throughout the West, and now has stores as far east as Indiana. The company recently hired Taylor Marshall in a newly created position of chief sustainability officer. Upon being hired, Marshall discussed sustainability with each major officer at KPG. The following is part of the discussion between Marshall and Jones.
Marshall: As you know, sustainability has become an important issue today, and the Board has noticed that many of our competitors have been focusing on reducing their carbon footprint. In general, I’ve noticed KPG has been content just running the grocery business as usual. The Board, however, feels that to maintain our competitive advantage, as well as be a good corporate citizen, we should look at ways to become greener.
Jones: We try to recycle and use those new light bulbs but really haven’t thought about how distribution could address the issue. I’m just in charge of getting products from one place to the other. Our trucks are relatively new, so I don’t really see how my department could help.
Marshall: Other retailers are finding they can reduce emissions, and maybe even save some money, by moving distribution centers closer to stores. As you can see from this map (see Figure 1), we currently use the distribution center in Phoenix, Ariz., to service stores as far away as Indiana, Minnesota, and Wisconsin, and we have plans to expand even further east. I was wondering if it would be worthwhile to open a distribution center closer to those stores, perhaps in the St. Louis, Mo., area.
Jones: Do you mean build a new distribution center? I always thought that might be a good idea just because we could increase freshness of produce and service those stores faster, but we do get economies of scale by centralizing the distribution services. Do you really think the Board would be willing to cut loose with some cash for that?
Marshall: When they hired me, they assured me they would be willing to spend money on sustainability efforts. So even if it costs a bit more, they said they think it’s an important enough issue to put some money behind it. But they are concerned about shareholders, so they need to know how much sales would have to go up to cover any additional costs.
Jones: Sounds good. When would you need the information?
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1.
Marshall: The Board wants me to prepare a cumulative report with recommendations from all the departments, so if we could get your results to me in one month, that would be great.
Jones: I don’t know if I’ll be able to make that deadline. I’m kind of swamped right now, and I’m not even sure what kind of analysis would be needed to determine the additional sales required to support the effort. Would there be money in the budget to hire a consulting team to check out the options?
Marshall: As I said, the Board thinks this is an important issue, so I’m sure that isn’t a problem. As long as you don’t go overboard, go ahead and hire someone to do it.
Jones: Will do. In the past, we always used a 10-year planning horizon, even though projects last longer than that. The Board generally thinks they can’t forecast accurately past that. Is that the same for this project?
Marshall: I didn’t know that was the policy, but it makes sense to me. That would be great, and I’ll make sure the other department heads do the same. That will make it easier when I combine all the recommendations in my final report to the Board.
Figure 1: Major Markets and Distribution Centers
After the meeting, Jones did some initial investigating and compiled some information regarding alternatives for this distribution center:
KPG could do nothing and continue using its existing distribution in Phoenix. If a new distribution center in the Central region were used, hopefully it could be available for use in January of the coming year. This new distribution center would save KPG 700,000 trucking miles per year.
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2. KPG could build a new distribution center outside St. Louis in an area called Pontoon Beach. Looking online, it appeared the appropriate acreage could be purchased for $1 million. KPG could lease some space in a distribution center outside St. Louis in an area called Wood River. While researching this issue, Jones came across an article about Kraft Foods leasing warehouse space with an underground distribution center in Springfield, Mo. Because the facility is underground, it provides low-cost refrigeration. Jones even looked at some YouTube videos, mostly posted by truck drivers, and it looked like this type of facility might work for KPG as well. This may have some additional sustainability advantages that Marshall and the Board might appreciate. Jones located another underground facility, Natural Chill, which is also outside St. Louis, and e-mailed the contact for more information about leasing that facility. Jones called your team to evaluate these four alternatives. You have a meeting in two weeks to discuss the alternatives and another meeting scheduled in six weeks to present your analysis.
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