It is not efficiency or speed which is the primary goal of the Supply Chain, but rather using those mechanisms in a decision context to drive profitability, not as an end to themselves. Speed and efficiency are killing middle tier retail through their haphazard application without regard to brand strength, margin attainment, and markdown avoidance.

1. Value Chain Management
Value Chain Strategy
powered by FourthQuadrant
Whole Supply Chain Cost Allocation by Product and Service Channel
Supply Chain technologies and standards advanced during the
Twentieth Century to such an extent that the average
consumer goods merchant across that time span began to
develop, as a part of its regular product offering sold to its
customer, the actual servicing and delivery of its finished
goods and raw materials. Driven by economic forces,
executive thought over the last eight years in particular, has
moved out of the efficiency based world of logistics and into
the realm of service as a competitive advantage. Consumer
goods companies in particular have begun to develop
strategies around not only using speed to market as a
competitive distinction, but began to understand that the
timing and quality of service is directly linked to the margin
strategy of a given product. Gone are the days of ‘Speed to
Market’ or ‘Efficient’ Supply Chains with the end purposes of just being blindly quick or lean, and
broaching are the days of effective ‘Speed to Margin’ business thinking. A company which saves 32 cents
per unit sold, by consolidating its purchases into one fast and efficient Merchandise Push shipment, which
however subsequently marks down 65% of that Push by $3.00
per unit because of sellthrough risk mitigation overbuying, has
not executed a sound margin decision. This may sound like
Supply Chains developed on a common business sense, but surprisingly, this goal
Value Channel Strategy basis misalignment is reflected in 95% of finished goods orders
bear completely different globally today. (3) Single Value Channel strategies may be
features from Supply Chains efficient, but adherence to one channel for all purchases and
planned for optimized efficiency. sourcing is simply not good business. Planning for efficiency,
for efficiency’s sake alone, is not efficient at all. The onus on
The Return on Investment
Global Supply Chain management broaching the world
potential can range from industry over the next eight years, will not reside simply in
.1 to 3% of Sales making logistics mechanisms efficient, but moreover, in
directly linking Supply Chain performance level and expense
decisions with resulting profitability by item.
Page 1

2. Idhasoft, Ltd. along with its United States subsidiary Idhasoft,
Inc. has been instrumental in the development of Supply Chain
Strategies for over 150 consumer goods and manufacturing As a result of planning for efficiency
companies worldwide. During this 22 years reign as a Best of only, consumer products companies are
Breed provider of these services, it has become clear to senior
executive support resources that the landscape facing many
Overbuying/mis-timing
global operators has changed dramatically. In the 1990’s many inventory and then having
of the world’s best operators gained tremendous global to mark that same
momentum through the establishment of efficient commodity inventory down to sell it,
delivery mechanisms. Consolidation complexes in Shenzhen and
and Long Beach, robust and functional megaplexes, are a Under-allocating/Over-
legacy of this efficient consumption oriented planning allocating costs to
philosophy. (1) Throughout the establishment of these categories; not knowing
strategic handling ports, global companies gained advantage by that the company is losing
driving down the cost of product sourcing and delivery. or making profitability on
Understandably, companies which offered commodity or those items.
staple consumer goods, were the winners in this dramatic shift
in global Supply Chain. Their competitive cost structures
simply drove smaller competitors out of business through aggressive price competitiveness. In 1961,
before the container was employed worldwide as a standard, ocean freight costs accounted for as much as
10 percent of the value of U.S. imports. For some commodities, freight comprised as much as 25 percent of
the cost of the product, according to a Society of Naval Architects study concluded after review of the data
from 1959. (2)
Today, the average consumer goods burden in freight expense, as a percentage of retail, is in the range of
1.2 to 3.5 percent to sales. (3) From an operations perspective, this landmark reduction in cost was part of
the impetus which drove the massive commercialization success of the North American consumer goods
market during the 1970’s, 80’s and 90’s. However, with the inevitable advent of oligopolistic plays such as
Wal-Mart, Proctor & Gamble, and Kroger which result from the powerful weaponry such efficiencies
afford, along come a horde of business disadvantages. Many of these disadvantages do not manifest
themselves until the consumer goods margin equation begins to place a valuation on the service level
which is employed to effect delivery of a component or finished good, or begin to see costs as a chain of
connected and margin sensitive activities rather than simply a bucket of associated expenses. Just because
dollars are spent on moving a container, does not mean that all those dollars need be accounted for under
a line item called “container moving.” This makes no sense from a business perspective and does not help
decision-makers rationalize their business effectiveness. This vertical misappropriation of expense
accounting lies at the core of the consumer goods global supply chain challenge worldwide today.
So while we have seen a leveraged drop in the cost of bringing freight into the US, on the whole a
tremendous achievement; at the same time, we have undergone a tremendous increase in the push
merchandising and markdown philosophies under which those efficiently serviced goods are sold. The size
of the average buy has increased as merchants ever increasingly rely upon mass purchase leverages to
achieve Gross Margin Return on Investment goals through efficiency and price point. Commensurate with
this first blush advantage in efficient cost sourcing, the United States realized an increase in the average
Page 2

3. markdown rates realized in retail. Today the National Retail Federation and other industry sources cite
that a full 65% of consumer goods are marked down or discounted below their Gross Margin Plan in some
fashion. (3)(4)(5)(6) In addition, because these costs have leveraged so low historically, operations costs
were at one time added as an accounting footnote in the profitability lines of the typical Profit and Loss
statement. (1) As fuel prices and costs of labor and facilities have risen however, and pricing pressure from
a continuously discriminating buyer-base increases, this cost component as a percentage of retail has
begun to creep back up, forcing consumer goods companies to re-examine their approach to achieving
business margin goals. Today we are faced with the echo of the efficiency boom so effectively brought
about in global logistics over the last 15 years. But there are problems, and those problems are specifically
that consumer products companies are
a. Overbuying/mis-timing inventory in order to attain efficiencies of logistics, and then having
to mark that inventory down to sell it, and
b. under-allocating those costs to high cube and complex items, and over-allocating those
same costs to basics thereby misleading many companies as to true profitability
performance.
THE MALADY
A company which saves 32 cents per There is an inherent set of legacy practices that drives this
unit, through logistics efficiency, but misalignment of margin and departmental goals inside of
then subsequently marks down 65% consumer products. This misalignment has become apparent
of those same units because of in the over 150 Supply Chain and Value Chain Strategies
overbuying/mis-timing to market, conducted by Idhasoft over the last 22 years. Its essence
has not executed a sound margin resides in the disciplines and practices begun in profit and loss
decision. accounting in the seventeenth century and applied rigorously
within consumer goods production sourcing and demand
accounting even into today’s largest Enterprise Resource
Planning suites. There are three components to this
misalignment of merchandise profit and operational goals:
Vertical Profit and Loss Expense Silo’s - Expenses, and especially direct operating expenses
are tracked in ‘like activity’ silo’s rather than by channel of service and the commensurate returned
margin that service channel drives for a specific product. This is actually the root cause of this lack
of understanding along with an inventory focus on GMROI (5)(6), rather than what is termed a
VALUE CHANNEL RETURN ON INVESTMENT.
Misaligned Organizational Structures and Measures – Consumer products company
executives are incentivized to maximize unit sellthrough, lower Cost Purchases beyond the market
value of the item, sacrificing its quality, and lower business expenses. (7) The key is that lower
expenses by management domain, increased unit sales, and lower cost purchases are not always
aligned with the overall health and profitability of the business. (8)
Page 3

4. An Outdated Method of GMROI (Gross Margin Return On Investment) determination –
The classic definition of GMROI inside in particular the demand end of the consumer products
cycle, is to take the margin dollars derived for a product in a given period and divide it by the total
average inventory dollars held over that same period, of that same product. This basis of the three
primary ERP Margin planning modules. (3)(5)(6) This misleads organizations into a whole host of
end state margin reducing activities.
These three principles all serve to misalign corporate goals with effective Net and Gross Margin planning.
The core weakness on which these are centered is the consideration of Operating Expense as a cost of
business and not a Cost of Goods Sold. (6) Of course we can always treat ‘First Cost’ and ‘Cost Purchase’ as
the literal expense paid to manufacture or vendor source an item, this will always be the case. However, a
severe lack of focus on the expense impact and role of service in the effective ‘sell’ contributes to this
misalignment. Counter to the trend we cited earlier in this article, wherein efficiencies have relegated
operating logistics costs to become a footnote in Profit and Loss margins, operating expenses in a high
service based – high tech perishability – long global Supply Chain – high fuel sensitive environments have
begun to rise to compose anywhere from 5% to 45% as much as the cost of the Cost of Goods Sold
themselves. (6) Our failure as an industry to realize that we are ‘selling’ the channel of service and Supply
Chain by which we deliver the product perception to the end customer, is at fault for our misalignment of
goals.
THE VALUE CHAIN
First, Demand is an uncertain thing. The underlying principle in
consumer products demand planning is that Forecasts are always
wrong. (7) We were to reside in the theoretical world of efficient
production planning and MRP constraints analysis then our task as
Given that demand is not a
executive and Supply Chain managers would be simple. We could
continue to presume that demand is an objective function, or fixed certain entity, profitability
entity even worse, and plan efficiency and optimization to rule the
therefore, is driven less off of
day. Indeed 95% or more of the Supply Chain networks in North
America are aligned to optimize expense, without an objective efficiencies of Supply Chain
regard to the dynamic of Service Channels constrained into the
infrastructure, than it is driven
optimization equation. (3) This is a mistake. It bifurcates the
industry into two types of consumer products provider: by having the ability to place
the right item, at the right
1) The Efficient - Those which succeed by offering a broad
array of merchandise, through one efficient optimized Supply location, at the right time
Channel, and
2) The Responsive - Those which offer only a few high margin
categories, through a set of „non-efficient‟ Supply Channels.
Page 4

5. The simple fact is, that the average consumer products company needs both ‘efficient’ and ‘non-efficient’
mechanisms at its avail; or better yet expressed, ‘Cost Leveraged’ and ‘Service Profiled’ Channels of Supply
Chain in order to appropriately address the broad service levels required to serve today’s customer.
These service channels are a key component which influences perceptions on the part of the consumer as
to their brand receptiveness and willingness to pay a given margin. Customers are buying the service and
touch branding, afforded the delivery of the product into their hands, almost every bit as much as the label
branding. The cost of this service, we contend should be allocated, by the type of service needed, into the
Cost of Goods Sold profitability model of every product manufactured or sold by a consumer goods entity.
Given that demand is not a certain entity, profitability therefore, is driven less off of efficiencies of Supply
Chain infrastructure, than it is driven by having the ability to place the right item, at the right location, at
the right time, and only that item, despite whether or not the logistics of doing so are ‘efficient.’ Then to
complete the measure of profitability, those specific supply channel costs to attain this situation, should be
allocated back into the Gross Margin Return on Investment Plan for that item and not be handled as a
corporate cost into Net Margin planning. In addition, alternative costs in alternative value channels of
service, for that same item should be known and become an option available to the category manager.
This cost allocation into Cost of Goods Sold, of the Supply Channel expense involved in servicing one
product through one channel of service is called a Value Channel and is the basis of sound business profit
decision-making. Its focus is on what is intuitively grasped by savvy consumer products executives, and
could be called a NMROI (Net Margin Return on Investment – although there would be more indirect costs
entailed in a true NMROI perspective, this is helpful to elicit the principle) or a revision to the classic
understanding of GMROI. Executives use this principle subjectively in the consumer goods world today,
however are not equipped with the right tools, disciplines, accounting, organizational goals, and
information from which to effectively apply a Value Chain Strategy approach to profitability.
Value Channel Business Thinking and Extreme Impact on Profitability
Page 5

6. GMROI planning today, as stated earlier, is calculated by dividing item Gross Margin by the dollars of
inventory held on average of that item during the time in which that Gross Margin was returned in sales.
Today this continues as the basis of many consumer goods plans, in that this GMROI fallacy misaligns
corporate goals through outdated P&L structures, offset management goals and incentives, and poor
decisions on how to apply Supply Chain efficiency versus responsiveness. We contend that the correct
employment of GMROI, in a value context, would be as follows:
NEW $Gross Margin
GMROI = _______________________________________________________________________
$(Cost Purchases) + (Sourcing Costs) + (Logistics Costs) + (Customer Keep Costs)
Gross Margin
Components of the
Return-on-Investment Value Chain
Merchant
Selected
Pretax Channel
Profit
Margin
.16
5
4
2
1
Sales Backstock
General & Inventory
Admin .14 Hold Philosophy
Operations
Costs
.12
} Channel Costs
Cost Per Unit
Y-Axis
Acquisition
Costs/
Freight
.04
(Avg. Cost
Used)
Cost
Purchases
1 2 3 4 5 6 7 8 9
Unique Channels
.54
Page 6

7. In other words, all costs related to the production, sourcing, logistics, and delivery into a kept customer’s
hands, should be accounted into a Chain of Value, which returns a specific Gross Margin, for a specific
Supply Channel, resulting from a specific Value decision on the part of merchandise planner. The summary
depicted below is what is called a Value Chain. It is the essence of expense which is required to produce a
given purchase, non-returned, margin outcome for a specific consumption of a consumer good. This
margin equation is applied to units sold, and has less to do with the money invested in the inventory which
is held during that sales duration, which is the basis of GMROI planning in the industry today. (5)(6)
Now certainly measures on the opportunity cost of the inventory investment can be added into this margin
equation, however these cost allocations are not expenses in the disciplined sense and can prove to be
more problematic than first blush might suggest. We develop programs for Supply Chain strategies which
begin on the sound premise of a Value Chain and then move into the inventory argument as an important
secondary and conditional consideration, not the primary driver of business acumen. The basis with which
Idhasoft has executed Supply Chain Strategy planning for its consumer goods demand and sourcing clients,
is centered on a Value Channel approach.
Supply Chains which are developed on a Value Channel Strategy basis bear
completely different features than Supply Chains planned for optimized efficiency.
This effort is what we appropriately title a
VALUE CHAIN STRATEGY
POWERED BY FOURTHQUADRANT
Page 7

8. Value Chain Strategy
powered by FourthQuadrant
VALUE CHANNEL STRATEGY OVERVIEW
We have seen that the Value Chain is a series of activities
through which consumer products pass in order to gain
returned margin value. It is important not to mix the
concept of the Value Chain with the modal costs
occurring throughout the activities. Let’s examine the
differences with regards to a diamond cutter, for
example. The cutting activity may have a low cost, but
the activity adds much to the value of the end product,
since a rough diamond is significantly less valuable than a
cut diamond.
The principal Value Chain elements in the consumer
products supply chain include: vendor selection,
consolidation / deconsolidation, inbound logistics,
distribution operations, outbound logistics, and the retail
store or end consumer. An organization’s “local” Value
Chains are part of a larger system that includes the linear activity sets of upstream manufacturers and
downstream customers. This larger collection of activities is known as the value system. The Value Chain
framework is at the forefront of management vision as a powerful analytical tool for strategic planning.
The vital goal of Value Chain management is to maximize value creation while minimizing costs. For
consumer products clients, value creation often represents maximizing product profitability or gaining
additional market share.
Capturing the value generated along the Value Chain is IDHASOFT’s approach to supply chain
management. For example, a consumer products retailer may choose to implement a two tier distribution
network to reduce the total inventory requirement without sacrificing store service. By rationalizing and
identifying the upstream and downstream cost impacts along the Value Chain, organizations may choose
to develop new channels, establish new brick and mortar entities, and implement other supply chain
enhancements to leverage the value system as a competitive advantage.
Page 8

9. KEY OBJECTIVES
Simply put, Value Chain management is the process of making decisions about the routing and storage of
goods, based on the actual cost to service a specific SKU (or merchandise category) through a specific
pathway from vendor to customer. These specific pathways, defined as unique configurations of the Value
Chain elements, are commonly referred to as channels.
The key objective of a comprehensive Value Chain strategy is to rationalize and identity the true impact of
channel selection on product profitability, gross margin, and market share. An effective Value Chain
strategy will enable a firm to make critical decisions, leverage existing resources, and allocate capital in
support of the core profitability and market share goals of the organization. Failing to view the
organization from a Value Chain perspective often results in segmented and locally optimized functions, in
contrast to inclusive strategic execution.
IDHASOFT utilizes its proprietary software, FourthQuadrant, to assist clients with Value Chain
management.
Value Chain Design Simulation Planning
FourthQuadrant
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
HALE Project
Non-competed Competed
Pathfinder Plus Earth Science & Technology Demonstrations
ASE Tools (Pathfinder Plus, Predator B, others)
–
Risk Reduction Annual Demonstrations/Campaigns
14-day Demonstrator
Tech Development 1st Flt Mission Demo
(AuRA, ITAS) 60-day Demonstrator
Build Decision 1st Flt Mission Demo
EAV Demonstrator
Technology Investment Areas - Concepts & Technologies
HALE
EAV
Planetary Aircraft Risk Reduction Demo’s
Mars Scout 2007 V V V V V 1st Flight
Opportunity on Mars
AO P-A DS MS Launch
Other NASA Science (Mars Scout)
5/07 TBD TBD
Directorates Exploration (?) (?)
Strategy Plan Strategy Plan
Customer Setup and Value Chain
Road Map Tracking
Value Chain Design Simulation
Generation
Tracking
Page 9

10. APPLICATION OVERVIEW
FourthQuadrant is a proprietary decision support system (DSS) that allows IDHASOFT’s clients to lens their
value systems and supply chains in horizontal service structures rather than vertical cost silos.
FourthQuadrant empowers our clients with the ability to accurately assess the true cost of service at the
most appropriate level of detail (merchandise category, SKU, etc.). In addition to rationalizing true and
accurate Value Chain costs, FourthQuadrant features industry leading simulation, planning, tracking, and
reporting capabilities.
FourthQuadrant is a Web 2.0 solution built using a Windows .NET 3.5 framework (C# / LINQ/
WPF/ WCF/ WWF). The core database language is MSSQL / Server 2008. The business logic
tier typically resides on a Windows Vista Business 64 bit multi-core server.
Page 10

11. APPROACH
The first step in value channel management is to conduct
a comprehensive data collection effort that enables our
modeling experts to configure and populate
FourthQuadrant. Included in the data collection effort are
informational interviews with key associates /
stakeholders, distribution center surveys, and detailed
operations and IS data queries. Once the data collection is
complete and the business requirements have been
approved by the steering committee. the project team will
identify and define each merchandise category and work
content category for the value channel matrix. IDHASOFT
engineers will measure and populate the FourthQuadrant
matrix with work content data for each task within the
distribution operation.
Operations Pr ocessing Work Content Measures
Category Identification Infor mation (Dept Classes)
Categor y RECEIVING BREAKDOWN QA PUT-AWAY TICKETING
CAT_ID DEPT_NAME CLASS_NAME OPS_PROC PALLET_WC FLOOR_WC PQA_WC DPA_WC TICKCATA_WC TICKCATB_WC
1101 WOVEN TOPS SOLID SHIRT HANG SORTER 0.011 0.013 0.025 0.002 0.271 0.093
1201 KNIT BOTTOMS KNIT PANT HANG SORTER 0.026 0.031 0.032 0.004 0.271 0.093
1301 SWEATERS SWEATER SOLID HANG SORTER 0.025 0.030 0.025 0.004 0.271 0.093
1501 JACKETS/ OUTERWEAR DOWN JACKET HANG SORTER 0.059 0.070 0.032 0.009 0.271 0.093
2403 DENIM JEANS REFUGE JEANS FLAT / PTL 0.066 0.079 0.036 0.010 0.271 0.093
Specific costs are assigned based on the most appropriate measure (work content or cube-based) for each
work function and storage method within the four walls. In addition, a cost equation is developed for each
current and potential value channel based on variable and fixed costs to return an exact cost per unit.
Variable costs are largely comprised of direct and indirect hourly labor expenses while fixed costs include
salaried labor, facility overhead, and depreciation.
Operations Pr ocessing Wor k Content Cost Per Unit
Category Identification Infor mation (Dept Classes)
Categor y VARIABLE FIXED TOTAL
CAT_ID DEPT_NAME CLASS_NAME OPS_PROC TOTAL_WC DL_CPU INDL_CPU FIXED_CPU TOTAL_CPU
1101 WOVEN TOPS SOLID SHIRT HANG SORTER 0.444 $0.07 $0.02 $0.03 $0.12
1201 KNIT BOTTOMS KNIT PANT HANG SORTER 0.518 $0.09 $0.02 $0.03 $0.14
1301 SWEATERS SWEATER SOLID HANG SORTER 0.475 $0.08 $0.02 $0.03 $0.13
1501 JACKETS/ OUTERWEAR DOWN JACKET HANG SORTER 0.559 $0.09 $0.03 $0.03 $0.15
2403 DENIM JEANS REFUGE JEANS FLAT / PTL 0.600 $0.10 $0.03 $0.03 $0.16
Page 11

12. CAPABILITIES
The capabilities of FourthQuadrant extend beyond weighted average cost per unit evaluations at the
merchandise category level to ground up, discrete value channel costs at the SKU level of detail. Work
content for every function, including inventory storage, throughout the DC is identified and evaluated. As a
result of the flexibility and scalability of FourthQuadrant, all valid value channels may be assessed for each
sales channel, physical flow channel, SKU, inventory type, and purchase order cycle within the supply
chain. Rationalized and accurate service costs from FourthQuadrant are utlilized by finance, merchant
groups, and operations teams across IDHASOFT’s client base.
Finance – aggregate business performance, procurement decision support, performance
benchmarking
Merchants – GMROI planning on true profit, value channel selection, merchandise strategy
Operations – budgeting, capacity planning, staff planning, supply chain strategy
FourthQuadrant also enables IDHASOFT to continuously benchmark all elements of the Value Chain against
industry averages, potential alternatives, and historical results.
VALUE PROPOSITION
The business impact of Value Chain rationalization with FourthQuadrant as opposed to productivity
improvement, netowork optimization analysis, or even a cube-based or simple weighted average mode
cost allocation initiative is significant. In our most recent applications of Value Channel Strategic
approaches to consumer goods companies, the savings in terms of logistics costs, service effectiveness,
reduction in shrink and stockout, timing of goods to margin, and rationalization of performing categories
has ranged from .1% to 3% of total retail sales. This is huge in comparison to industry standard efficiency
and netowrk optimization studies.
THE IMPACT OF VALUE OVER EFFICIENCY
Page 12

13. COST ALLOCATION EXAMPLE
Let’s examine a simple drain component example for a large home improvement supplier. Because drains
are a low volume and small cube item, a basic weighted average cost evaluation traditionally produced a
low cost per unit metric. However, drain complexity is actually a array intensive, narrow and shallow
allocation profiled and high handling cost merchandise category that may also require above average value
added service to move into a saleable condition. Prior the implementation of FourthQuadrant, the
expense to margin value impact of drain fixtures was greatly underestimated for both profitability planning
and operational budgeting. A sound Value Chain analysis may both show, that a higher cost fulfillment
mechanism will recover more sold Gross Margin, as well as show categories where we are actually losing
money, and we did not know it.
In addition to end-to-end value channel rationalization, FourthQuadrant is often leveraged as a cost
allocation or activity-based costing tool. Rather than making high-level assumptions, using weighted
averages, or assigning distribution costs based solely on cube; FourthQuadrant empowers IDHASOFT’s
clients to assign specific costs to each item or merchandise department based on the exact channel it
traveled through the distribution center. Please see the example below for the basic structure of the cost
allocation utility.
SKU: 553243 Description: American Standard Lifetime Drain, White
Merch_Cat: Plumbing
Weight: 5.2 lbs.
Cube: 560 cubic inches
MSRP: $69.99
Value Channel 1: Flow, Pallet Distro Value Channel 2: Merch Hold, Case Distro
Service Time: 1.8 days Service Time: 5.6 days
DC Cost per Unit: $.18 DC Cost per Unit: $.38
Page 13

14. Case Example: “Hidden” cost impact on profitability
At IDHASOFT, FourthQuadrant enables our Value Chain experts to uncover “hidden” supply chain costs at
the item or merchandise category level in route to developing optimal Value Chain strategies and channel
selection guidelines for our clients. Rather than using blanket costs, which mix together the disparate costs
of handling and servicing goods, Value Chain management measures the true cost for a specific item.
These costs and the myriad of alternative routes which that item may take across the Value Chain and
through the distribution center are displayed to users in an industry leading interface. Below is a basic
example of a FourthQuadrant profitability report for jeans, dresses, and accessories from our benchmark
database.
INDUSTRY COMMON PROFIT MODEL
Jeans Dresses Accessories
Net Retail Sales Price $49.99 $15.99 $8.49
Purchase Price ($25.00) ($8.00) ($3.50)
Distribution Center ($0.85) ($0.64) ($0.21)
Transportation / Logistics ($2.85) ($2.14) ($0.71)
Gross Profit $21.29 $5.22 $4.07
Gross Margin 43% 33% 48%
Annual Unit Volume 32,000,000 8,000,000 26,000,000
Annual Gross Profit $681,280,000 $41,720,000 $105,690,000
DCB VALUE CHAIN MODEL (4TH QUADRANT)
Jeans Dresses Accessories
Retail Sales Price $54.99 $22.99 $15.49
Markdown Impact ($5.00) ($7.00) ($5.00)
Net Retail Sales Price $49.99 $15.99 $10.49
Purchase Price ($25.00) ($8.00) ($3.50)
Inbound Transportation / Logistics ($1.20) ($1.75) ($0.55)
Storage - Floor Staging ($0.06) ($0.04) ($0.02)
Storage - Standard Pallet Rack ($0.12) ($0.08)
Storage - Bin Shelving ($0.06) ($0.05)
Inbound Processes ($0.08) ($0.12) ($0.02)
Storage Processes ($0.02) ($0.10) ($0.08)
Value Added Services ($0.18)
Outbound Processes ($0.10) ($0.35) ($0.27)
Outbound Transportation / Logistics ($1.10) ($0.90) ($0.40)
True Cost ($27.56) ($11.62) ($4.97)
Gross Profit $22.43 $4.37 $5.52
Gross Margin 41% 19% 36%
Annual Unit Volume 32,000,000 8,000,000 26,000,000
Annual Gross Profit $717,760,000 $34,960,000 $143,520,000
Page 14

15. CASE HISTORY BUSINESS IMPACTS
The most expensive business activities are the cost of lost sale or an unnecessary price markdown. The
average consumer product company gross margin ranges from 14 – 42% of sales. Comparatively, supply
chain costs range from 2 – 12% of sales in magnitude. Therefore, electing to route goods through
expedited or high touch logistics channels is not an unsound business practice, provided that the business
can accurately identify the cost impacts and protect gross margin. IDHASOFT has experienced continued
success utilizing FourthQuadrant for Value Chain management and supply chain evaluation for our clients
over the past 7 years. Specific achievements include, but are not limited to, the following.
$2.2B Sporting Goods, Retail and Customer Direct
Client established distribution center labor cost at $.55 per unit for the next season and had begun staffing
accordingly. Sales plans indicated an increase in compliant apparel from 28% to 36% of total business unit volume.
Our Value Chain effort showed that $.45 per unit was a more accurate labor cost because of the lower work content
involved in a flow apparel push channel as compared to a hard lines pull channel, upon which they had originally
budgeted. The new budget resulted in a reduction of $1.2M in early season overstaffing costs.
$3.1B Fashion Apparel, Retail and Customer Direct
An initial eight week long examination of the Value Chain resulted in a 50% reduction of safety stock held for 30%
percent of the fashion items. Additional savings were realized in a 180-day period by enabling merchants to select
the appropriate network channel based on the FourthQuadrant analysis of true handling costs and service
requirements.
$4.5B Value-priced Apparel, Retail
Client budgeted $.245 per unit for future operations, but merchandising planned to shift its mix of home products from
9% to 38% percent of the total unit volume. A FourthQuadrant analysis indicated that the average home product
processed at a true burden of $.76 per unit and required triple the distribution space (sq. ft.). Although the new home
lines were profitable, without understanding the true cost to serve, the retailer would have grossly under budgeted and
critically mis-planned the requirements to handle the new product mix.
$750MM Fashion Apparel, Retail
Client’s distribution infrastructure was out of capacity and they sought to develop a strategy to accommodate the
space and throughput shortfalls. IDHASOFT used FourthQuadrant to identify which merchandise categories were
most appropriately handled by a third party partner based on quality concerns, ship accuracy, and profitability. The
results of the Value Chain analysis allowed the client to meet store service requirements during peak season while
avoiding $1.1MM in additional distribution expense.
$2.1B Specialty Apparel, Retail and Customer Direct
Determined the optimal use of vendor created inner packs, vendor created case packs, and consolidator created case
packs by merchandise category for client. The cost savings opportunity alone was in excess of $1.2MM annually.
Distribution Network Strategy and Distribution Center Design
IDHASOFT utilizes FourthQuadrant in all distribution network strategy and distribution center design efforts to
ensure that all solutions meet the needs of the corporate goals, mitigate risk, protect gross margin, and promote
profitability with the principal understanding that the least costly solution is not necessarily the optimal answer for the
business.
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16. About IDHASOFT
IDHASOFT Services
IDHASOFT partners with its clients to deliver end-to-end supply chain solutions through the Planning
development of competitive and resilient supply chain strategies and processes. Our depth and  Business and Supply
breadth of experienced people and industry partnerships allow for our customers to rely on us to Chain Planning and
help them meet or exceed their goals and business objectives. Strategy
 Distribution Network
and Node Analysis
IDHASOFT helps distributors, manufacturers and retailers improve through-put, reduce operating  Transportation
costs and achieve perfect order fulfillment from supplier to customer. We have helped over 250+ Planning and
Procurement
companies realize operational improvement and financial gains by aligning strategy, streamlining  Automated Systems
processes and implementing software systems. Strategy and
Planning
 Merger and
IDHASOFT's customers' operate some of the leanest and most sophisticated supply chains in their Consolidation
industry supported by integrated demand planning, warehouse management, transportation Operations Planning
management, labor, voice, material handling and business intelligence systems. Our customer's
models range from single distribution center (DC), single channel, make to stock configurations to Execution
 Business
multi-DC, multi-channel, make to order and engineer to order configurations. Requirements
Definition and
IDHASOFT adds value by applying practical operating and systems expertise to ensure Functional Design
 Facility and Material
measurable, sustainable and cost justified change. We collaborate with solution providers that are Handling Design and
best suited for our customer's unique industry, challenges and budget. Our portfolio of qualified Procurement
solutions is designed to meet the needs of an entire enterprise or a specific supply chain  Supply Chain
component. Whether the issues are information technology or operations based, un-known or un- Execution System
Selection and
realized, IDHASOFT provides the knowledge to help achieve supply chain excellence. Integration Services
 Hardware and
Equipment
Procurement
Industries Served
 Fashion/Apparel
To learn more about realizing benefits from Idhasoft, contact us:  Sporting Goods
 Arts and Crafts
Contact: Roger B Cunningham
 3PL
Address: IDHASOFT, INC.
3730 Roswell Road – Suite 275  Off-Price
Marietta, Georgia 30062  Household
Phone: 770.971.8008 x107  Beverage
Website: www.idhasoft.com  Grocery
www.dcbandcompany.com
 Furniture
Email: roger.cunningham@idhasoft.com  Health
This brief is for informational purposes only. Information obtained in this publication has been obtained from sources
IDHASOFT considers to be reliable, but is not warranted by IDHASOFT. Copyright © 2008 IDHASOFT. All Rights
reserved.
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17. REFERENCES
1. Erie, S. P. Globalization L.A.: Trade, Infrastructure, and Regional Development. Stanford University Press, Palo Alto, California,
2004.
2. MacMillan, D. C., and T. B. Westfall. Competitive General Cargo Ships. Transactions of the Society of Naval Architects and Marine
Engineers, 68, 1970, p. 843. 5.
2. DCB and Company, Inc. Industry Benchmarks and Trends in Retail, DCB and Company, Inc. 2007.
3. Retail Industry Indicators 2008, National Retail Federation.
4. Levy, Michael, Babson College and Barton A. Weitz, Retailing Management University of Florida, McGraw-Hill Irwin, Sixth Edition
5. Tepper, Betty K. The Mathematics for Retail Buying, Fairchild Publications, Inc. New York, Fifth Edition, pp. 27 – 37, pp. 106 - 151.
6. Simchi-Levi, David, Designing and Managing the Supply Chain, Massachusetts Institute of Technology, Cambridge, MA, McGraw-
Hill Irwin 2008, Third Edition, pp.35
7. Appleyard, Dennis R., International Economics, Davidson College, McGraw-Hill Irwin 2008, Sixth Edition, pp. 700 -704.
8. Harvard Business School, Harvard Business Review on Supply Chain Management, Harvard Business School Publishing Corporation,
2006; pp.49 – 63, 90, 171 – 193.
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