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SCENARIO

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Todays 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: Production in units Year 1 Year 2 Year 3 Year 4 Year 5 60,000 100,000 140,000 180,000 220,000

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 Tanis investigations she contacted the Voldanian government and spoke to an official called Grot in the inward investment division. Grot seemed very keen to support Jots 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 Jots application didnt get delayed in bureaucracy. Fault in new flying spaceship toy A fault has been reported by a number of customers and consumers regarding Jots 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. Jots 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 isnt 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 Jots 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 Jots 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 shouldnt 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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