Jot: Toy Case Manufacturing Analysis

Table of Content

Maybe we could edit and refer to the sample report as follows. Note: This report is far more comprehensive than would be expected from a candid ate in exam conditions. It is more detailed for teaching purposes. T4 part B – case study Jot – toy case – March 2012 REPORT To: Jon Grunt Managing Director, Jot From: Management Accountant Date: 28 February 2012 Co ntents Review of issues facing Jot 1. 0 Introduction 2. 0 Terms of reference 3. 0 Prioritisation of the issues facing Jot 4. 0 Discussion of the issues facing Jot 5. 0 Ethical issues and recommendations on ethical issues 6. Recommendations 7. 0 Conclusions Appendice Appendix 1 Appendix 2 Appendix 3 SWOT analysis PEST analysis Selection of new outsourced manufacturer for products W an d ZZ Appendix 4 VP “own brand” proposal Appendix 5 Inventory valuation Appendix 6 Calculations for outsourced manufacturers p and Q for license d action figures Appendix 7 Email on the key criteria for the selection of outsourced manuf acturers Jot is a small unlisted company which designs and outsources the manufactur e ofa range of children’s toys. It has grown rapidly since it was established in 1998.

It is currently experiencing manufacturing problems due to an earthquake aff ec-ting 2 of its outsourced anufacturers and also quality problems with another outsourced manufact urer. The quality of the company’s products, upon which its reputation is based, must not be compro mised. The Jot brand name is known for quality toys but it is important that its produ CtS appeal to cost conscious retailers and price sensitive customers. Jot can use the costleadership strateg y, using Porter’s generic strategy framework, to select the minimum cost in its choice of manufacturer s for products Y Y and ZZ. . 0 Terms of reference am the Management Accountant appointed to write a report to Jon Grun, Ma naging Director of Jot, a toy ompany, which prioritises, analyses and evaluates the issues facing Jot and makes appropriate recommendations. have also been asked to write an email to the management team to set out t he key criteria for the selection of new outsourced manufacturers in general, together with my reco mmendation on which manufacturer(s) should be appointed for products YY and ZZ.

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This is included in Appendix 7 to this report. 3. 1 Top priority ” Manufacturing problems The top priority is the loss of 2 outsourced manufacturers following the recen t earthquake. They are unable to manufacture any products for Jot for the remainder of 2012. Theref ore new outsourced manufacturers need to be identified and appointed urgently in order to manu facture products YY and ZZ, which total 150,000 units in 2012. This volume of products represents over 17 % of Jots planned sales of 868,500 units in 2012. 3. Second priority ” Quality problem The second priority is considered to be the quality problem with outsourced manufacturer Q for the licensed action figure products. The current quality is not acceptable and the order of 80,000 need to be started again. However, it needs to be considered whether the order is retain d by outsourced manufacturer Q at a higher price than the current contract or whether Jot sho uld appoint outsourced manufacturer p. 3. 3 Third priority – VP proposal This is considered to be the third priority as this is a large contract for this key customer.

Additionally, there is a risk that Jot could lose VP as a customer, if Jot were to decline the “o wn brand” proposal. Jot has never produced branded products for any retailer before, only its own “Jo t” brand, so this is a new venture for the company, but this could see high growth in sales volumes. 3. 4 Fourth priority Inventory The revised inventory valuation is considered to be the fourth priority issue. A realistic valuation for these slowmoving products needs to be established to ensure that the accounts for the year ended 31 December 2011 are accurate and reflect realistic valuations.

However, th e proposed valuations suggested by Boris Hepp, Sales Director, would result in a significant writedo A SWOT analysis summarising the strengths, weaknesses, opportunities and t hreats facing Jot is shown in Appendix 1. A PEST analysis is shown in Appendix 2. 4. 1 Overview Jot is growing fast and is experiencing problems with some of its outsourced anufacturers. It needs to urgently address the problems caused by the loss of 2 outsourced manufactu rers caused by the earthquake and the quality problems on the licensed products.

It must maint ain the quality of its products to retain and enhance its reputation. Late delivery of products, or poor quality , could result in reputational damage to the Jot brand and have longterm conseq uences. Jot has seven main customers which account for almost 70% of Jot’s sales an d are therefore key players with high power, in respect of Mendelow’s stakeholder analysis. One of these seven main customers is VP, a major toy retailer in the IJSA. VP has approached Jot with a proposal to p roduce toys for it under an “own brand” label.

This could be a huge opportunity for Jot but also has a ran ge of risks. 4. 2 – Manufacturing problems With the volume of products growing, Jot has only 20 outsourced manufactur ers. Following the recent earthquake, the factories of 2 of these outsourced manufacturers have been destroyed and cannot be rebuilt in time in order to meet the required production of products VY and Z Z for 2012. The total volume of units of products MY and ZZ iS 150,000 units for 2012. Of the three manufacturers being considered only B has the capacity to suppl all of products W and ZZ.

Jot would appear to have three options: place the order for all Of products YY and ZZ with one manufacturer – but only Manufacturer B has this capacity. Place the order for product YY with one manufacturer and ZZ with another but Manufacturer C would only have the capacity to produce all of product ZZ. Place orders for products YY and ZZ with more than one of the three manufac turers or even spread the orders over all three of the shortlisted manufacturers. There is an urgent need to locate and appoint one or more outsourced manuf acturers to make products YY and ZZ.

Only one of Jot’s existing outsourced manufacturers, Manufacturer A, has some available capacity, but not enough capacity for both products. Therefore, Jot will need t 0 select and appoint a new manufacturer for some, or all, of the 150,000 units as Manufacturer A has onl y spare capacity for 120,000 units. The sales forecasts are for 120,000 for MY and 30,000 units of zz. It iS not proposed to appoint just one manufacturer as this would be too risky. There is also the need to maximise p rofit by selecting the manufacturers that can produce these two products for the lowest cost.

Both manufacturers B and C have endered a price that includes a setup cost which is chargeable to Jot. The selection of manufacturer(s) will depend on a number of criteria including in particular the delivered cost of products to Jot’s warehouses, the quality of the products, and the relia bility of the deliveries in terms of timeliness. Flexibility may also be an important issue i. e. how respon Sive are these three manufacturers to changes in planned order quantities. Additionally, the manu facturers approach to CSR should also be an issue for Jot to consider.

Jot needs to do everything possible to reduce its cost base in order to improv its low profit margins. Jot’s operating profit margin was only 5. 6% in 2011, compared with, for example, t he Lego Group which had an operating profit margin in 2010 which was significantly higher at 31. 9%. Appendix 3 shows the comparison of the three proposed manufacturers This shows the total contribution for each product less the total setup charges, resulting in the pro fit for each product for each manufacturer, taking into account the capacity constraint of 100,000 units for Manufacturer C.

Each of the three shortlisted manufacturers has limited available capacity and it is necess ry to consider the total profit that can be generated for each product by each of the outsourced man ufacturers in order to maximise Jot’s profit. A summary table is as follows: As can be seen from the above table Manufacturer C has the highest profit pe r unit for Product Y Y at ‚1 81, and the highest overall profit for product YY at ‚181 ,OOO. Therefore in order to maximise profit, Manufacturer C should be selected to make product YY up to its capacity of 1 00,000 units.

Therefore it would be necessary to select either Manufacturer A or B to make the balance of 20,000 units of product Y All 3 manufacturers will generate very similar levels of total profit for product ZZ, with a range between ‚120 K and ‚114 K. If Manufacturer C is selected for product YY, then it will no t have sufficient capacity for manufacturing any of the ZZ products. Therefore, Manufacturer A or Man ufacturer B should be selected for product ZZ. Manufacturer This company already manufactures products for Jot, so it is a known outsour ced manufacturer.

It has available capacity for only 120,000 units so it cannot produce both products b ut it could produce all ofYY only or some ofYY and all of ZZ. Manufacturer A has the possible problem is that it is located in the same area near to the earthquake, so this could result in other problems with communication links, roads and even further earthquakes. The profit per product YY at only ‚0. 60 per unit is far lower than competitors and therefore Manufacturer A should not really be considered to be the main manufacturer of product YY. However, it will generate the highest profit for ZZ and therefore is very suitable for product ZZ.

Manufacturer A is known to Jot and is therefore lower risk and it has acceptab le quality but has some roblems with CSR issues. Jot needs to work with manufacturer A to try to im prove and resolve the CSR issues. Firstly this company is located in Asia but not in China. Therefore, this is a ne w location for Jot to have an outsourced manufacturer and this will require new logistical links to be establ ished. Shipping costs at ‚0. 60 per unit are 50% higher than shipments from China. Manufacturer B has a large amount of available capacity at 180,000 so it coul d produce one or both of these products for Jot.

Manufacturer B has a large setup charge to establish production but it has a I wer unit cost. Therefore, the greater the volume of production the lower the outsourced manufacturin g cost will be for Jot. The overall profit for product W (based on the full 120,000 units) is ‚1 56 K, which i s ‚1. 30 per unit. This is over double the amount of profit per unit compared to Manufacturer A but re quires the full volume of 120,000 units to achieve this level of profit. It should be noted that Manufacturer C (see below) achieves the highest profit for product YY, but has a capacity constraint of only 1 00,000 units.

Therefore, Manufacturer A or B sho ld be selected to produce the balance of 20,000 units. However, for just 20,000 units of product MY, Manufacturer B would generate a loss, due to the high level of setup costs, as shown below: Therefore, for the balance of 20,000 units of product Y Y, Manufacturer B woul d result in a loss and should not be appointed. Therefore Manufacturer A should be selected for th e balance of 20,000 units of product Y Y. Manufacturer C Manufacturer C is based in Eastern Europe, which is near to the European sal es markets. This would result in Jot “nearshoring” some of its outsourced manufacturing.

Nearshorin is defined as the transfer of business processes to a company in a nearby country. Shipping costs are low at only ‚0. 02 per unit. It would be useful for Jot to app oint a more local manufacturer so that the outsourced manufacturer can be more responsive t o late increases in sales volumes and could result in Jot carrying lower inventory levels. Manufacturer C has limited capacity at 1 00,000 and therefore could only prod uce part of the order for productYY or all of product ZZ. Manufacturer C also has a setup charge for the production of each product, al though its setup charges are lower than Manufacturer B.

Manufacturer C could generate the hi ghest total profit for productYY at ‚181 goo but it could only manufacture 100,000 units of the required 120,000 units for product YY. The difference between the profit that could be made for product YY by appointin g Manufacturer B, rather than Manufacturer C, is ‚25,000 (as Manufacturer B generates a total profit of ‚156,000 but this is for the total of 120,000 units). Perhaps the balance of 20,000 units of product YY could be produced by Man ufacturer A (as Manufacturer B would be too expensive if the set up charge was incurred for only 20,000 units as hown above).

Manufacturer C is only a little more expensive that Manufacturer A for produc t ZZ but as Manufacturer C is the cheapest for product YY and it has limited capacity, it is proposed that it should not be considered for product ZZ. Manufacturer C has acceptable CSR credentials and produces good quality products. ov It seems realistic that Jot should appoint two or even all three of these outsou rced manufacturers to ensure that enough products are manufactured to meet sales forecasts and s pread the risk of losing production capacity if there were to be any further problems.

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Jot: Toy Case Manufacturing Analysis. (2018, Apr 05). Retrieved from

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