Case: The Royal Mint (DUE 8/10)

A unique manufacturing operation in the UK is the Royal Mint at Llantrisant in South Wales. The
Royal Mint is designated as an Executive Agency responsible to the Treasury of Her Majesty’s (HM)
Government. The Chancellor of the Exchequer is appointed (ex-officio) as Master of the Mint. Its
objective is to provide the Government with the coinage at a competitive price. The Royal Mint has
the capacity to handle all of the UK business and still be able to bid for contracts from those
countries that do not have their own minting operation. It services over 60 countries in any one year
and produces in excess of three billion coins annually. Its manufacturing requirement ranges from
high volumes of standard coinage to individual service medals or commemorative coins.

In the UK, the Treasury contracts with the Royal Mint on an annual basis for the likely requirements
for coin the following 12 months, and the Treasury is also responsible for decisions on any changes
to the coinage. The last coin that was introduced was the new smaller 10p coin; this involved an
issue of over one billion new coins and the withdrawal of all the old coins from circulation. This
represents one of the largest single projects undertaken and a massive logistics exercise to
coordinate the movement of the coins. The Mint meets every three months with executives from
the UK clearing banks to discuss their requirements for currency in the shorter term. These
estimates are then updated at weekly planning meetings. The Mint would like to work to a “just-in-
time” schedule, but because of the nature of the product and the implications of the money not
being available, they are obliged to keep a predetermined safety stock to cover any shortfalls.

As in any manufacturing operation, the unit cost of the product is a critical factor in measuring
performance, and in the case of the Royal Mint, there is a unique cost ceiling, in that their cost base
must always be less than the face value of the coins being produced. Therefore, this mass
manufacturing process must focus on monitoring its operating costs. The issue of payment for the
product is an interesting concept within the “minting” industry and in the UK. The clearing banks
pay the face value of the coins to the Treasury and the annual contract agreement with the Royal
Mint is based on the Treasury agreeing to cover a fixed percentage of their fixed costs and the
variable cost of each unit then purchased over the year. The Royal Mint can then invoice the
Treasury for the currency produced.

The coins are costed in terms of pounds per thousand pieces. Of that cost, approximately 40 to 50
percent is comprised of the raw material cost, with the next 20 to 40 percent coming from the
production process which transforms that raw material into a blank coin. The actual stamping of the
die on to the coin and the simultaneous milling of the edges is an almost insignificant part of the
overall process costs, mainly due to the vast economies of scale at this stage. The efficiency of the
stamping process is nominally determined by the life expectancy of the die, and the research at the
Mint is involved in initiatives to improve the materials being used in both the coins and dies to
extend this period of use. The coning machines used in the manufacturing process are flexible in
that they can run to produce any of the UK and most overseas coins without long change-over
periods and orders vary from 1,000 million coins for a large country to an order of 5,000 for a small
island. The machines are able to operate at speeds up to 750 coins per minute and therefore the
nature of a 5,000-coin run is very costly, but all the same still viable.
One issue has been the threat of the intrinsic raw metal cost exceeding the face value of the coin:
something which has been most prevalent in those countries facing high inflation and which leads to
coinage being withdrawn from circulation by those wanting to capitalize on the returns available
from the base material. In the UK, the smaller denominations were reaching that point and the Mint
had to change the composition of the 2-pence and 1-penny coins to a steel core with an
electroplated copper outer layer. This reduced the unit cost of the coin and also added to its
expected lifetime because used a less expensive base metal. This new format of coin represents the
biggest change in the manufacturing process of coins to occur over the past few years and the
pioneering of the electroplating technique, whereby a mild steel core is electroplated with copper,
nickel or brass, resulted in a process which will aid the conservation of materials. The reduction in
costs is also being achieved without a noticeable reduction in the recognized value of the coin.
Another consequence of the electroplating procedure is that the coins have magnetic properties due
to the presence of a mild steel core and this has caused initial problems for vending machine
manufacturers.

(After Slack et al., 1998)

Questions for Case entitled “The Royal Mint” – 16 points, 0.5 pt bonus

1. Identify the external customers of the Royal Mint. (1.5 pt)

2. Do you agree with the statement “The case facts suggest that the demand for coinage in the
UK is stable over the planning period.” Why or why not? (2 pts)
3. What is the Royal Mint’s generic business strategy? Defend your answer. (1 pt)
4. Can the product design process be improved? If “yes”, how? Cite case fact(s) to support
your answer. (3.5 pts)
5. Identify the process flow structure(s) present in the minting plant. Defend your answer(s). –
3 pts
6. Cite three key operating characteristics that might suggest that the plant is a flexible plant
(1.5 pts).
7. Why would a 5000-coin production run be considered as being very costly? (1 pt)
8. Why would a situation whereby the “intrinsic value of the raw material used for the coin
exceeds the face value of the coin” be considered as a threat? (1 pt)
9. Assume the ff: (2 pts)
a. Production run for a specific UK coin is 2,000,000 pieces which will be distributed
during the year
b. Total fixed costs for a specific coinage production run is 15,000 British Pounds
c. Total variable cost is 140,000 British Pounds.

Required: If Treasury has contracted to pay 25% of “their fixed costs and the variable cost
of each unit”, determine how much should be paid by the Treasury to the Royal
Mint. (show solution details)