Operations Decision” Assume hired a managing consultant a company offer advice make a decision shut completely continue operations. It 100 workers produce 6,000 units output month (working 20 days / month).
Details of the business
Miller Inc. is a manufacturer of a fast moving soap, Socas which is available as a bar of 250g, 500g or 1 kg. The company is named after Michelle Miller who is an industrial chemist who invented the soap. The company’s strengths include the seemingly endless funds that the company has from Michelle’s father, Turner Miller who is the owner of Turner Pharmaceuticals, which was handed down to him from his father. The other strength of the company is that it has a strong board of directors who have wide experience in the fast moving consumer goods industry and hardworking. However, the company has one major weakness, which is that Michelle has been running it to the ground by being arrogant and not appreciating employees. Consumers love the company’s products and over the last five years in which the company has been operating, they have managed to build a large consumer base that is loyal to their products. The soap industry is at a period of growth and there is potential for Miller Inc. To grow their business if they can venture into new and emerging markets. However, there is also steep competition from other companies with strong brands, which presents a threat to the company.
The PESTLE analysis framework is chosen for conducting an environmental scan of the organization. The identified political factors are increased regulation of the soap manufacturing industry as a result of concerns related to safety of consumers using these soaps. Manufacturers are thus required to meet high production standards for their products. Secondly, the law provides for high minimum wages, which presents an issue of high expenditure on wages by the company. Economic factors identified are the recent recession which has reduced the purchasing power of consumers and stunted the growth of the industry. The economy has also had high rates of inflation, which reduces the dispensable income. The economy is now recovering from the recession and this has created growth in the spending power of consumers.
The identified socio-cultural factors are the values and beliefs of the consumers in high quality products, which create substantial market for the products of Miller Inc. There are no religion or language issues in the key market areas for the company and generally, literacy levels are high. In terms of technology, the company largely relies on the internet and social networks as their advertising channels. Other electronic media are also used in advertising and promotion. However, these are not the major focus for the organization. In terms of production, Miller Inc. has not modernized its production systems. Therefore, there is heavy reliance on employees to handle many processes. This requires the company to have a huge workforce.
There are also legal factors that affect Miller Inc. The first is the law that stipulates high minimum wages. This creates a challenge for Miller Inc. since their wage bill is high. Secondly, issues of product safety mean that the company has to comply with in order to keep its certification. These product safety regulations also stipulate standards for product labeling and these increases the expenditure for the company.
The last set of factors are the environmental factors. The soap manufacturing industry is a fast moving consumer goods industry and one of the important issues in soap manufacturing is pollution. The company has to set up good systems for pollution monitoring of effluents and exhaust gases. There are also strict standards for these that the company must adhere to. Waste disposal is also a huge issue since in the manufacturing process, a lot of waste is produced which can be toxic if disposed unsafely.
The cost of unit production at the organization is high at $23.30 per unit and the marginal cost of the last unit is $30. These values are extremely high for the soap manufacturing industry. Even when considering that the products are for the high-end soap industry, the cost of production is still high compared to the price of the unit output at $32. This means that the company is operating at a loss since they have high fixed costs that exceed the firm’s total revenue. This is by spending $2,000 for inputs per day, the company spends $40,000 in a month with 20 working days. 100 employees working 20 days a month and being paid $70 per day cost the company $140,000 per month. Adding these two expenses, they total to $180,000 per month. The company produces 6,000 units per month, which are sold at $32 which provides revenue of $192,000 for the company leaving only $12,000 per month for the company. Considering that overheads such as cost of discounts, freight and other activities such as advertising and promotion have not been added, the company will be operating at a loss since these normally total more than $12,000 per month. In both the short and long terms, the company is operating at a loss.
The key drivers of financial performance for Miller Inc. are price, volume, margins and sustainability. Therefore, the company needs to consider adjusting these three in order to succeed. In terms of price, the company should consider ways of reducing the cost of goods sold or marginal cost per unit. This is done by reducing costs of inputs and cost of wages. Freight and labor costs also need to be considered in reducing the cost of goods sold. The company should also consider purchasing inputs in volume and producing in volume in order to benefit from economies of scale. In terms of sustainability, the organization should consider ways of ensuring that their production and market is consistent in order to succeed Tukker, 2008()
There are various strategies the company can use to improve its profitability. First is to find cheaper sources of inputs such as raw materials and packaging. These will reduce the cost of production considerably. Secondly, the company should consider mechanizing some of its manufacturing processes. Though these will have high capital costs in the short run as a result of buying and repairing machinery, they are often cheaper in the long run than the cost of wages for doing the same processes manually Banker, Bardhan, Chang, & Lin, 2006()
To implement these recommendations, the company will need to conduct a needs assessment of their business. This will identify areas which can be mechanized and also suppliers of alternative or cheaper inputs for production Fairise & Feve, 2006.
The second step will be to prioritize these needs to give a timeline for implementation of these recommendations. Those that are less resource-intensive can normally be implemented earlier. Last is to manage change. This is where the progress of implementation should be evaluated regularly to ensure it meets the goals.
In the case of this organization, discontinued operations will provide them with a huge advantage Jayanthi, Roth, Kristal, & Venu, 2009.
One such decision could be when Miller Inc. considers terminating its operations should they not be able to gain cost advantages after evaluating and implementing possible cost saving operations for a period of 24 months. This is because the company will have spent enough time trying to develop a profitable product unsuccessfully. When the management is faced by such decisions, they need to consult the board of directors on the value of closing the production facility and selling off assets in order to prevent accruing more losses.
Another possible decision is to change into a different product line such as bar soaps targeted to the lower income market segments. These will often have lower cost of production thus allowing the company to achieve its profits margins when selling the product. By doing this, the company can salvage its operations and succeed in developing a new product instead of stopping their operations. When faced with this decision, the management should evaluate the viability and feasibility of this new product against market needs and see whether it might meet the needs better.
Banker, R.D., Bardhan, I.R., Chang, H., & Lin, S. (2006). Plant Information Systems, Manufacturing Capabilities, and Plant Performance. MIS Quarterly, 30(2), 315-337. doi: 10.2307/25148733
Fairise, X., & Feve, P. (2006). Labor Adjustment Costs and Complex Eigenvalues. Economic Theory, 29(1), 95-110. doi: 10.2307/25056110
Jayanthi, S., Roth, A.V., Kristal, M.M., & Venu, L.C.-R. (2009). Strategic Resource Dynamics of Manufacturing Firms. Management Science, 55(6), 1060-1076. doi: 10.2307/40539281
Tukker, A. et al. (2008). Sustainable Consumption and Production: A Framework for Action. Brussels.