To: Mylo Rogers, Owner, Favco Corporation

From: John Wilson, Director

Date: July 15, 1999

Subject: Operations Status Update

CC: Packaging Department Operational Division

Dear Sir:

As Departmental Director, I am especially pleased to provide accurate responses to your enquiry regarding the current operational status of our Packaging Department. You will find that performance and cost-effectiveness are of consistently high quality, and that all established FAVCO standards and procedures are being honored by our packaging workers.

Our distribution costs have remained economical and relatively constant over time, reflecting an outlay of 12.3 cents per package.

The primary client of our packaging department, as you are aware, is FAVCO and its faithful merchandising and cataloguing customers. We serve up to 90,000 customer orders per week. These clients expect their merchandise to arrive safely in an undamaged condition. Although our departmental employees spend up to 8% of their time resolving packaging and shipping problems, we do solve these problems and provide excellent shipping services to all Favco customers. Most of Favco's customers are pleased and are served well, even though approximately 15% of our shipments require special handling and re-packaging efforts. These efforts consume about 12% of our employees' time; but high standards are definitely maintained. Therefore, packaging and shipping are being properly executed, and all client needs, with relatively few delays, are being honored. We are pleased to point out that 78% of shipments are processed normally without special arrangements .

Our employees are motivated to begin work when merchandise arrives in our staging area where it is made ready for packaging. 70,000 packages per week arrive on a normal basis, whereas 20,000 are special or difficult items which consume extra employee time.

As we have stated, approximately 90,000 packages per week are processed by our Department. Each order requires a mean processing time of 5 days from time of customer placement. It is noteworthy to state that 14,000 packages per week consume about 12% of our employee time due to reprocessing problems and delays. However, all customers ultimately receive full satisfaction in keeping with FAVCO's policies and practices.

Workers are repeatedly reminded that their productivity is crucial to proper operation of the department.

We emphasize the following points and options:

1. Each worker must contribute his or her fair share of the overall demand for work.

2. Functions must be, and are, delineated and assigned.

3. Errors need to be identified and prevented.

4. Statistics are and will continue to be kept on all aspects of the packaging operation.

5. Additionally, consideration is being given to changing salary policy and establishing a "per-unit-processed" wage basis.

We are pleased to reiterate that, fortunately, 78% of packages are already being processed efficiently. However, emphasis must be placed on improving performance with respect to the 22% problem packages. Methods must be devised, perhaps through creation of a Problem Resolution Group, to streamline, expedite and hasten processing of the 22% category. If this is accomplished, the price per package will fall by an estimated 1.6 cents per unit, assuming increased customer satisfaction results and that sales increase, proportionately, perhaps on the order of 15%.

Also, if the production-based wage policy is implemented, resultant payroll savings can be assigned to the 'consumable supply budget', making it easier and faster to process problem items with readily available boxing, containers and other supplies. Of course, studies will have to be conducted on an experimental basis to determine if production-based incentive-type salaries will actually produce savings for the operation or not.

In view of the foregoing, internal departmental memoranda will be issued, containing these suggestions and observations, and all employees will be informed of impending changes, as well as of the importance of working efficiently and conscientiously.

If I can provide any further data or clarification, Sir, please do not hesitate to contact my office.

Yours sincerely,

John Wilson,


Packaging Operations Department