Analysis of Grand Chocolate’s situation
Garland Chocolates, whose headquarter is located in London, is a famous food manufacturer with over 50 plants globally, 8 of which are settled in the United States. The company generates 3 billion revenues each year.
Edgeworth Toffee is one of their top products, sold in two different formats. One is a fixed-size or a retail-ready pack with approximately 2500 cases sold a year. While the other one is a 10-pound bulk package which is placed in stores, so that the clients can pick the amount of toffee they want themselves, with around 3000 cases sold per year. Both of them are sold for exact the same price, i.e. $145 per a package.
Enterprise resource planning (ERP) system is used to manage the company’s daily operation. In recent years, thanks to the ERP system, the company realized that the efficiency of the manufacturing and packing lines is reducing. Both production lines have been utilized for over 20 years; they have almost run out of their productive lives. For this reason, the company has to make the decision whether to outsource their production process or keep it in-house.
Problem Analysis
As was mentioned before, the manufacturing and packing lines are losing their efficiency. Information in exhibit 2 shows that the packing efficiency and scrap rate are far behind the standard rates. Hence, the first key solution is to solve the packing problem. Secondly, the manufacturing line is now only reaching the 80 percent of the target efficiency and would predictably decline to 76 percent in the next years. The situation is becoming deteriorating. Investments into new equipment seem to be the easiest way to solve the entire problem, but the main issue is where to get the money. So, outsourcing is another good way to solve the problem.
Possible Solutions
Alternative 1: Company invests in new manufacturing and packing equipment.
Pros:
Securing company’s reputation.
Another 20 years of high-efficient production process.
Boosting up the packing efficiency.
Cons:
Company will bear the budget burden.
Extra cost may be needed to hire new staff to operate on the new machines.
Alternative 2: Outsourcing the manufacturing and packing lines.
Pros:
Cost will dramatically decrease reduction.
Time-saving.
Reduction of direct labor cost and the overhead cost.
Cons:
Quality may not meet the standard.
Transportation would be one of major considerations when sourcing the production sites.
Undesirable product quality may harm the reputation.
Competitors may steal the secret of toffee manufacturing.
Alternative 3: Buy a new manufacturing equipment to maintain the toffee production in-house and outsource the packing procedure.
Pros:
Save the costs on packing and decrease the rate of scrap while increasing the efficiency.
Ensure product quality.
Ensure that the company keeps their core competitive advantages.
Cons:
Issues with transportation of intermediate products.
Alternative 4: Outsource the packing line and keep using the old manufacturing equipment.
Pros:
Decrease the scrap rate of packing.
Boost up the efficiency.
Cost saving.
Cons:
Large amount of money needed to invest into new packing equipment.
Employees may need time to familiarize themselves with the new packing machines.
Before we analyze which method is the best, we have to do some mathematical analysis. From the exhibit 1 we understand that the product selling price is $145 and the margin is 49.30. If the company chooses to accept the new marketing strategy, the facelift of the package could increase the sales by 20%. So, in this case, the net profit for the first case sale will increase by 49.30*20%=$9.86. From the previous information it is known that in total the company sells 5500 cases of two different formats a year. Therefore, the increasing profit for one year will be 5500*9.86=$54230.
We also can assume that the new equipment’s lifetime is around 20 years, if we consider the time value of the money and set the cost of capital to be 10 percent. By using the equation PV=(c/r)*(1-1/(1+r)^20) we get the present value of the extra profit which will be generated in the next 20 years, which is $461839.20. This means that the extra profit can not offset the investment of $74000 (60000+14000). The analysis may not be exact because the new investment not only generates extra profit but also contributes to reduction of labor and overhead cost. Due to the lack of information, I can not calculate the exact number of reduced labor and overhead cost. But we realize that the outsourcing strategy has significant advantage in terms of cost saving.
There is no reason to adopt the alternative 1. Even though it provides the company with the possibility to keep the secret of the toffee formula, such large investment imposes great financial burden on the company. The scanty cash flow would cause major operation problems.
Alternative 2 would be a good solution in terms of cost saving, but the aim of the company is not just cost saving. Outsourcing the manufacturing process could create potential market competitors. Outsourcing requires the company to find a supplier with the high level of supply chain techniques. Basically, if the company outsources its jobs, in some way it loses the control of that process. If Martin delays the delivery time, Garland reputation would suffer. In addition, lack of toffee in store may result in old customers being unsatisfied and the loss of new customers. The market risk is high when we choose the alternative 2.
I presume that alternative 3 provides a possibility to solve the problem. Firstly, the new manufacturing equipment comprises the recent technologies and features, which provide the potential market power to produce some other commodities in the future. This is important, since we cannot guarantee the toffee to be still famous in the market in the next 20 years. Secondly, the condition of the manufacturing equipment is getting bad. From the exhibit 2 we understand that the packing efficiency is only one-half of the standard rate and the scrap rate is 8 times higher than the standard rate. They are unable to produce toffee anymore.
Outsourcing the company’s core sector does not seem to be a good idea. Even though buying new manufacturing equipment would cause financial tension for a period, it is still worth to do this. The feedback of the customers is extremely good because of the excellent quality and delicious taste. Since their reputation is built on the word of mouth, the company has to keep the high quality of the product. This is a key way to win the market shares. The new manufacturing equipment also increases the efficiency and decreases the scrap rate, thus, it also helps to decrease other overhead costs. Outsourcing provide cost advantages to the company compared to packing in-house. Besides that, the lower cost could offset the cost of the new manufacturing equipment and release the financial pressure of the company. Outsourcing the packing line offers the opportunities to build new relationships with a new supplier, which offers Garland to gain access to world-class capacities.
Alternative 4 could be the best choice. Although the efficiency of the manufacturing line has decreased to 76%, it is still not far away from the standard 80%, the scrap rate of the old machine is 1.5 which is almost the same as the standard scrap rate. Outsourcing the packing line is the strategy to saving the cost and focusing on the core competency.
I would recommend alternatives 3 and 4.
Implementation and control
Initially, we should hire some specialist to sign the contact with the Garland Chocolates. Solving the issues with the packing line is the first priority because of the lower efficiency and higher scrap rate of the packing process. If we want to maintain the market share, we have to lower the cost and ensure that the customers are satisfied.
Then we could issue shares to generate the money from the public. The manufacturing equipment is still in the good condition, but the efficiency will decline in the next 5 years. Leaving the manufacturing process away is not a smart idea. We should deal with this problem after we have the money available in hand. As mentioned before, the manufacturing life will still be in good condition for 5 years. Keeping the manufacturing process in-house without buying the new manufacturing equipment will provide the company with the opportunity to make the further decision depending on the market preference. If toffee is not famous anymore and can not generate the profit, investments into another project could be made, which reduces the market risk. So, in that case, we first choose the alternative 4 to solve the most important problem, then we have the chance to make further changes if something goes wrong or the new market opportunities occur. This may be the best way to operate the company and solve the manufacturing issues.
