Dhl Case Analysis

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It is now 1991, DHL has established its role as the industrial leader in internaitonal express courier. However, the environment is changing rapidly. The air express giant is now facing fierce competitions like never before. With main competitors like FedEx, TNT, and UPS trying to acquire capacities and undercut DHL 's price, price has dropped 5% each year from 1985 to 1990 by estimation, with extreme drops in some markets. Margins are being squeezed as a result. To maintain its advantage in the market, DHL is facing some important decisions such as price setting strategies and decision structure. Needless to say, DHL is making some crucial choices here. A right step will lead to better profitability but a false one might bring
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The contribution of each local operation was calculated by subtracting local costs from revenue. This implies that, the P&L is calculated by deducting the cost incurred within their region from the revenue of that region. Revenue is recognized at the location where a shipment was originated. This system is unreasonable in the sense that it did not consider the costs to other country operations of delivery and whether the selling price was sufficient to cover the cost of pickup, line haul, hub transfer, delivery, and headquarters overhead and management costs. Therefore, a region 's revenue is not being matched with its costs. Its real cost should include all costs along the way of sending its documents or parcels to their destinations. For regions with higher incoming traffic, this system assigns a higher cost to it. The higher cost will distort management 's incentive to maximize profit. If use MR=MC to calculate optimal price, the region 's MC will become higher than its real MC, resulting in a higher price, and it is not the real profit maximizing price.

So, in order to provide the incentive for management to carry out a price that maximize the profit, the cost accounting structure must be changed. The company must find out the cost at each step of the transporting, and then add them up to get the total MC of a certain route. This requires DHL to improve its accounting IT system – PRISM.

Problematic PRISM
PRISM costs were based on historical
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