SCENARIO

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Today’s date is the 1 November 2012.

You are the consultant to Jot, an independent toy company

Prepare a report that prioritises, analyses and evaluates the issues facing the board
of Jot. You should make recommendations where appropriate.

Read all the information provided before you begin.

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A variety of issues have arisen, on which the board would like your analysis and
opinion:

Near-shoring proposal in Voldania

Jot has been considering outsourcing part of its manufacturing to Voldania, a country
in Eastern Europe and the board has asked that you consider this proposal from a
financial, strategic and operational viewpoint.

Tani Grun has put together some financial information as below and she comments
as follows: ‘The prices we can get for products made in China as opposed to made
in Voldania are the same, so we can ignore the revenue side completely. However, I
have researched the costs as thoroughly as I can, but inevitably there are many
estimates included.’

Jot has a five-year planning horizon and so ignores profits and cash flows after that
period and would review the situation again at some future point. The intention is
that Jot would gradually switch production from China to Voldania in ever increasing
quantities over the initial 5-year period.

Financial information:

Year 1 Year 2 Year 3 Year 4 Year 5

Production 60,000 100,000 140,000 180,000 220,000
in units

Notes: the ‘costs’ below refer to the charge made by the manufacturer to Jot and as
such are the costs to Jot rather than the costs to the manufacturer. Tani has
investigated Voldanian prices by asking to a supplier to do an example quote of a
product that is currently made in China for Jot. She asked for a detailed breakdown
of costs charged.

1. The labour rate charged per hour in Voldania in year 1 is €5 and will inflate at
2% per annum thereafter. Labour rates are to be accurate to three decimal
places in any calculations. Labour rates charged per hour in China are €1.75
in year 1 (adjusted to the Euro currency) but are expected to rise by 12% per
annum thereafter.
2. The production approach will be very different in the two countries. Voldania
will use as many machines as possible resulting in 40% more machining costs
than in China. Machining costs charged (based on past analysis) will be €1.40
per unit on average in China throughout the next 5 years. However the focus
on machining, results in 25% less labour time being used in Voldania
compared to China. For the products under consideration the Chinese
manufacturer estimates that labour time per unit for them will average 0.6
hours per unit
3. Distribution costs will be substantially less if products are manufactured in
Voldania. Tani estimates that the saving will be around 60% of the Chinese
cost. Distribution costs from China will average at €3 per unit in the first year
and are expected to inflate at 6% thereafter due to ever increasing crude oil
prices.

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 4. Material costs are not thought to be significantly different in the two markets
and hence have been ignored.

As part of Tani’s investigations she contacted the Voldanian government and spoke
to an official called Grot in the inward investment division. Grot seemed very keen to
support Jot’s activities and stated that it was Voldanian policy to encourage overseas
companies to manufacture within Voldania. He also asked for a personal donation of
€25,000 which he promised would help him ensure that Jot’s application didn’t get
delayed in bureaucracy.

Fault in new flying spaceship toy

A fault has been reported by a number of customers and consumers regarding Jot’s
newly launched flying spaceship. The spaceship uses rechargeable batteries that
are recharged whilst in situ inside the toy. Attaching the toy using a lead and an
adapter to the mains electrical supply recharges the batteries. Recharging takes 2
hours and so some consumers have 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 two hours required.

To date there have been 12 reported incidents. Most have reported the toy becoming
too hot to touch and 2 have reported smoke coming from the toy after it had been left
charging for more than four hours. There have been no reported incidents of fire.

Following these complaints a brief investigation has revealed that the insulation
around the electrical circuitry was not designed to be sufficiently fire and heat
resistant for the length of time the toy has sometimes been left to recharge by some
consumers. There is no blame attached to the manufacturer. A new designer (Indy
Kaplia) employed by Jot earlier in the year designed the toy and made the error.

Sales of the product have been strong. Jot’s customers have sold 1,200 units at a
price of €84. The product cost to the retailers was €40. The product costs JOT €24
to make and distribute. Jot has 3,200 units in inventory ready for shipment to
retailers. The initial manufacturing order of 6,000 units has already been made and
delivered. No further order has yet been placed.

Michael Werner has indicated that all may not be lost. He thinks that if Jot spends
another €10 per unit on improved insulation the products will then be safe to ship out
to customers. This work can be done quickly and in Europe and the figure above
includes any additional distribution costs. Boris Hepp though, is unsettled by this
idea. He says that many customers (including all the major retailers) are complaining
bitterly and so Jot would be better to write the product off completely so as not to
further damage an already bruised reputation.

Launch of new range of toys for 9 – 11 age group

Alana Lotz has just returned from a toy fair for toy companies where the latest ideas
concerning the toy world were discussed. She reached the conclusion that the
sophistication of children was increasing all the time and that it was time for Jot to
reach beyond its traditional market segments.

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Alana has suggested that Jot should develop a range of toys for the 9 – 11 age group
of children. Children in this age group demand a greater sophistication from their
toys, they are not satisfied with lights and noises and want something more. Alana
also thinks the smart phone market is going to continue to grow and that children
aged between 9 and 11 increasingly have access to a smart phone.

The idea is to start with a smart phone application that has both gaming and
educational aspects, where children would have to be able to spell and be numerate
to proceed through the levels of the game. She feels that parents that have
previously bought Jot products are likely to support it by buying again for the same
children that they bought Jot toys for when they were younger.

Investigations are at an early stage but Alana thinks that applications are affordable
for Jot with the initial design of the program costing as little as €30,000. She would
like this to be checked however by reference to the costs of initial development of
Angry Birds, a well-known and successful application.

Alana said ‘this is a very exciting potential development for Jot, we can move into a
new era and a new market with this product and so look ahead with confidence.’

John Grun is a little sceptical about this plan. ‘Look, this just isn’t what we do. We
know how to make a toy shuffle about; to make a noise and even light up but this is a
whole new area that we know nothing about.’

You have been asked to assess the suitability, acceptability and feasibility of the
idea.

Late delivery of Christmas product

An email has arrived this morning from Gull, one of Jot’s suppliers in China. It
indicated that Gull would not be able to meet its obligation to deliver the 2,400 units
that had been ordered for delivery on 4 November 2012 (3 days from now). Gull has
been expanding rapidly and is rumoured to have been prioritising production to
higher margin orders, as it is unable to meet all orders this year.

Michael Werner is considering what to do. Gull has said that it can provide 75% of
the order on time with the other 25% to be delivered on 15 December. Gull is
adamant that this is the best that it can do. Michael is wondering whether it is best to
send all 75% to Jot’s main customers or whether Jot should share out the product
more equally so that the independent toyshops at least get something of what was
ordered on time.

Boris Hepp is unimpressed. ‘This is the second problem this month, we shouldn’t be
making so many mistakes. If this supplier cannot fulfil its contract then we should not
use it again. Surely it should pay for the error by way of compensation,’ he said.

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