STRATEGIC RECOMMENDATIONS FOR TOYS (CYPRUS) LTD.

STRATEGIC RECOMMENDATIONS FOR TOYS (CYPRUS) LTD.

Instructions:-

Toys (Cyprus) Ltd.

STRATEGIC RECOMMENDATIONS FOR TOYS (CYPRUS) LTD.

Toys Ltd. was established in 1990 in a provincial town close to Larnaca in Cyprus with the stated objectives of producing high quality toys and educational equipment for principally, the Cyprus market and later the middle-east. Over the period of 20 years it has seen various ups and downs in fortune but has been facing increasing competition especially in the education segment of its business. Recently it has experienced a downturn in its profitability which its management ascribe to the deteriorating economic markets in Europe and the ”knock on” effect in the Cyprus market. Various strategies to overcome this deterioration in its sales and profits have been proposed and cuts in the employee force and production techniques have been proposed. The management consider that these strategies together with more stringent cost controls and cost cutting will produce the desired results in the future.

One of the factors reported by the sales director, Kyriacos Dmitriou, is the increasing number of returns being received by the goods returned department. This phenomenon he says, “….. is not sustainable if the firm is to return to profitability. “
The production manager has suggested that if 100% of items produced are inspected at the end of the production line then the problem of returns of defectives will be solved. This operation could be achieved by moving 2 or 3 of the more experienced workers from the assembly line and onto final quality inspection. Again, this strategy would not involve changes in staff numbers. It has also been suggested by the production department that a higher degree of self assembly by the customers/consumers could be used as this would again reduce production costs and place the onus of the defectives issue on the consumers.

The Marketing Director, Stavrou Kiriacou, is concerned that so many items with working parts are being returned due to erratic or non-working parts. He is concerned that this will affect the reputation and image of the firm. His senior assistant has proposed that as a measure of good will the firm agrees to receive faulty goods back and replace them with new items. This, he says, will cure the image problems. He also suggests that the faulty units could be rebuilt and repaired then sold in the outlet shop. These could be sold at a compensating discount. He believes also that this would not detract from the sales of new items. Under this strategy no extra staff would be needed as regular staff could carry out the functions during lulls in their regular work.

It has been suggested by the accountants that the company should be looking for cheaper components even if they are considered lower quality as this would satisfy the company’s need for cost reduction in production. With the change in staff organisation, cheaper components, cheaper materials, rebuilding products and sales in outlets the returns problems and profit levels would be addressed. The accountants have asked for more accurate figures of returns, defectives, fault points and total production volume figures are provided to them. It could be they say, that the levels of returns are at acceptable levels. After all they claim, the percentage “defectives” may well be within the parameters laid down in industry standards and bench marks. Additionally, the accountants have queried if the firm can afford to choose strategies other than those they have proposed:
a)buying cheaper components and materials b)working to industry norms on defectives and acceptance levels c)”toughing” it out as far as returns are concerned by denying liability and resisting compensation by replacement of defective products.

Operations Management – Assessment 2 – Toys (Cyprus) Ltd. – Case study

You have been requested to provide advice and justified recommendations, as a new graduate of management studies, to the management of TOYS (Cyprus) Ltd. regarding their problems with their products and processes. They are particularly interested in your observations regarding their proposals to overcome their poor performance in the markets they are in.

They have asked that you provide them with justified reasons for recommendations.

You are to write your recommendations, findings and observations with fully justified argument.

Solution

STRATEGIC RECOMMENDATIONS FOR TOYS (CYPRUS) LTD.

STRATEGIC RECOMMENDATIONS FOR TOYS (CYPRUS) LTD.

Introduction

Competition, high customer expectations, scarce resources and environmental issues have become fundamental challenges to the exemplary perform. These factors, directly and indirectly, affect the production and operational costs for any company. Whichever the industry a company is operating in, costs forms the largest expenses that have a direct impact on profitability.

The main dilemma is to identify different strategic methods to curb material and operational costs without affecting the quality of the final products. It should be understood that the final products should meet the minimal expectations of the customers. Different studies have shown that the cost associated with quality ranges between 15% and 20% of the revenue realized. Conversely, the cost sometimes rises to 50% of the total revenue realized (Schweizer, 2007, p.67). According to the industry norms, a thriving company should have a quality related cost of between 10% and 15% percent of its operating cost (Schweizer, 2007,p. 71). Key manufacturing issues facing many companies are: reduction of labour and material costs and obtaining affordable element sourcing arising from the economic downturn.

Competitive product quality, service delivery and cost are fundamental for any company’s sustainability in the market. Effective quality management strategies can lower the labour and material costs below 10% of the total operating costs. This study focusses on strategies that could be applied by Toys (Cyprus) Ltd. to lower its material and personnel costs, redeem its image and brand and improve its quality and profitability.

Background

Toys Ltd. located in Larnaca, Cyprus was established in 1990 to produce high-quality toys and educational equipment. In its 20 years of operations, the company has been faced with increasing competition, profitability downturn, and deteriorating Cyprus and Middle East market. The company is also facing high material and operation costs, increasing number of sales returns as a result of defect toys and products and a deteriorating company reputation, brand, and image.

The management is focusing the following proposals to curb the operational issues:

1. Buying cheaper components and materials

Substituting the current manufacturing materials for the cheaper ones. For example, the management can identify new suppliers who will offer the materials at a lower price while maintaining the quality. Depending on the target market, the company should invest different materials in accordance with the requirements. For example, the company can recycle the old disposed toys to create new materials to produce new ones. Likewise, the company should increase its cycle times, change the material composition of its products. The proposal can be achieved using the value analysis/value engineering (VaVe) and the Enterprise resource planning (ERP) systems.

• Working to industry norms on defectives and acceptance levels

According to the industry norms, a thriving company should have a quality related cost of between 10% and 15% percent of its operating cost. This simply means that the level of defectives should be maintain at the acceptable minimal. Therefore, each manufactured produced should be checked against the acceptable industrial standards. More so, where defects have been detected after products have been delivered, such products should be recalled back for rectification.

“Toughing” it out as far as returns are concerned by denying liability and resisting compensation by replacement of defective products.

Although, this option is viable in controlling the company’s operational costs, it would damage the company’s reputation in the market. Considering that the company is facing adverse competition in the company, denying liability of defective products would lead to further lose of the current market share. Instead, the company should invest in recalling and repairing defective materials. The strategy would ensure that the company maintains its market share, enhance customer loyalty and increase its sales.

This study focuses on identifying several strategic recommendations that can be used by the Toys Ltd. to enhance its operation and sustainable development as well as meeting the above-mentioned approaches.

The Strategic Recommendations

This section address the value analysis/value engineering (VaVe) approach, the Enterprise resource planning (ERP) systems and recalling of defective products. The three options can be used to control the material and production costs low, improve the quality of products without cost increase, increase customer satisfaction and reduce defective products.

1. The value analysis/value engineering (VaVe)

The VaVe is a procedural and systematic approach that can be used by companies in their decision-making process. The VaVe is also known as Value Management, Value Analysis, and Value Planning among other names (Chary, 2004, p. 56). VaVe answers three questions namely: What must a product do? What is the cost of the product? And what is the product worth? In short, VaVe allows product analysis for quality improvement, meaningful relationship with the suppliers and cost reduction. The approach has a diversified perspective focussing on three areas of;

1. Internal VaVe which analyze areas within the control of the company that needs improvement.
2. External VaVe which focus on cost reduction and supplier development
3. And, External/ Joint VaVe focusing on total value chain improvement.

In the case of Toys (Cyprus) Ltd., the main goal is cost reduction. Some of the cost reduction approaches are sourcing cheaper resources and improved labour productivity. The former is essential because it constitutes 50% of the manufacturing cost (Agha, 2010, p. 42). However, the Company has failed in capitalizing on the opportunity of using VaVe approach to address the product functionality and redesign as it would reduce the material cost to 10%-15% (Wild, 2003, p. 111).

1. Product Redesign

If applied in the product design phase, VaVe approach can lead to enhanced customer value at a reduced cost. VaVe takes a holistic and broader approach to produce products that conform to the customers’ needs while at the same time reducing the material cost (Shim, 2009, p. 49).

 Take a scenario where a company manufacturing valve components for gas and oil companies is focusing on reducing its material cost. Traditional the Company would have analyzed its valve design by reviewing the valve components, its functionality and reducing material composition (Stevenson, 2014, p. 67). However, through a holistic approach using the VaVe method the company established that 75% of the cost was secondary. Only 25% of the total cost could be directly associated with the production of a valve. From the findings, the company decided to redesign its valve by inventing an intra-tube valve system. The new design eliminated the secondary and other associated costs while at the same time a simpler product that conformed to the consumer needs (Berk, 2010, p. 78). By eliminating most components of the valve, customers’ value was enhanced. Strategically, the VaVe approach enabled reduction of material cost associated with manufacturing the valve by approximately 70% while at the same time reducing the Valve’s market price and quality; increasing the customer satisfaction (Goldratt, 2014, p. 81).

1. Application of VaVe approach effectively

 There are three steps the company can apply in optimising the VaVe approach. First, Toys (Cyprus) Ltd. should define their products according to value generation. The analysis should ensure that products have been prioritized for improvement. The step will ensure that the management and other stakeholders define and understand the goals. The definition process focuses on data analysis to align internal strategies with the stakeholders’ objectives. Through process definition of VaVe, the company would not only reduce the material cost but also achieve functionality improvement, improved vertical integration, and faster delivery of products among other aspects ( Horngren , et al., 2011, p. 91).

Second, the company should ensure that its toys and educational equipment still perform their fundamental functions without increasing the cost, sacrificing product quality or their delivery time. The entire process should be consistent and flexible at the same time. The third step is strategically deploying the redesigned product model (Heizer & Render, 2001, p. 65). This step like others requires the involvement of the stakeholders- suppliers, customers, production team and the management- who are well equipped with providing insightful ideas. With the involvement of all the interested parties, the company will engage in broadly and deeply improvement opportunities (Schweizer, 2007, p. 132).

The company can reduce the material costs, increase product quality, improve customer value and increased earnings (before Interest, Tax, Depreciation, and Amortization) by employing a collaborative, pragmatic, and holistic VaVe approach.

• The Enterprise resource planning (ERP) systems

The success of any manufacturing company is the ability to produce quality goods conforming to the customer needs at reasonable prices/costs. The main goal of the profit making organization is increasing its profitability level and expanding its market share. This can only be done by meeting the minimal needs of the customers. In meeting this goal, a company should pay adequate attention to the efficiency and cost incurred in producing the products. Executing the business processed entailed in the production processes require the production team to have technological expertise (Heizer & Render, 2001, p. 86). At this point, the enterprise resource planning (ERP) system is applied. The system optimizes the functionality of manufacturing companies. When implemented effectively, the ERP software decreases operating costs as well as improving efficiency.

The ERP system has several quantifiable benefits that would be beneficial to the Toys (Cyprus) Co Ltd.

• Reduction of inventory used. Through the application of ERP, the company will enhance its scheduling and planning which would lead to reducing the inventory usage/ wastage by 20% or more. Not only will the company benefit from inventory reduction but also long term saving on the cost incurred to acquire this largest component of assets. The costs associated with inventory are interest charged, handling, warehousing, insurance, shrinkage, obsolescence, damages, and taxes. Considering that interest rate is 10%, the entire cost of carrying inventory would be between 25% and 30% (SCHROEDER, 2003, p. 54).
• With the ERP system in place, the company will make orders and purchases only when inventories are needed. Orders can only be made on needed dates while unneeded stock will be cancelled or their order postponed until when the need arises. This prevents the build-up of obsolete materials which enhance savings. With realistic schedules and prevented shortages, orders can be processed faster. Likewise, the implementation of the Just In Time (JIT) philosophy would further reduce the lead times used in the manufacturing process (Meredith & Shafer , 2002, p. 112).
• Reducing the material cost. The ERP system is equipped with negotiation information like projected material needed, and performance statistics. The information would give the company the efficiency of meeting future requirements. With improved procurement processes would lead to fewer interruptions and shortages which are likely to reduce the material cost by a range of 5% to 10% (Drury, 2004, p. 84).
• Reducing the labour cost. With ERP, the company would reduce the degree of manufacturing interruptions and shortages as well as reducing the amount defect products and goods returned after sales. Reduced overtime and less rework translate into a reduced cost of labour by 10%. Successful implementation of ERP leads to minimised rush jobs, less expediting time, extra setups, material handling, and disruptions The company should take advantage of its experienced employees and supervisors who have a better visibility of the required resources and time to meet schedules. Supervisors should be engaged in training, directing and managing other employees on the best methods of improving the quality of the products (Goldratt, 2014, p. 65).
• ERP brings about improved sales and customer services. With coordinated production and sales, the customers become more satisfied with the services provided by the company. This would lead to better customer services and increased earnings. ERP will coordinate and inform the marketing and sales departments when delivery and shipments should be made to the customers leading to repeat order placement by customers after their needs are fully satisfied. Creating a direct contact with the customers improves the services which in return could increase the sales volume by 10% (Schweizer, 2007, p. 90). Likewise, with ERP system, the company enjoys the flexibility of reacting to the demand changes as well as diagnosing the delivery problems. The company would swiftly take a corrective action like alerting the company about the changes, delivery dates as well as any alteration on the delivery schedule (Patnaik, 2015, p. 126).
• Enhanced accounting controls. With ERP, the company will enjoy improving collection procedures by reducing the amount it takes before receivables are collected. Likewise, ERP enhances the timely provision of customer statements, check on credits and management of the receivable account. The company would also easily monitor and take advantage of the discounts provided by the suppliers ( Horngren , et al., 2011, p. 223).

The bottom-line is that the company would enjoy effective cost control with ERP system in place.

• Strategic approach for recalling defects as a way of building the company image

The number of customer complaints and goods returned to the good returned department have increased over time. This has led to the fall of the company’s image and reputation. One strategy that can be applied by the company to redeem its image is by recalling the defects, replace them with goods ones and later repair the defects ones for resale (Reider, 2007, p. 211).

Before conducting a recall of defective products, the company should have prepared recall plan and policies. First, the company should constitute a recall team headed by a senior executive officer. The team should be well aware of the existing link between customer safety, their satisfaction and recalls as well as the impact of recall of the company’s long term success. The role of the recall team is to identify personnel within the company that can be called into action when a recall situation arises (Blocher, et al., 2009, p. 101).

When a recall situation arises, the head of the recall team has a mandate of appointing a response team. The team should examine the seriousness of the situation to identify the most effective response. The results would help the team to determine whether or not guaranteeing a recall is necessary. The objective is to find the most effective solution for both the company and the customers.

After the recall of the products, the team should establish a mechanism of rectifying the defect and reintroduce them into the market for resale. The goal is to earn part of the expenses incurred during the recall and replacement of the recalled products (Heizer & Render, 2001, p. 97).

Conclusion

The Toys (Cyprus) Ltd. should implement both the VaVe approach and the ERP system into its manufacturing activities. From the discussion, the two strategic techniques will help in solving the cost and bad reputation currently facing the organization. Some of the benefits the company stand to enjoy are;

1. Reducing both the piece and total costs incurred in the production. The cost saved would amount to 25%,
2. Improving the operational performance by 30-40%,
3. Improving the quality of the products by between 20-30%,
4. Reducing the manufacturing cost by approximately 20%,
5. Improving customer relation and satisfaction,
6. Increasing product conformity,
7. Redeeming the company’s brand image and reputation,
8. And, reducing the degree of recalls.  

References List

Horngren , C. T., Datar, S. M. & Rajan, M. V., 2011. Cost Accounting: A Managerial Emphasis. New Jersey: Prentice Hall.

Agha, N., 2010. Inventory Management and Cost Control in Manufacturing Industries in Nigeria. The Nigeria Journal of Management, pp. 5(2): 173-188.

Berk, J., 2010. Cost Reduction and Optimization for Manufacturing and Industrial Companies. New Jersey: Wiley.

Blocher, E., Stout , D. & Cokins, G., 2009. Cost Management: A Strategic Emphasis. New York: McGraw-Hill/Irwin.

Chary, 2004. Production And Operations Management. Revised ed. New York: Tata McGraw-Hill Education.

Drury, C., 2004. Management and cost accounting. Singapore: seng les press .

Goldratt, E. M., 2014. The Goal: A Process of Ongoing Improvement. New Jersey: North River Press.

Heizer, J. H. & Render, B., 2001. Operations Management. New Jersey: Prentice Hall.

Meredith, . J. R. R. & Shafer , S. M., 2002. Introducing Operations Management: Wall Street Journal Series. New Jersey: Wiley .

Patnaik, S., 2015. Operations Management. United Kingdom: Lulu.com.

Reider, R., 2007. Operational Review Workbook: Case Studies, Forms, and Exercises. 1 edition ed. Washington, DC: Wiley.

SCHROEDER, R. G., 2003. Operations Management: Decision Making in the Operations Function. New York: MCGRAW-HILL EDUCATION.

Schweizer, M., 2007. Operational and strategic decision-making: Soft Systems Methodology, Analytical Hierarchy Process and Alexandrian Pattern Analysis applied. s.l.:GRIN Verlag.

Shim, J. K., 2009. Operations Management. London,UK: Barron’s Educational Series.

Stevenson, 2014. Operations Management. 12 ed. New York: BE.

Wild, R., 2003. Operations Management. London,UK: Thomson Learning.