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Joined: 03 Jun 2012
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15 Aug 2012, 11:05
ESSAY QUESTION:
The following memo was circulated by the management team of a retail company:

“We are very pleased to announce that the relocation of our inventory, which had been located in four different warehouses throughout the country, to a single new warehouse near Company headquarters in Boston. This consolidated location will cut the company’s expenses for warehouse rent in half. As a result we expect our monthly profitability to go up by this amount.”

Discuss how well reasoned you find this argument. Point out flaws in the argument's logic and analyze the argument's underlying assumptions. In addition, evaluate how supporting evidence is used and what evidence might counter the argument's conclusion. You may also discuss what additional evidence could be used to strengthen the argument or what changes would make the argument more logically sound.

RESPONSE:

The management team of the retail company in their memo concluded that the monthly profitability of the company is going to go up by the same amount the company will save on rent on four different warehouses as it has decided to relocate the inventory from four different warehouses throughout the country to a single new warehouse near the Company headquarters in Boston. Unfortunately the argument presented by the management is not cogent because of the following faulty assumptions.
Firstly, the management team incorrectly assumes that moving the entire inventory from different warehouses to a single warehouse might not affect transportation costs of the inventory to the company’s retail outlets. If the retail outlets of the company were spread all across the length and breadth of the company, then in such a case, having the inventory consolidated at one place may result in higher transportation costs for the company, which will eat into the savings from rent the company hopes to achieve by shutting other warehouses. Similarly, if the concerned company only has retail outlets near Boston, in such a case the transportation costs of the inventory will decrease resulting in increase in savings of the company apart from the rent savings. In both the scenarios, the company profitability will not be the same as the amount it saves on rent.

Secondly, the management fails to consider factors such as maintenance costs, taxes, electricity costs which might also play an important role in determining how much rent saving will eventually add up to the profits of the company. If the maintenance costs and electricity costs for the single warehouse facility turn out to be more than what the company was shelling out earlier for its four warehouses (could be because of labor costs and electricity costs are higher for an area like Boston), the actual rent savings of the company will diminish, thus making the conclusion of the management false.

Finally, company’s profitability is net result of many activities undertaken by the company, the most significant of which is its sales revenue. Unfortunately, if the company’s sales were to fall in the future owing to fall in the quality of its product or due to an economic crisis, the company’s profitability will also take a serious hit. In such a scenario, any saving made on warehouse rent would not help improve the profitability of the company by a similar amount.

Hence, the argument presented by the management team of the company is logically flawed. To strengthen its argument, the management team should precisely state that any costs incurred by the company in its day to day operations are not expected to change other than the rent because of its decision to shift the inventory to a single warehouse. It would be beneficial if a disclaimer stating that the argument in its originality will stand only if all other factors that affect the company’s profitability for ex. Economic conditions do not fluctuate much from their current state.
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Concentration: Finance, Technology
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Kudos [?]: 391 [1] , given: 142

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15 Aug 2012, 12:13
1
KUDOS
Following needs some improvement:
(utilize all of what you have learned for SC section)

1. Avoid lengthy statements. Be concise and direct.

The argument can be written:(There are many other ways, this is just an example)

The management of a retail company claims that the exact sum of rent saved from the consolidation of warehouses will add to the company's profitability.

2. Maintain consistent tense. Preferably present.

Quote:
their memo concluded(simple past) that the monthly profitability of the company is going to go up by the same amount the company will(future) save on rent

3. Avoid repeating words.

Quote:
profitability of the company is going to go up by the

Quote:
four different warehouses as it has decided to relocate the inventory from four different warehouses throughout the country to a single new warehouse near

4. Avoid weak words.

may.. might..

5. Do not use multiple "If x happens, Y will ..." : Count how many "If" clauses you have used

6. Pronoun ambiguity
Quote:
To strengthen its argument, the management team should precisely state that any costs incurred by the company in its day to day operations are not expected to change other than the rent because of its decision to shift the inventory to a single warehouse

Quote:
transportation costs for the company, which will eat into the savings from

All the above are must-to-correct action items. Apart from them, there are other minor flaws, such as using appropriate punctuation, avoiding colloquial language and abbreviations, maintaining variety in sentence structure etc. These are needed, only if you are willing to work for a 6.
Otherwise, the suggested rectification should fetch you a 5+.
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23 Aug 2014, 17:15
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