Jot case study - Report 2


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Jot case study - Report 2

  1. 1. Team nameReport titleJot toy – case studyUniversityRusangu UniversityTeam membersDina NchenesiBusiku SiagweleleRelsonTABLE OF CONTENT
  2. 2. 1.0 Executive SummaryThis report aims to prioritize, analyse and evaluate the current issues of Jotmanagement. The report starts with te 4main issues Jot is currently facing, theissues have been categorised in two, (i) issues that threaten the business (ii) plansrelating to expansion and market.For the first issue, which is late delivery of Christmas product, the teamrecommend that Jot should distribute to the product preferring the major customersover smaller retailers. The second issue, fault in new flying spaceship, insulationshould be improved.Near soring to voldania, Jot should implement the proposal as manufacturing inChina is expensive. Jot should also accept the proposal to launch a new productrange.Finally, ethical issues are addressed and recommendations are made. Financial andstrategic analysis have been added in the appendices.INTRODUCTIONJot was established in 1988, it is a company that is specialized in relatively smallrange of 34 products aimed at only 2 age groups (the children between 3-5 and the
  3. 3. children between 5-8).3.0 Industry backgroundToy market is a highly seasoned market with most sales occurring in pre –Christmas periods (October – December) 86% of the world’s toys arePrioritisation of issues facing jotThe 4 main issues may be categorized as:Top priority – late delivery of Christmas productThe top priority is the need to make a decision on how to distribute the 75% of theinitial product order coming from Gull, that won’t be able to deliver the full order.These products are being delivered on the 4th November, 2011, which 3days fromtoday, and this is the 4th quarter, the period in which there are higher sales, makingit top priority. Therefore, this issue is urgent. Michael Werner has options on howto distribute the products.Second priority – fault in new flying spaceship toyThe second priority is considered to be the fault in the new flying spaceship. Afault been reported by customers and consumers, recharging the toy takes twohours, but some consumers have taken to leaving the toy plugged in meaning itcharges for more than two hours, as a result there has been reports of the toybecoming too hot to touch, and two reports of smoke coming from the toy. Theyhave been only 12 reported incidents so far.Jot has sold 1200 units out of the initial 6000units ordered, leaving 3200units ininventory which are ready to be shipped out to the customers. Thereforeimprovements need to be made as quickly as possible on these products before theycan be shipped out.Third priority – near shoring proposal to voldaniaThis is considered to be the third priority as clearly it is becoming expensive tooutsource from China with the rising raw material and oil prices. Jot is a growingcompany that is dependent on its sales for profit, and to achieve tis it needs to
  4. 4. source a cheaper place to reduce on the cost of production.Fourth priority – launch of new range of toys for 9-11 age groupJot has grown rapidly and has managed to gain a good market share in Europe andUSA, and would like to expand its sales to other areas in the world. It providesproducts for specifically two age groups. Decision on developing a new range oftoys for a new age group means opportunity for Jot to maintain its already existingcustomers, and attract even new and more customers, hence increasing its marketshare and sales.Discussion of issues facing jotLate delivery of Christmas productAn email arrived from Gull, one of Jot’s suppliers in China. It indicates that Gullwould not be able to meet its obligation to deliver the 2400 units that had beenordered for delivery on 4th November, 2012. Gull has been expanding rapidly andis rumoured to have been prioritising production to higher margin orders, as it isunable to meet all orders this year.Gull said they can provide 75% of the order on time with other 25% to be deliveredon 15th December, there is need for a decision to be made immediately.Michael has two options:Option 1 - Send all 75% to Jot’s main customersOption 2 - To share out the product more equally so that the independent toy shopsat least get something of what was ordered on time.Option 1Option1 means Jot distributes only to its major seven companies, which compriseof retailers, large international super markets retailers, department stores and oneon line retailer. These seven companies are found in Europe and USA, meaning ifJot distributes to these companies, it will cover 68% of its sales, leaving only about32%of its sales from the remaining small and medium retailers, of which productswill be delivered to them in December when the rest of the order is ready.Option 2
  5. 5. Option2 means jot distributes to all its customers. But this will mean the productswill not be distributed according the orders placed, Jot will distribute in ratios so asto accommodate all the customers, meaning the large companies that mostlyplace large orders will not get all the orders at once, but will receive their orders inparts until Gull finishes delivering the products to Jot.In summary, Last year 2011, jot recorded sales of 9,866, 000 of which 68% of thefigure was from Europe and USA, and the remaining 38% of the figure was fromsouth America, Asia, and the rest of the world. Option 1 simply means prioritisingthe seven large companies which are found in Europe and USA, from whichhighest sales are drown, this option would safely make us say Europe and USA arecovered. Option 2 requires jot to distribute the product to all customers, so unlikeoption 1, here jot will need to come up with ratios of which they will use todistribute the product to everyone.Borris proposed that Jot no longer uses Gull’s services and request forcompensation for the error. Contractors are not employees and do not have anemployment contract. This means they have to fulfil all the obligations in thebusiness-to-business supplier contract they have with the client. In the event theyfail to do what their contract says they should, then the client is entitled toterminate the contract immediately as a result of a breach of the contract’s terms bythe contractor. In this case Gull has failed to deliver the products in the requiredtime, which justifies breach of contract. Granting compensation would be an actRecommendationsIt is recommended that jot selects option 2 and distributes the products only to itsseven large customers, prioritising them in order to maintain high sales gotten fromthem.It is also recommended that Jot’s contract with outsourced manufacturer Gullshould be terminated immediately.It is also recommended that a document with the key criteria and performancemeasures for outsourced manufacturers needs to be written by Michael Werner andagreed by Jot’s senior management team within the next month. This should then
  6. 6. form the basis for appointing and monitoring outsourced manufacturers in future.These documents on key criteria and performance measures should ensure that Jottakes account of other factors outside the current cost and quality criteria. Thereshould be greater emphasis on quality and on time delivery of goods.It is also recommended that Michael Werner should send out an invitation to tenderdocuments for the product to a range of outsourced manufacturers in readiness fornext year’s manufacturing.JustificationOption 2 will make jot distribute to all its customers, but since there isn’t enoughfor everyone, companies will not receive their full orders, meaning all thecompanies will be disappointed, and might even lose faith in Jot, which might leadto lose of business.Option 1 prioritises the largest companies, in this case which are the mostimportant companies, if we distribute the product to these companies it means Jothas its largest companies satisfied and left with the smaller ones to deal with afterthe last part of the order is delivered.It should be put in mind that this is business, and everybody in business is there tomake profits, and profits can only be made if when the business is properly running,production is place, and sales are being made. We want to believe terminatingGull’s contract is a right way to go because we will avoid the chain of losses that isbeing passed on from Gull to Jot, on to the Retailers and their customers too. Gulloffering compensation for Jot for the error will help Jot cover up its losses causedby the discount it will give to its customers; this will also favour Gull because itwill show that it’s taking responsibility for its actionsIt is necessary for Jot to prepare a document setting out the key criteria for theselection of outsourced manufacturers in order to put this important process on amore professional basis. This will enable Jot to make its choice of manufacturerbased on a range of criteria, rather than solely on cost. This will also address theconcerns of Jot’s management team over the efficiency and effectiveness for some
  7. 7. of its current outsourced manufacturersAction to be takenJot must receive the 75% part of its order and distribute the product to largestcustomers which are the seven companies, then wait for the other remaining 25%of the product to come and distribute it to the remaining smaller companies.Borris Hepp must communicate to the smaller companies that will not receive theirorder in time in advance making them aware that the goods will be delivered tothem late.Tani Grun should put up a compensation plan in form of discounts for theinconvenienced companies, this will help Jot keep its customers besides them beingdisappointed.Michael Werner should prepare a document outlining the key criteria for theselection of outsourced manufacturers. This then needs to be approved by the JotBoard.Michael Werner should prepare a document outlining the key performancemeasures to be used to monitor its outsourced manufacturers. He may need helpfrom specialised agencies to help prepare a useable and well-structured set ofperformance measures.Existing outsourced manufacturers need to be audited and a list of improvements,both urgent and other less urgent actions, should be agreed with each outsourcedmanufacturer.Notice needs to be given to all outsourced manufacturers to take action on thepoints raised in the audit and that failure to take action will result in a terminationof their manufacturing contracts.On-going audit and dialogue with manufacturers needs to continue so that Jotestablishes long-term close links with its supply chain and that its outsourcedmanufacturers conform to the standards expected by Jot.Tender to be sent out to outsourced manufacturers for product in readiness for earlynext year.
  8. 8. fault in new flying spaceship toyA fault was reported by a number of customers regarding Jot’s newly launchedflying spaceship. Tis toy was meant to recharge for 2hours and so some consumershave taken to leaving the toy plugged in to charge whilst they go out of the house.This has meant the toy is often left charging for substantially longer than the twohours required.A brief investigation revealed that the insulation around the electrical circuitry wasnot designed to be sufficiently fire and heat resistant for the length of time the toyhas sometimes been left to recharge by some consumers. This was an error made bythe new designer, Indy Kapila, who designed the toy.There have been 12 reported incidents so far, and no reported incidents of fire.Option1- Michael Werner thinks that if Jot spends another 10 Euros unit onimproved insulation, the products will then be safe to ship out to customers.Option 2 – Borris Hepp though, thinks it would be better to write the product offcompletely so as not to further damage an already bruised reputation.Option 3 – another option can be to continue selling the product at a lower costbecause of the risk it has.Option 1This toy uses rechargeable batteries that are recharged while in situ inside the toy.Attaching the toy using a lead and an adapter to the mains electrical supplyrecharges the batteries. The battery is meant to charge for only 2hrs, but peopletend to charge for longer than 2hrs, whilst the insulation around the electricalcircuitry was not designed to be sufficiently fire and heat resistant.So spending another 10euros per unit on improving the insulation of the productwill make the toy safe to ship out to the customers, and they can leave it to chargefor more than 2hrs without any heating or fire.Option 2Writing the product off completely means Jot stops selling the product despite the
  9. 9. sales of the product having been strong.The initial manufacturing order of 6000 units have already been made anddelivered, and of this, 1200 units have been sold by jot’s customers, and it has 3200unit in inventory ready for shipment, but doing away with the product simplymeans the rest of the product in inventory should be discarded.Option 3If Jot decide to continue selling the product despite the fault that been discovered, itmeans the product will have to been sold to the customers but at a lower price if wewant it to sell.RecommendationJot is recommended to pick on option 1, improve the toy and continue to sell it inorder to gain even more sales.JustificationThis is a toy that had been rushed into production in time for the 2012 Christmasseason, which could be one of the reasons why the error was over looked because itwas realised in a rush, but still it had been greeted well by the retailers. Sales forthe product have been very strong, retailers have been selling this toy at 84euros,Jot was selling to them at 40euros, whilst production cost them 24euros, this showsthat both parties are making over 100% profit from the sales. Spending an extra10euro wouldn’t make any disadvantages, but would actually create even moresales and profits, because Jot will be providing a perfect product to its customers.Action to be takenMichael Werner should suspend shipment of the product to its customers for now,and work on improving its insulation.Alana Lotz and Indy Kapilia should find a way to improve the insulation of thespaceship toyTani Gruns must work out the extra expense of improving the toy, and determinehow much the toy will have to sold at afterwards.
  10. 10. Alana Lotz should give a time frame in which to do this, and inform its customerswhen exactly to expect the product back on the market.Near –Shoring to VoldaniaOver the last 10 to 15 years many companies have outsourced their manufacturingto companies in China. However, with wage rates in China increasing, somecompanies have started to consider near shoring. Jot has been consideringoutsourcing part of its manufacturing to Voldania, a country in Eastern Europe.This proposal will be considered from a financial, strategic and operational viewpoint.FinancialDue to high rates of labour and machine in Voldania, it makes to it expensive toproduce in Voldania and cheaper to manufacture in China because of the lowerrates of labour and machine hours. Distribution costs are higher in China than inVoldania, making Voldania the cheapest place to manufacture from.StrategicMoving to Voldania means manufacturing at a lower cost because of the country’slower costs, When Jot manufactures at a lower cost, it will begin tob make profitabove industry average which will result into sustainable competitive advantage.OperationalMost of the outsourced manufactures manufacture for not only one distributor, andit is indicated that the US market represents two third of its revenues and otherdistributors. Recently they prioritise they production to higher margin orders,which makes them unable to meet orders for the other companies like Jot.Currently the rising cost of labour and raw materials is making manufacturing inChina increasingly expensive.RecommendationIt is recommended that Jot begins to outsource manufacturing companies in
  11. 11. Voldania.JustificationJot is a rapidly growing company that depends on its product sales for its profits,and in order to maintain and gain more profit sales, it needs to produce at a lowercost. Any firm sets out to become the low cost producer in its industry. The sourcesof cost advantage are varied and depend on the structure of the industry. They mayinclude the pursuit of economies of scale, proprietary technology, preferentialaccess to raw materials and other factors. A low cost producer must find andexploit all sources of cost advantage. If a firm can achieve and sustain overall costleadership, then it will be an above average performer in its industry, provided itcan command prices at or near the industry average.Near-shoring versus China. China is no longer the dominant production location itonce was. Studies have shown rising labour costs, increased congestion in gettingproduct through the ports, much higher transport costs, and growing concern over‘toxic toys’ where the paint used contains carcinogens or lead. China also has apoor reputation for respecting the intellectual property rights of outside firms.Near- shoring to North Africa, Mexico, Estonia, Hungary and other places wouldhelp Jot to develop a more flexible, just-in-time, supply chain. Orders can befulfilled and supplied in 4-6 weeks rather than 3 months with consequent benefitsfor adjusting supply to demand and reducing inventory and transport costs.Actions to be takenTani Grun must begin processing applications with the Voldanian officials to startsworks in the countryMichael Werner should start analysing manufacturing companies Jot could possiblywork with.Launch of new product range of toys for age group 9-11Alana Lotz suggested that Jot should develop a range of toys for the 9-11 agegroups of children. The idea is to start with a smart phone application that has bothgaming and educational aspects. Investigations are at an early stage but Alanathinks that applications are affordable for Jot with the initial design of the program
  12. 12. costing as little as 30000euros.The pre-seen states that Jot does not produce toys for the under 3’s nor for the over8’s (page 3).Alana says that this is a very exciting potential development for jot, but John Grunis sceptical about this plan because this is a whole new area that they know nothingabout. This will analysed using Johnson, Scholes and Whittington’s model ofsuitability, acceptability, and feasibility.SuitabilityIt is doubtful that the under 3’s is an attractive market for Jot because its distinctivecompetence in electronic educational toys is unlikely to be exploited there. Under3’s are toddlers and they are still learning motor skills, the over 8’s is much morepromising.From the time Jot came on the market it’s been manufacturing products for onlytwo (2) age groups, and it seeks to grow its market in other areas of the world. Jot’sstrength in its current market is mainly related to its customers that buy its products.Developing a new product will target the existing customers, which will also attractnew customers, widening its market and stopping them from looking elsewhere.AcceptabilityFeasibilityGiven Jot’s high returned earnings amounting to 802,000, that haven’t beenclaimed in form of dividends yet, it is expected that the launch of the new productwill financed from these earnings, and as it stands, developing the application forthe initial product, smart phone, only needs 30000, therefore not significantlyimpacting the earnings.RecommendationIt is recommended that Jot takes up the challenge and develop new product for theage group 9-11.JustificationWould this new product be attractive to the customers? It is more likely thatcustomers would like to continue buying toys for their growing children from the
  13. 13. same toy company they bought toys for them when they were younger. Jot isknown for products that range innovation and at the ‘cutting edge’ of nowtechnology, a smart phone with gaming and educational application will beappealing to the market.Action to betakenAlana Lotz should8.0 Ethical issues and recommendations on ethical issues8.1 Faults on new spaceship productWhy is this an ethical issue?There is a dilemma as to whether Jot should take responsibility for the fault in thenew spaceship toy, or whether it should just blame it on the customers for notfollowing the instructions on how long to charge the toy.It would appear that Jot is ready to take responsibility for the fault because theyindicate Indy Kaplia, the toy designer, made the error, and Michael Wernerindicates that inprovements can be made to the product.However, the ethical aspect of this case concerns duty of care for the customer’ssafety, integrity and professional behaviour.RecommendationsIt is recommended that Jot should contact the customers that have been experiencedand been inconvenienced by the fault (in this case, 12 incidents) and sympathize forthe incidents, and explain the reason why they experienced that.It is also recommended that Jot should also contact the rest of the customers thathave the toy but haven’t experienced the fault, re-emphasize on how long the toyneeds to be charged, and caution on the results if instruction is not followed.8.2 Personal donation to GrotWhy is this an ethical issue?Grot is clearly asking for a bribe in order for him to help jot in processing itsapplication faster. Jot could be charged of corruption and not following properapplication procedures, tis would show lack of professionalism, integrity andhonesty on Jot’s part.However, jot would want to consider the fact that they need to develop and
  14. 14. maintain good relationships with the Voldanian officials.RecommendationsIt is recommended that Jot should not consider the request made by Grot, butfollow proper application procedures.It is also recommended that Jot should avoid working with Grot, but identify adifferent official to work with on the application process.9.0 ConclusionJot has been very successful since it was established in 1998 and has grown thebusiness considerably. It continues to be innovative and to create new toys and hasexpanded its geographical markets substantially.There is every reason to consider that Jot will continue to be successful andprofitable but it needs to urgently address its forecast cash shortage and start to planits longer-term future and how the company can be financed long-term. It is likelythat the company could become listed in the future. However, there is no future fora company that constantly has cash flow difficulties, so this issue must beaddressed so that Jot’s owners can concentrate on the business of designing andoutsourcing the manufacture of its range of innovative toys.
  15. 15. APPENDICESSTRATEGIC ANALYSISSWOT ANALYSISAppendix 1StrengthsSuccessful and fast growing companyGood product designsProfitable companyHigh growth in sales revenue (almost 18% last year)Expanding geographical marketsExperienced and committed management teamManagement control very strong as majority of shares are held by management.Own in house team of designers designing toys that are uniqueWeaknessesDependent on just 7 customers for 68% of sales revenueReliant on outsourced manufacturersHighly dependent on customers’ changing preferencesSeasonal business with peak sales in quarter 4Dependent on Jot’s senior management team and a loss of any member would haveserious consequencesWorking capital completely dependent on over draftUsing the same outsourced vendors resulting in cartel
  16. 16. OpportunitiesUnexplored market segmentsNear shoring business processes of sourcing work in a nearby countryEstablishment of links and promotion of the Jot brand in new geographical marketsas well as further market penetration in Europe and the competitive USA marketThreatsRising prices of oil and raw materials in ChinaPotential loss of sales for new flying spaceship, unless it can be improved in timeSafety issue with new flying spaceship toyLosing key customers due to late deliveryAppendix 2Cost tables for the near shoring proposal to VoldaniaLabour costs*labour costs are 1.75 in china in year one then rise to 12% per annum.Voldania’s are 5 in year1 and inflate at 2% per annum*china’s labour time per unit is 0.6/unit, and voldania’s is 25% less, which is0.45/unit.YEARCHINAVOLDANIA(000)(000)163000135,000
  17. 17. 2117,600292,5003184,380327,7264265,454429,7865363,396535,788TOTAL999,3401,657,800Machine hours*machine costs are 1.40 per unit in china throughout the five yearsVoldania’s are 40% more than in ChinaYEARCHINAVOLDANIA
  18. 18. 184,000117,6002140,000196,0003196,000274,4004252,000352,8005308,000431,200TOTAL980,0001,137,200Distribution costs*distribution costs in china are 3 per unit in year1 at inflation of 6%Voldania’s are 60% of the Chinese costYEAR
  19. 19. CHINAVOLDANIA1180,00072,0002318,000127,2003471,940188,7764643,140257,2565833,140333,256TOTAL2,446,220978,486
  20. 20. Table with Combination of TotalsCHINAVOLDANIALabour hours999,3401,657,800Machine hours980,0001.137,200Distribution costs2,446,220978,486Total cost of production4,420,0604,008,288