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21 Sep 2015, 03:35
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ESSAY QUESTION:
The following memo was circulated by the management team of a retail company:
“We are very pleased to announce 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.
YOUR RESPONSE:
The main underlying assumption behind the argument is that cutting warehouse rent expenses has a direct impact on the company's profitability; that is, savings from rent expenses will not imply any other additional costs and therefore will have a positive effect in the company's monthly balance. While it is true that cutting fixed costs has a direct and positive impact in profitability, the argument fails to consider whether the cut in rent costs would indirectly bring other costs, and whether these new costs would counterbalance the savings.
Various possibilities -which might have been taken into account by the company, but are not explicitly explained in the memo- exist that would contradict this argument. Centralizing the storage of inventory in a single location may negatively impact logistics costs: namely, fuel and labor costs for longer transportation distances. If we assume that the previous four warehouses were strategically and not arbitrary located throughout the country, logistics costs would likely increase. Another aspect that may be affected by the new warehouse location is the storage system of the company -namely "just in time", "FIFO", etc.-, which might also affect the overall balance.
On the other hand, if the company's main market were New England -i.e. New England and surrounding states account for a significant percentage of the company's revenue- it may seem indeed logical to centralize the storage near Boston, especially if the other three markets were not being profitable.
As a conclusion, we may say that while it is true that a cut in fixed costs has a positive impact in the monthly balance, it is likely that it will also raise other variable costs. These new variable costs can be either greater or smaller than the savings. In the first case profitability would decrease and in the second case profitability would increase by less than the amount saved. In none of the two cases would the monthly profitability go up by the amount of rent savings, as is stated in the memo. Therefore, only in the unlikely event where rent savings did not impact any other variable costs, would the statement in the memo remain valid.
The following memo was circulated by the management team of a retail company:
“We are very pleased to announce 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.
YOUR RESPONSE:
The main underlying assumption behind the argument is that cutting warehouse rent expenses has a direct impact on the company's profitability; that is, savings from rent expenses will not imply any other additional costs and therefore will have a positive effect in the company's monthly balance. While it is true that cutting fixed costs has a direct and positive impact in profitability, the argument fails to consider whether the cut in rent costs would indirectly bring other costs, and whether these new costs would counterbalance the savings.
Various possibilities -which might have been taken into account by the company, but are not explicitly explained in the memo- exist that would contradict this argument. Centralizing the storage of inventory in a single location may negatively impact logistics costs: namely, fuel and labor costs for longer transportation distances. If we assume that the previous four warehouses were strategically and not arbitrary located throughout the country, logistics costs would likely increase. Another aspect that may be affected by the new warehouse location is the storage system of the company -namely "just in time", "FIFO", etc.-, which might also affect the overall balance.
On the other hand, if the company's main market were New England -i.e. New England and surrounding states account for a significant percentage of the company's revenue- it may seem indeed logical to centralize the storage near Boston, especially if the other three markets were not being profitable.
As a conclusion, we may say that while it is true that a cut in fixed costs has a positive impact in the monthly balance, it is likely that it will also raise other variable costs. These new variable costs can be either greater or smaller than the savings. In the first case profitability would decrease and in the second case profitability would increase by less than the amount saved. In none of the two cases would the monthly profitability go up by the amount of rent savings, as is stated in the memo. Therefore, only in the unlikely event where rent savings did not impact any other variable costs, would the statement in the memo remain valid.
23 Sep 2015, 00:37
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paulaalv11
I certainly not in the position to rate your essay. But may I advise one thing-
A real example may help you. You have explained well the example about boston and New England. Perhaps a real example, -
If a company like AMAZON tries to consolidate the locations to one , then it might affect their business in various ways- one day delivery, etc.
Such example might strengthen your essay. Just a suggestion.
Thanks,
Rohan.
23 Sep 2015, 00:44
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Many thanks for your valuable feedback, Rohan!
