Holborn College

MBA
MODULE TITLE: Operations Strategies & Change
Management
MODULE CODE: WAMB4007

MODULE LEADER: Ian Ervine

DATE: 17 January 2008

DURATION: 2 hours

INSTRUCTIONS TO CANDIDATES:

This paper has Five questions.

You are required to attempt question NUMBER ONE (1) and any
other TWO questions of your choice from questions 2 to 5.

Candidates may bring into the examination their own annotated

copy of the Ice House Toys Case Study.

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 PART A
Compulsory question based on Ice House Toys

Question 1

(a) Evaluate the impact on operations of Robin’s sales targets for the 2004
Christmas Catalogue and discuss to what extent the planned 2004
increase in warehouse space helps resolve the problems faced.
(18 marks)

(b) What are the longer-term capacity planning issues? Evaluate the
impact of the projected 15 per cent growth over five years.
(16 marks)

(c) Robin could consider accepting a 7.5 per cent reduction in gross profit
margins through the adoption of an alternative purchasing policy which would
significantly reduce stock levels. In addition, Robin could consider the use of
overtime.
Discuss the possibility of these two proposals.
(16 marks)

(Total 50 marks)

PART B
Choose two questions from this section

Question 2

(a) Using examples, discuss the role that Operations Management plays in
organisations and evaluate its importance.
(10 marks)

(b) Discuss the role that the operations function plays in achieving
strategic success and, using examples, discuss how the performance
of operations can be measured (15 marks)

(Total 25 marks)

Questions continue on next page

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Question 3

(a) Project management can be divided into a number of stages. Discuss

what you believe to be the important stages in projects. (8 marks)

(b) Discuss the importance of planning and control in the successful

completion of projects. (10 marks)

(c) You have been supplied with Table 1 which provides the main activities,
duration in days and preceding activities for building a new house:

TABLE 1

Activity Duration weeks Preceding Activities

A Planning Permission 9 -
B Building Regulations 6 -
C Foundation 6 A
D Steel Erection 12 A
E Walls 3 C
F Roof and Windows 9 D
G Services: (Electric and Gas) 9 B
H Plastering 12 G
I Finishing 15 E,F,H

Construct a project plan and identify the Critical Path and the shortest time to
completion. (9 marks)
(Total 25 marks)

Question 4

(a) Explain and discuss the term ‘Supply Chain Management’ and its major
associated activities. (7 marks)

(b) Discuss the types of relationships in supply chains and show how
these impact the management of the delivery of products and services
to customers. (10
marks)

(c) Discuss improvements that could be implemented in supply chain

relationships which could help increase efficiency. (8 marks)

(Total 25 marks)
Questions continue on next page

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Question 5

(a) Discuss why organisations hold inventories. (5 marks)

(b) Draw a diagram of the basic Economic Batch Quantity (EBQ) model
and explain what assumptions you are making. (5 marks)

(c) 2C o D
EBQ =
Ch (1 − D / P

Knight Productions plc makes many components prior to assembly of

PCs. The stock control system has been investigated and one example
is the memory board. It has been estimated that this board costs about
£5 to produce. Knight Productions plc uses about 240,000 boards per
year and at the moment produce them at a rate of 60,000 per week
in a batch every quarter. Each time a batch is set up, it costs £75
to change the production line and £125 for preparation and scheduling.
Stock-holding costs are related to unit costs, including insurance
(2.5%),deterioration (3.5%), warehousing 5% and cost of capital (9%)
What advice would you give concerning stock control? (10 marks)

(d) Discuss when and how you would employ the EBQ model and to what
extent it may be useful in a world where reality differs from the
assumptions you used in deriving the model? (5 marks)
(Total 25 marks)

End of examination

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 CASE STUDY – Ice House Toys

Introduction

Robin Baker, the Managing Director of a small group of toy shops, suspected
that he had a problem. His company, formed in 1962, consisted of five
profitable shops and a catalogue sales (mail-order) business which, although
profitable, had never been able to capitalise fully on the quality of its products
and the loyalty of its customers.

The mail-order operation of Ice House Toys was run from a renovated
eighteenth century ice house (originally constructed on a dockside for storing
imported blocks of ice) in Bristol, which the company acquired in 1981 when
such old industrial property was cheap and easy to find. The current state of
the property market made relocation unrealistic, and alternative modern
warehouse space in the Bristol area was both inconveniently situated and
overly expensive.

The building consisted of three floors, each of which was divided by the
stairwell and lift-shaft into two working areas of 600 square metres each. One
of the ground floor areas was used to store stock for the company’s shops,
but it was decided to relocate this space to the mail-order operation from the
beginning of September 2004. The other ground floor area was used as the
packing room for the mail-order operation. Of the remaining four work areas in
the building, three (two on the first floor and one on the second) were mail-
order stockrooms, while the fourth contained the office. As is often the case in
a historic industrial building, ceiling height was restricted and stock was
stacked to maximise the available space.

Sales and purchasing patterns

Ice House Toys distributed three mail-order catalogues every year, each of
which contained approximately 300 different toys and games, all of which
were standard products manufactured in the UK, Europe and the Far East.
The major catalogue was for Christmas, sent to 160,000 customers in the first
week of October. In 2003, this had resulted in a total of 22,600 orders with an
average order value of £63. The Winter Sale Catalogue and the Spring
Catalogue were each sent to 45,000 regular customers, and in 2003 achieved
a combined total of 6,900 orders with an average order value of £35.

The stock for the Christmas Catalogue was ordered before the end of July,
and was received in two phases. The first, representing approximately 75 per
cent of total requirements, arrived in the first week of October, filling the stock
areas to capacity. The remainder was ordered after the first 2,500 customer
orders had been processed and the sales pattern had been analysed, and
was normally delivered during the last week in November.

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 Table 1 Orders received from Christmas Catalogue in 2003

Month Week Orders

October 1 0
2 300
3 800
4 1800
November 1 2900
2 3300
3 3700
4 3500
December 1 2800
2 2200
3 1300

The feasibility of receiving deliveries of smaller quantities of stock had been

considered on several occasions in the past but, taking loss of discount and
advantageous terms of payment into account, the resulting 7.5 per cent
reduction in gross profit margins had been considered unacceptable.

Table 2 2003 Christmas Catalogue: cost analysis

Breakdown of costs for one average order (2003 figures)

Sales 63.00
Cost of stock, packaging materials, carriage 34.50
Gross Profit 28.50

Share of fixed costs1 15.13

Catalogue production2 4.67
VDU operator 0.53
Stock collector wages 0.18
Packer wages 1.16
Dispatcher wages 0.53
Net profit 6.30

Notes:
1
Total fixed costs £342,000 absorbed over 22,600 orders.
2
160,000 catalogues were printed and mailed at cost of £0.66 each, resulting
in 22,600 orders.

In 2003, stock with a total resale value of £1.5 million was ordered. This was
based on a projection of 21,000 orders with an average value of £65, plus a
margin for error which Robin always added to guard against unexpected
higher demand for a particular item or the failure of some suppliers to deliver
an order in full. Any surplus stock at the end of the Christmas Catalogue
period could be disposed of through the Winter Sale Catalogue or through the
retail shops. Robin liked to maintain a minimum stock level at any time to

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cover 10 working days, allowing a buffer for late delivery from a supplier or for
a sudden unexpected demand for a particular item.
The recorded volume of orders received from the Christmas Catalogue in
2003 is given above in Table 1. The pattern was found to be very similar to
previous years.

Given the 24th December delivery deadline for Christmas, all orders had to be
dispatched by the end of the third week in December. Any customers whose
orders were received in the fourth week of December (there were only 75
orders in 2003) were contacted by telephone and most usually agreed to their
order being dispatched when the warehouse re-opened in the first week of
January.

Operations

Any order arriving at the warehouse passed through three stages in the
following sequence:
• Recording
• Assembly and packing
• Dispatch
A more detailed analysis of each of these three stages follows:

Recording

All orders are entered into the computer on the day on which they arrive so
that the earliest notice can be obtained concerning any stock shortages.
There are facilities in the office for up to seven VDU operators who are hired
from a local agency on paid on an hourly basis. Working a seven-hour day,
each operator can process an average of 22 orders per hour, which involves
entering either an existing customer account number or set up a new
customer in terms of name and address and other pertinent details. The
details of the order and payments are entered against either an existing or
new customer. Picking lists, packing notes and address labels are then
automatically printed out two floors below in the Parcels Room, where both
assembly/packing and dispatch operations are situated.

Assembly and packing

The assembly operation is divided into two stages, both of which, according to
internal and external work studies, are performed efficiently. For every batch
of 20 orders, the computer produces an aggregate picking list, which enables
each of the three stock collectors to go round the stockrooms (on the first and
second floors) and, on average can select the required stock for 20 orders in
a 45 minute period. This collected stock is given to teams of two packers who
work together to allocate the items to individual orders and check that each
order is correct and all items are included. The requisite items are carefully
packed by order into suitable-sized boxes. The completed orders are then

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passed on, with packing note attached, to the dispatch area on the ground
floor. Each packer completes an average of 4.3 parcels per hour, which
enables a single stock collector to provide sufficient items of stock for six
packers.

The total space allocated to the packing operation is 330 square metres,
which is sufficient for a maximum of 16 packers at any one time. This
department, like the dispatch department, is staffed entirely by part-timers
who work either a four-hour morning shift or a five-hour afternoon shift. The
warehouse operates Monday to Friday from 9 a.m. to 6 p.m.

Dispatch

The workers in the dispatch department are, like their colleagues in assembly
and packing, employed as and when required. Their job is to take each
parcel, attach an address label, which has been printed by the computer and
check that it is correct. If everything is fine, the order number is entered into
the computer to confirm that the order has been fully processed. The parcels
are then stored in a secure area on the loading bay and are collected by a
parcel carrier at regular intervals, six times per day. Each person in the
dispatch team can complete about 9.5 orders per hour and requires about 30
square metres of floor space to operate effectively.

Future plans

Robin Baker was determined to expand catalogue sales considerably in 2004.

‘The 2003 ratio of 22,600 orders from 160,000 catalogues sent out was close
to the average over the last 10 seasons. For 2004, however, there are three
major changes envisioned
.
Firstly, we have made an agreement to share part of our customer database
with a company that sells upmarket children’s clothes by mail order. Of
course, these are clearly identified customers who have signed an agreement
to allow their details to be used in that way. In return, the clothes company will
provide us access to its database of similarly disposed customers, and this
will add some 30,000 names and addresses to our current list.

Our second initiative is to spend a further £27,000 on advertising the

catalogue business. In the past, we have found that for each additional
£1,500 expenditure on advertising 190 additional orders ensues.

Thirdly, we finally launched our new website, aimed at existing customers

only, at the end of November 2003, and expect this to have a significant
impact on our market this year. Unfortunately, it was late for the Christmas
season just finished because the design had to be re-worked to overcome a
number of very irritating bugs that were identified by around a thousand trial

8
customers. Now, however, anyone who accesses this site will be able to
obtain more comprehensive descriptions and photographs of all the products
we supply, and it will make ordering much simpler for the customer. They will
simply fill their virtual shopping baskets by clicking on the products they
require. There will be no need to copy out product descriptions and codes: the
system will do all that for them. We learnt a lot during the trial, and found that
the average order value for the Internet customers was around £85. From
discussions with some other mail-order retailers who have similarly gone
online, I would expect about ten per cent of our customers to use this service
in 2004, the first year of operation, and the usage of this channel to double
each year for the next four years from a combination of converting existing
customers and attracting new customers to the site.

Orders received this way will remove the need to key in data in the Recording
Office. The data-entry staff will simply check the details deposited by the
online customers and, if these are correctly and fully completed, will allow the
order to pass into the further processes as normal. Our trials indicate that this
will allow each operator to completely process and authorise these orders at a
rate of about one per minute. That will eventually have a significant impact on
our costs and will increase our capacity to enter orders into the system at the
busiest times of the season.

The main worry I now have concerns the ongoing expansion of the business
will either lead us to completely run out of warehouse space due to the sheer
volume of stock or to us being forced to pay overtime in some departments at
time and a half to run the operations during evenings or weekends. This could
undermine our tight cost controls and erode our hard-won profits. Also, at
present, it is our policy to dispatch all orders within three days of receipt; I am
also concerned that this may become increasingly difficult to achieve as our
sales volumes should increase by around 15 per cent per year from the 2004
season onwards’