AIB (MBA) 2015 Report for the subject "Operations Management" by A.R.W.M.M.D.Rohana

1. OPERATIONS MANAGEMENT
A.R.W.M.M.D.Rohana Kumara
B.Sc (Sri Lanka), MBCS (UK), MBA (Aus-Reading)
Australian Institute of Business
Master of Business Administration
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2. Executive Summary #
In manufacturing sector most of the companies face biggest challenge to practice proper
capacity management and planning mechanism to meet consumer demand in the market with
exact capacity of production on time. Due to that factor most of the companies need to bare
huge purchasing cost of raw materials, production cost, storage cost of raw materials / finished
goods and operational cost. Therefore most of the companies are now try to implement proper
capacity management and planning mechanism within their operations to meet exact
consumer demand to reduce the additional cost for different departments and parties involved.
Kandy Beverages (KB) is one of the popular fruit juice manufacturer in Sri Lanka specialized in
production of all kind of fruit juices from tropical fruits grow in Sri Lanka. Because of the
freshness and taste, ‘KB’ became the leading brand for fruit juice market Sri Lanka in last three
years. But ‘KB’ continuously experience high rate of production cost during the both season and
off season of the fruit juice production. Company needs to reduce the production cost with
proper industry best practices to keep the profit margin stable. The objective of this assignment
will be to identify the causes for the high rate of production cost faced by ‘KB’ and propose
recommended actions that can contribute to better planning for reduce the cost and keep the
expected profit margin stable.
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3. Contents
Contents.......................................................................................................................................3
1. Introduction.............................................................................................................................4
2. Operation issue of the organization.........................................................................................5
2.1 Reasons for operation issue ..................................................................................................6
3. Business impact to the organization........................................................................................7
4. Best practices to mitigate the organizational issue..................................................................9
5. Conclusion.............................................................................................................................12
6. Recommendations for capacity planning..............................................................................13
6.1 Chase the consumer demand with production.....................................................................13
6.2 Increase the supply arrangements.......................................................................................13
6.3 Increase the permanent employees......................................................................................13
6.4 Hire temporary and casual workers based on the demand of production..........................13
References.................................................................................................................................14
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4. 1. Introduction
Kandy Beverages (KB) is one of the popular fruit juice manufacturer in Sri Lanka. Kandy
Beverages specialized in production of all kind of fruit juices from tropical fruits grow in Sri
Lanka. Because of the freshness and taste, ‘KB’ became the leading brand for fruit juice market
Sri Lanka in last three years.
‘KB’ consistently strived to exceed the customer expectations by providing revolutionized soft
drink products through various kind of tropical fruits grow in Sri Lanka. In order to maintain the
brand name and the customer satisfaction, company requires maintain the consistent product
availability in the market. Operation managers of ‘KB’ expected to be constantly produce soft
drink bottles with the help employees who are highly energized, competent and motivated to
perform excellently in production with the help of latest machinery to meet the consumer
demand.
In the last two years, company finance report indicates that company has been experienced
high rate of production cost during the both season and off season of the fruit juice production.
This rate was notably quite high than the previous years because of maintaining capacity of
fruit stocks and employees according to the demand changes in the market. As a result 30% of
the additional production cost experiencing by the company due to lack of proper capacity
management and planning of production to meet the future consumer demand.
In this assignment I will determine the reasons for the high production cost due to lack of
proper capacity management and planning. Then I will identify the possible solutions that
Kandy Beverages could implement to retain their production smoothly with reducing
production cost to keep the competitive advantage in the industry.
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5. 2. Operation issue of the organization
Kandy Beverages was started its operation in year 2012 and year by year it grown the market
share. Continuous process and technology improvement ‘KB’ was able to give the best out of
best quality fruit juice products to its customers. Because of that in 2014 “KB” became the
market leader for fruit juice products in Sri Lanka with 35% of market share and reached annual
revenue of 500 million Dollars. Market research gives an indication for next five years annual
growth of market share of ‘KB’ will increase 5% constantly.
As a market leader of Sri Lankan fruit juice industry ‘KB’ has many competitors who are in the
same business. “Smack”, “Minute Made” and “Dole” are the closest competitors who
collectively have 40% market share with range of fruit juice products. They always try with new
strategies to increase their market share and reduce the production cost with less wastage and
environmental friendly manner.
As a market leader of the fruit juice industry, ‘KB’ has large and solid supply chain for the fresh
fruit manufacturers and having their own farm lands. Because of that ‘KB’ is able to purchase
fruit stocks from the suppliers to the production in both season and off season of fruits.
Figure 2.1 Supply Chain Diagram
Source – Authors Work
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Customers
Consumer
CustomerCompanySuppliers
Supplier
Supplier
External
Supplier
Farmer
Internal
Supplier
Company
Farm Land
ConsumerRetail
Outlet
Production
Plant

6. 2.1 Reasons for operation issue
Company started production in 2012 with the total capacity of 1 million fruit juice bottles per
day in 8 hour shift. Which was the average demand for ‘KB’ fruit juice bottles per day in 2012.
In monsoons demand for fruit juice was decline below the average and in summer it increases
above the average demand. Company maintain the production capacity in same level and keep
the excess production in monsoons to meet the demand of summer. Company have 100
employees in full time permanent carder and policy of no casual or temporary workers should
hire during the financial year.
But company has been experienced high rate of production cost per unit in 2013 onwards. The
rate was notably increasing quite higher than the previous years and 30% additional production
cost experienced in 2014. After deep investigation, management found that additional cost for
purchasing, production, storage and marketing needed due lack of proper capacity
management and planning for production to meet the consumer demand on seasonal changes.
Due to constant production of fruit juice plant is working 8 hour shift every working day.
Production capacity is not affected by any seasonal change. But supply chain face huge
problems during off season of fruits, they need to purchase fruits from their supply network at
higher cost. Not only that company identified that due policy of no casual or temporary workers
they can’t reduce or increase the capacity to meet the demand with reduce or increase the
shifts of the employees to meet the consumer demand.
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7. 3. Business impact to the organization
Fruit juice production plant maintain constant production capacity 1 Million bottles per day
throughout the year lead over heads in the hand of operation managers in different ways in
different seasonal changes of consumer demand.
Figure 3.1 Consumer demand for fruit juice
Source – Authors Work
In monsoon season demand for the fruit juice decline below the average. Same time it is the off
season for the fruit harvesting. But due to meet the constant production capacity, company buy
fruits even at higher price. Suppliers may face huge problems to keep the fruit stock available
for meet the production capacity. Because of less demand for fruit juice there is always
additional stocks produced and they keep for high demanding summer. Storage cost increases
and Sales and Marketing team need to spend more money to for advertisements to convince
the customers in monsoon to buy their product which became overhead for the company
profit. Not only that, since company only have full time permanent employees, management
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8. can’t lay off them to reduce the capacity due to high cost for supplies in monsoons make
another overhead with employee salaries.
In summer demand for fruit juice increases above the average. Same time it is the season for
the fruit harvesting, price of the fruits very low. Due to high demand those stocked fruit juice in
monsoon need to release to the market to meet the consumer demand. But some of those
stock were stored months in sheds and are close to expire. Therefore some stock manufactured
early in off season get expired cause huge loss for the company and other stocks may lead to
unsatisfied customers who expect fresh fruit juice for consume. Not only that, since company
have policy of only full time permanent employees, operation managers can’t hire casual or
temporary employees to increase the production with more shifts to get the benefit of low
price supply to meet the high demand. And one shift with 8 hours also not allowed them to
increase the shifts with available permanent employees to increase production with overtime
shifts. Which make them not to gain advantage of the seasonal demand with more sales.
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9. 4. Best practices to mitigate the organizational issue
Satisfy the consumer with enough fruit juice bottles and satisfy the management with minimize
the unexpected cost for production, ‘KB’ operation managers find several best practices for
their plan capacity management. Capacity management is the activity to identifying the
mismatches between consumer demands and adjust the ability of operation or production to
supply the demand (Slack et al. 2012). Therefore capacity management decisions should reflect
both predicable and unpredictable variations in capacity and demand for fruit juice to maximize
the sales and minimize the cost with the help of seasonal advantages of production.
But if we change the capacity of the production plant it cascade backwards to the end suppliers
of raw material of fruit as “upstream” flow of customer requirement and also cascade up words
to our end consumers with “downstream” flow of products for consumer fulfilment (Slack et al.
2012). Therefore ‘KB’ operation managers need to identify the base capacity of the production
plant. Luckily the already identified their base capacity for 8 hour shift is 1 million bottles per
day. It reflects
• Relative importance of the operation’s performance objectives.
• Perishability of the operation’s outputs.
• Degree of variability in the demand and supply.
4.1 How can demand – capacity mismatches be managed?
Almost all operations have to cope with varying demand or supply. Therefore they will need to
consider the adjusting capacity around its base capacity or the benchmark capacity. There are
three approaches to treating such variations to meet the consumer demand with the
production with capacity management (Slack et al. 2012).
• Level capacity plan – absorb all the fluctuation (‘KB’ Currently practicing this, but this is
not suitable for the food products which expire soon)
• Chase demand plan – change the capacity to reflect demand fluctuations.
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10. • Manage demand plan – attempt to change the demand to reduce fluctuations (‘KB’
won’t be able to do that, because demand for fruit juice increases in summer due to
heat and thirst which is natural demand)
Therefore ‘KB’ left one option to manage the demand capacity mismatch with implementing
chase demand plan for the production. According to the new plan ‘KB’ management needs to
cascade the effect down to suppliers and also up to retail outlets with different parameters.
Adopt the new plan management need to introduce new methods to adjust the capacity as
follows (Slack et al. 2012);
• Overtime
• Annualised hours (Set number of working hours per week)
• Staff scheduling (Arrange working times in multiple shifts)
• Using part time and temporary staff (recruit staff who work for less than working
day)
• Varying the size of the workforce (Hiring extra staff during high demand)
• Change the output rate ( Based on the demand change the per day production units)
Cost is the direct measure of productivity that can help motivation force for people involved in
improving the effectiveness of manufacturing (Lee 2000; Strong 200). Along with that we can
introduce lean operation to the working environment (Salaiz 2003).
• Safe and interesting employee environment and involvement.
• Standardize work plan
• Quality measurements
• Operational machine availability (planned machine maintenance)
• Material management (inventory control, receiving and shipping)
• Manufacturing flow of fruit juice.
Not only that introducing innovative operations can result in direct performance improvements
(faster cycle time and lower costs), which leads to superior market performance with greater
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11. customer satisfaction for ‘KB’ products. And improved market performance help to higher the
customer retention to the ability to penetrate new markets in future. May be export the excess
products in to south Asian countries (Hammer et al.2004).
To meet the demand with above changes, management need to consider another important
factor to reduce the extra cost for inventory management. Now production managers need to
purchase and store exact amount of raw materials for the production and store the finished
products before sell to retail outlets. That will help to keep low cost for store inventory for a
long time before production and after production. To do that having and maintaining of data
accuracy is vital for the day to day effectiveness of the inventory management (Slack et al.
2012).
To have responsive supply chain, operation managers need to practice triple ‘A’ approach for
the supply chain (Lee 2004).
• Ability – Respond to short term changes in demand or supply, quickly handle the
external disruption smoothly.
• Adoptability – Adjust supply chain design to meet structural shifts in markets, modify
supply network to strategies, products and technology.
• Alignment – Create incentives for better performance.
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12. 5. Conclusion
Using the theories mentioned above, we can conclude that ‘KB’ was experienced the high rate
of production cost per unit because of the operational management bad practice. Lack of
proper capacity management and planning process practicing in the production process leads
the high cost per unit throughout the year. However organization could overcome the situation
with practising several capacity management and planning methods like;
• Chasing consumer demand with production
• Increase supply arrangements
• Increase permanent employees
• Increase temporary and casual workers based on the consumer demand
Since ‘KB’ is the market leader and have potential demand growth for fruit juice products in
future company could adopt newly introduced best practices as fast as possible to increase the
market share with meet the consumer demand with the proper production planning. Which will
help ‘KB’ to gain the competitive advantage over the other products with satisfying best quality
products on demand with minimized cost benefit to their consumers.
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13. 6. Recommendations for capacity planning
Based on the theories that I mentioned in chapter four, I would like to provide some
recommendations for avoid such high cost operations in future and maximize the profit
through applying best practices in the organization.
6.1 Chase the consumer demand with production
6.2 Increase the supply arrangements
6.3 Increase the permanent employees
6.4 Hire temporary and casual workers based on the demand of production
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14. References
Slack, N, Brandon-Jones, A, Johnston, R and Betts, A 2012, Operations and Process
Management, 3rd
edn, Pearson Education Limited
Lee, HL 2004, ‘The triple A supply chain’, Harvard Business Review, vol.82, no.10, pp.102-112
Hammer, M and Stanton, S 2004, ‘Deep change: how operational innovation can transform
your company’, Harvard Business Review, vol. 82, iss. 4, pp. 84-93.
Deo, BS and Strong, D 200, ‘Cost the ultimate measure of productivity’, Industrial Management,
vol. 42, no.03, pp. 20-24.
Salaiz, C 2003, ‘Lean Operations at Delphi’, Manufacturing Engineering, vol. 131, no. 3, pp. 97-
104.
Bitner, MJ 1992, ‘Servicescapes: the impact of physical surrounding on customers and
employees’, Journal of Marketing, vol. 56, no. 6, pp. 57-71.
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