Topic 3 - Operations

Essay Questions Bank: Topic 4 - Operations
School name: The Sheffield College
01 A business decides to make increasing profits its main objective.
Is it inevitable that this business will need to improve its quality to achieve this objective?
Justify your view.
[25 marks]
The Sheffield College Page 1

02 Read the information about Logger Boards Ltd.
To what extent does the data in Appendix A suggest that building the new production facility will
improve Logger Boards Ltd's operational efficiency?
[16 marks]

03 Read the information about VeganLife Ltd.
VeganLife Ltd wants to introduce a new quality assurance system. Evaluate the impact that a
quality assurance system could have on the competitiveness of VeganLife Ltd.
[16 marks]

04 Read the information about Nissan UK.
To what extent do you think the performance of Nissan's workforce has been the main factor
influencing its decision to increase car production at the Sunderland factory in the UK?
[16 marks]

05 Given the increasing levels of competition in many markets, does this mean that businesses in
these markets that are trying to maintain profits must set increasing efficiency as their main
operational objective? Justify your answer.
[25 marks]

06 Read the information about G-Free.
To what extent will the planned lean production system be good for G-Free Ltd's stakeholders?
[16 marks]

07 Read the information about Daihatsu.
Many car manufacturers are expected to respond to a fall in overall capacity utilisation in the
industry by cutting prices.
To what extent is cutting prices a good way for any business to respond to a fall in the overall
capacity utilisation in its industry?
[16 marks]

08 A business wants to increase the productivity of its workforce.
To what extent is the greater use of delegation likely to be an effective way for the business to
achieve this?
[25 marks]

09 Read the information about AM plc.
Should AM plc invest in building its new factory at Site A or Site B?
Use quantitative and qualitative information to justify your view.
[20 marks]

10 Read the information about The Hostel Society.
Was HS right to sell the three hostels in 2016? Justify your view.
[16 marks]

11 Read the information about Zoo.
Do you think Sue should go ahead with the investment in the new production capacity? Justify
your answer using quantitative and qualitative information.
[16 marks]

12 Read the information about DWS Ltd.
In 2010 Mike introduced a new approach to operations in response to competitive pressures

(paragraph 5).
Using data from Appendix B and the other information provided, evaluate the extent to which
this new approach has been successful.
[16 marks]

13 Read the information about Galin plc.
Galin wants to increase labour productivity.
To what extent do you think that attempts by businesses to increase labour productivity will be
welcomed by employees?
[16 marks]

14 A business plans to improve its flexibility through mass customisation. Is it inevitable that improved
flexibility will worsen other measures of its operational performance?
Justify your view.
[25 marks]

15 Read the information about Sunport PLC.
To what extent is changing to cheaper suppliers a good decision for Sunport PLC?
[16 marks]

16 Read the information about AM plc.
AM plc will use a 'Just in Time' system at its new factory.
To what extent do you agree that this is a good idea?
[16 marks]

17 Read the information about Disrupted supply.
Reliability is the most important factor in a business' choice of supplier. To what extent is this true
for all businesses?
[16 marks]

Source: Logger Boards Ltd
Logger Boards Ltd
Bodhi Doyle started surfing when he was just 5 years old. Forty years later, he is the owner and
manager of a successful company that specialises in manufacturing professional-quality surf
boards using only recycled materials. Bodhi owns 100% of the shares of Logger Boards Ltd; a
business which dominates its niche market.
Throughout the company's 25-year history, it has followed Bodhi's founding mission:
'Logger Boards Ltd exists to intensify the thrill of riding waves while helping nature recover in its
battle with humanity.'
The business has grown from a one-man operation to fill a small workshop with five full-time
highly skilled employees creating environmentally friendly, top-quality surfboards.
From the very beginning, Bodhi's products have been popular, while several mass-market UK-
based surfboard manufacturers have struggled to survive. Logger Boards Ltd has had chances
to buy these businesses cheaply in order to expand. Bodhi has declined these opportunities. He
also recently turned down a chance to take over Logger Boards Ltd's specialist paint supplier.
Bodhi has worked tirelessly to seek out the very best recycled materials to ensure that his boards
meet the demands of the world's best surfers. The workshop is now powered completely by
renewable energy sources from an onsite wind turbine and a solar-panelled roof. Any waste-
water generated is filtered onsite and reused wherever possible. However, with sales at a record
high, Bodhi knows that the cramped conditions in the workshop, combined with a lack of storage
space for materials, have reduced efficiency.
Demand for Logger Boards Ltd surfboards is expected to keep growing. Bodhi has conducted
careful planning for a possible new production facility on the existing site that will allow the
business to increase total capacity. This would enable the business to:
keep all of its environmentally friendly systems

create space for more output
employ more workers if needed.
Bodhi's thorough research has generated forecast data, shown in Appendix A. The cost of
building the new production facility is estimated to be £500 000. Logger Board's Ltd's bank has
offered a long-term loan for this amount, at an annual interest rate of 5%. Further financial
information for Logger Boards Ltd is provided in Appendix B.

Demand for Bodhi's surfboards has grown without the need for promotional expenditure. Bodhi's
approach to promotion has been to rely solely on Logger Board's Ltd's social media account on
Instagram. Bodhi posts pictures and videos on this account. He has become an 'accidental'
influencer with 200 000 followers. The content focuses less on the business and more on Bodhi's
surfing lifestyle and personal environmental beliefs. Details of Logger Boards Ltd's followers and
customers are shown in Appendix C.
Bodhi remains undecided about his expansion plans – he has always aimed to minimise the level
of risk involved in any business decision he has made. He is also concerned that a larger
business may be harder to control, especially given his passion for ensuring that Logger Boards
Ltd's mission remains central to the way the business operates. Although his bank manager has
suggested that communication and organisational structure will be vital to the success of the
growth strategy, Bodhi feels that his leadership will be the most important aspect if the strategy is
to succeed.
Appendix A: Data for current workshop and forecast for new production facility
Current Forecast for first year in

workshop new production facility
Productivity (units per

500 600
worker per year)
Total cost per unit (£s) 350 350
Output (units per year) 2500 3000
Capacity (units per year) 2500 7500
Fixed costs £125 000 £250 000
Percentage of waste that is

98 95
recycled
Appendix B: Current financial data for Logger Boards Ltd (before new production facility)
Table 1: Balance sheet (statement of financial position) extracts
£000s
Current assets 246
Current liabilities 120

Non-current
400
liabilities
Total equity 1000
Table 2: Income statement extracts
£000s
Sales turnover 1125
Cost of sales 750
Expenses 125
Finance cost
(interest paid on 20
loans)
Profit for the year 230
Appendix C: Data on Logger Boards Ltd customers and social media followers

Source: VeganLife Ltd
VeganLife Ltd
VeganLife Ltd (VL) is a manufacturer and online supplier that sells vegan female toiletries. Vegan
goods are made using no animal-based products. VL operates in a niche market. It sells its products
to other businesses such as supermarkets and department stores and also directly to individual
customers. As this niche market grows at a fast rate every year, VL faces a growing threat to its
market share from competitors, especially large businesses.
VL sources raw materials from countries around the world and it manufactures these into products
such as soap, shower gel and makeup. VL packages and then sells the products to its customers who
order through the website. VL tries to be ethical and environmentally responsible. It uses Fairtrade
suppliers often located a long way away. VL tries to keep its waste and pollution as low as possible.
Table 3: Market and VL Information
2020
Market size £50 million
VL market share 15%
Costs of sales for VL £3.25 million
At the factory and warehouse there are currently two managers, two assistant managers and 30 full-
time and part-time staff. The staff have their own specific job roles:
Machine operators
Quality control supervisor
Packaging staff
General cleaning and maintenance staff
Office staff.
VL has high labour turnover compared to similar businesses. According to some staff this is due to
low pay and 'repetitive and boring' tasks. Factory and warehouse staff complain about the high level
of supervision, due to managers having narrow spans of control. Office staff say they are frustrated at
the lack of feedback they receive on their work, and feel under-valued.
VL has one staff member in charge of quality control. Recently there have been a large number of
quality issues with some products. The main problem is with the packaging of the products. Some of it
has split, causing products to leak. When this happens, VL has to refund customers and/or replace its

products.
The quality issues are causing VL to lose some loyal customers and are affecting its reputation. The
Operations Manager suggests that VL should introduce a quality assurance system to the factory and
warehouse. The system would initially cost £100 000 and would require all staff to be trained to use it,
with further training whenever the system is updated. VL knows that its competitors use a similar
system. The Operations Manager feels this is a good way to remain competitive.
VL has grown quickly in a short time and has been a profitable company that has paid rising dividends
to its shareholders every year. The shareholders have made it clear they expect this to continue.
However, cash flow is a problem. Recently a large business stopped trading, owing VL £350 000. VL
often struggles to keep up with the increasing demand from customers. It does not always have the
cash to buy the raw materials to meet the orders, and not all of its suppliers will sell to VL on credit.
Additionally, some of its customers do not always pay on time. VL often has to ask the bank to
increase its overdraft. Currently VL is £550 000 overdrawn, and the interest rate is set to increase.
Emma, the Managing Director, thinks the quality assurance system is a good idea, but feels spending
£100 000 of its profits is a risk. She believes the motivation issues amongst the staff need addressing
more urgently.
Due to changes in demographics, such as an increase in the population size of the UK and the
change in age structure, the markets for toiletries and vegan products are growing. New products are
being launched weekly and new competitors are entering the markets. Emma has noticed through her
own primary market research that there is a significant increase in the sales of vegan male toiletries.
She does not have any marketing qualifications but has been collecting data from focus groups she
has set up. She believes that targeting the vegan male toiletries market is the best way to make a
profit and help VL's cash flow position. From her research she estimates that it would need a large
investment for a new online advertising campaign for a vegan male shower gel.
Table 4: Financial forecast data for vegan male shower gel
Fixed costs £15 000
Total variable costs for 1000 units £750
Selling price £6.75
Table 5: Figure 3 Focus group responses (sample size 20) vegan male toiletries
2017 2018
Amount spent on toiletries in last

£21 £23
shop visit

Would you consider buying vegan
Yes Yes
toiletries?
How much would you be willing to

£8 per item £9 per item
spend on vegan toiletries?

Source: Nissan UK
Nissan UK
Nissan Motors, the Japanese vehicle manufacturer, recently invested heavily in developing a
new model of a car called the Invitation. This model is designed to compete with the VW Polo
and Ford Fiesta. Nissan has decided to build the Invitation at its Sunderland factory. This factory
has the highest labour productivity in Europe. The new jobs from this latest investment will take
the number of staff there from an average of 5600 in 2012 to 6000 in 2013.
Three years ago the recession had led to Nissan reducing production and cutting 1200 jobs at
Sunderland, so how has the company managed to turn things round?
The leadership at Nissan has developed and launched successful cars: the Qashqai model has
proved particularly popular globally. Nissan's Head of Production in Europe said that, despite
difficult conditions in Europe, “the market has grown by 4%, and our market share has grown by
25%. The market proves if you have got a good car at a competitive price, you can grow”.
The employer–employee relations at Nissan's Sunderland factory are exceptional and labour
turnover is at a record low level of 3.6%. This has led to further investment taking place at
Sunderland rather than at Nissan factories in other countries.
The current weakness of the pound makes the UK an attractive place to manufacture, adding to
Nissan's profit margins. The car industry now represents nearly 10% of total UK exports with
nearly 80% of car production being exported, particularly to emerging economies such as
Russia.
Government policy has helped Nissan. The government is providing a £9.3m grant to support the
company's £125m investment in Sunderland.
Nissan has high-capacity utilisation; this is unusual as there is significant over capacity in the car
industry.

Source: G-Free
G-Free
Background
1. The UK market for gluten-free food is growing rapidly (see Figure 1). This rising demand is
caused by three factors:
Greater awareness of food allergies.

Some consumers believing that these foods are healthier.
The endorsement of this type of food as a 'lifestyle choice' by celebrities.
Figure 1: UK sales of gluten-free food (£ million)
2. The price of gluten-free food is up to 300% higher than similar products that contain gluten. This
is due to the high costs of specialist ingredients, limited competition in the market, and price
inelastic demand.
3. In 2004 chef, Stephanie Morris, started to develop gluten-free bread recipes for her son who had
a severe food allergy. This bread was much better than that available in shops and she began to
investigate the possibility of starting a small scale business. Initially, as a sole trader, she sold
small batches of loaves in local food markets where it was well received.
4. In 2005 Stephanie invested a large part of her savings and left her secure job as a chef to start a
bakery in a small factory. This decision involved a large opportunity cost for Stephanie, but she
was optimistic that it could be worth the large risk. She found four investors to join her as co-
directors of a private limited company: G-Free Ltd, as she was advised that limited liability would

be useful. The other directors shared Stephanie's passion for the product, and had experience in
manufacturing and retail distribution within the food sector.
5. The G-Free Ltd brand of gluten-free bread was launched in UK supermarkets in 2007 and
received favourable coverage in health magazines. By 2009 it was established in the niche
market of gluten-free bread and quickly became the market leader.
6. At first G-Free Ltd sourced ingredients from four suppliers who had specialist knowledge of the
market. G-Free Ltd was a major customer for each of the suppliers and a close business
relationship developed with them. The suppliers offered high-quality ingredients and flexible
deliveries, but were not the largest or cheapest available.
7. The original small factory was described as being run using a team management approach on the
Blake Mouton grid. The factory grew steadily to employ over 100 staff and in 2012 it received a
regional award as being the best medium-sized business to work for. At the 'award ceremony' the
judges commented favourably on:
The high level of employee engagement.

Low labour turnover.
The willingness of employees to work flexibly.
Continued growth
8. Success with gluten-free bread led G-Free Ltd to develop a wider range of products from cakes
and biscuits to croissants and crumpets – all gluten-free and many were developed from
employee suggestions. In 2014 the company invested heavily in two new large bakeries. The
existing suppliers could not offer the range or volumes now needed by G-Free Ltd. Its new
products and increased scale meant that G-Free Ltd required more ingredients from a rising
number of suppliers.
9. Costs associated with this expansion were seen as the reason for the business not turning sales
growth into profit.
10. In 2015 G-Free Ltd experienced a serious problem in its operations. Some products were found
to contain traces of gluten. Flour from one of its new suppliers was contaminated. G-Free Ltd
acted swiftly to withdraw the products – mindful of the importance of maintaining the trust of its
customers and reviewed its quality control systems.
11. The continued growth of this market has recently attracted larger firms. Heinz, Nestlé and
Warburtons have each launched their own gluten-free ranges. These firms have lower unit costs
due to larger scale and the use of more technologically advanced systems. They also benefit from
strong brand images from their other products that sell in mass markets; this has helped them
enter the gluten-free niche.
12. The Operations Manager of G-Free Ltd believes that the company must react to this threat by
reviewing its optimum resource mix, particularly as labour costs at G-Free Ltd are rising. The

company plan a move towards a lean production system that will be more capital intensive. It will
also aim to improve operational performance by reducing the number of suppliers it works with
from 28 to 14.
13. The plan will see a reduction in staffing at the factories. This is opposed by the Human Resources
Manager who highlights that many of the staff have stayed loyal to the company for many years.
14. The plan will be completed by late 2018 at a cost of £28m. The Finance Manager suggests the
company fund this, and further growth, by becoming a public limited company. However, the
founder, Stephanie Morris, sees herself and the original directors as key people to help ensure
that the business stays true to its original aims and feels this may be threatened if the ownership
is changed in this way.
Table 1: Selected from G-Free Ltd Income Statements
2015 2016 2017 2019

(est.)
Turnover £m 42.0 51.0 54.5 65.6
Gross profit £m 14.5 21.5 24.1 29.0
Gross profit margin (%) 34.5 44.2 44.2
Expenses £m 16.1 18.2 21.3 18.7
Operating profit/loss £m −1.6 3.3 2.8 10.3
Operating profit margin (%) −3.8 6.5 5.1 15.7
Table 2: Selected data for G-Free Ltd
2015 2016 2017 2019

(est.)
Number of Employees 452 510 525 440
Total Employee Costs (£m) 9.8 11.2 12.0 11.5
Average Cost per Employee

21 681 21 960 22 857 26 136
(£)

Source: Daihatsu
Daihatsu
Daihatsu is a Japanese manufacturer of small cars. Its customers are now able to customise
their vehicles with car panels that they design for themselves online. Until recently customising
cars was expensive because it required skilled craftsmen to produce individual parts.
With 3-D printing, panels can be produced quickly and cheaply. Customers ordering a Daihatsu
car from their local dealership can design their own panels for the sides of the car to create
exactly the look that they want. Offering more customisation is one way that car manufacturers
are trying to gain a competitive advantage in a fiercely competitive environment.
Cars are a high value item for consumers and are usually bought on credit; the finance to buy the
car is often provided by the manufacturer. In 2016 over 74 million cars were sold worldwide. This
represents a global capacity utilisation in the car industry of only 78%. Some commentators
predict global capacity utilisation in the industry will fall in the next few years and that many car
manufacturers will respond to this situation by price cutting.

Source: The Hostel Society
The Hostel Society
1. The Hostel Society (HS) is a charity which owns and runs 23 hostels in some of the most
beautiful and remote parts of the UK countryside. A hostel is an affordable place to stay –
providing basic self-catering facilities, communal areas and cycle storage. Guests are typically
keen to walk and cycle in the countryside.
The Hostel Society's mission is:
'To promote a love of the countryside, particularly to people who have a limited income.'
2. HS is owned by its members who support the aims of the organisation and who pay an annual
fee. Over half of the members of HS are under 25 years old but it is the older members who are
the most actively involved in the running of the organisation. Many of the guests at the hostels are
also members. Members elect the board of directors (called trustees) at HS. As a charity, the
income and assets of HS cannot be paid out as dividends or bonuses to trustees or members.
3. The board of trustees at HS governs the organisation and sets its strategic direction – each
trustee gives his or her time and expertise voluntarily. Other enthusiastic members volunteer to
help manage hostels, maintain the grounds, carry out administration tasks and organise events.
These volunteers share the values of HS, and gain personal satisfaction from their roles and from
encouraging others to share their love of the countryside. They have often been involved with HS
for several years.
4. HS has a flexible staffing structure with a mixture of unpaid volunteers and paid seasonal, full-
time and part-time staff (Figure 1). This flexibility is seen as key to the success of HS.
5. Seasonal staff are typically students on low hourly pay rates. They cover busy periods in the
summer months when many hostels operate at or near to full capacity. In winter some hostels are
closed, and others operate with limited opening times.
6. As well as seasonal demand, hostels have busy periods each day when guests leave in the
morning and arrive in the late afternoon. The hostels will often be closed in between these times.
Figure 2: Overall staffing structure of HS

7. Staff at HS's head office in Lancaster take responsibility for membership services, marketing and
finance. Staff turnover in Lancaster has been high as employees have been attracted by higher
salaries offered for similar roles in other organisations.
8. The revenue for HS is generated from guests' stays at the hostels, membership fees and
payments for advertising on its website and in its newsletters. The trustees were concerned about
the losses in 2015 and 2016 as they always prioritise the long-term financial stability of the
organisation. Assets which had been built up over many years from donations from members had
to be used to meet these losses.
9. In 2016 the trustees decided to sell three small hostels in fairly remote parts of the Scottish
Highlands, claiming that the low occupancy rate (capacity utilisation) of these properties was
unsustainable. This was not popular with some members and attracted bad publicity in the media,
as these hostels gave access to remote areas of outstanding natural beauty. The hostels were
sold to a property developer who planned to use the land to build new housing developments.
The sale of these assets raised £1.5m which funded the upgrade of other hostels, together with a
promotional campaign aimed at boosting the demand for both people staying at hostels and
becoming members of HS.
10. Overall demand for hostels in the UK has been declining as people now expect more facilities
when booking accommodation and many prefer budget hotels. Other hostel organisations have
changed what they offer, borrowing large amounts to fund expansion into city-centre hostels. The
occupancy rate of these city-centre hostels has been high as the demand is less seasonal.
11. HS has decided to open a city-centre hostel in Edinburgh in 2018. This will:
Be funded by borrowing £3 million.

Be aimed at people wanting to stay in the city at any time of the year.
Offer more facilities than the existing hostels (such as TVs) in en-suite rooms.
Be priced from £60 per night for a room for two people.
12. A number of HS stakeholders oppose this decision to open its first city-centre hostel.
Table 7: Selected financial and performance data for HS

2017 2016 2015
Number of hostels 23 26 26
Maximum capacity (overnight

112 000 142 000 142 000
stays)
Number of overnights stays 74 000 75 000 76 100
Occupancy rate (capacity

66.1% 52.8% 53.6%
utilisation)
Average price per overnight

£25.00 £23.50 £23.50
stay
Variable cost per overnight stay £5.50 £5.50 £5.00
Annual fixed costs for hostels £1 300 000 £1 525 000 £1 450 000
Profit from hostels (£175 000) (£42 150)

Source: Zoo
Zoo
Sue is managing director and the sole owner of Zoo Ltd, a luxury fashion handbag business. Sue
has helped the company to grow over the last forty years, taking responsibility for the key
decisions for the business as a whole. She does, however, think carefully about the design of her
employees' jobs. She delegates many tasks to her team in areas such as marketing and
operations and is good at praising her employees for their achievements. Zoo sells through
independent fashion retailers in the UK. The average price of its handbags to all UK retailers is
£250.
Last year Sue's son Mike joined the business. Sue wants him to take over the company in the
future. Mike had just finished his business degree at university and is eager to prove himself.
Mike wants to increase the annual profits of the business by at least 60% in the next few years
and make returns on all future investments of at least 25%. Until now, sales of the business have
typically grown by 2% a year.
Mike has been negotiating on his own to win a contract with a very large fashion retailer, Nexia,
to sell Zoo handbags. Nexia has stores in the UK and throughout Europe. Nexia has told Mike
that it refuses to discuss the contract further unless Zoo has the ability to produce on a much
larger scale.
For Zoo this means it would need to invest £1 500 000 in new production capacity. This would
increase fixed costs by £160 000 a year but would not affect its variable costs per unit.
Mike has told Sue that there is an 80% chance that the contract will go ahead if Zoo invests in
more capacity. The decision whether to invest in more capacity remains with Sue.
The bags for Nexia will be produced in addition to its current output. If Nexia is happy with sales
in the first few years, bigger contracts may follow.
Appendix A: The terms of the potential contract
Nexia will pay Zoo £200 per handbag

Nexia would buy 10 000 handbags a year
Appendix B: Other Zoo production and finance data
Current output of Zoo: 12 000 bags a year

Variable costs of producing a Zoo bag: £130

Current annual fixed costs: £660 000
Appendix C: Zoo human resource performance data 2017–2018
Labour retention rate (% of staff staying with the business more than 5 years): 85%. Industry
average: 64%.
Labour productivity index 120. Industry average 100.

Source: DWS Ltd
DWS Ltd
The business
1. DWS Ltd was founded in 1989 by Mike Chappell, who, after five years as an apprentice
metalworker, set up his own business making metal tubing. The tubing is used in the manufacture
of products as diverse as furniture, cars and buildings. The operations process involves buying in
sheet metal and, at extremely high temperatures, shaping and joining the metal to create the
shapes required by customers. DWS Ltd has always focused on producing the very highest
quality products, adding significant value and charging relatively high prices.
Building a profitable business 1989–1994
2. DWS Ltd really struggled to attract customers in its first few years. Mike spent much of his time
visiting potential clients, to try to build a loyal customer base. He often did not see his two deputy
managers, in charge of operations and marketing, for several weeks – which left them waiting for
advice from Mike on how he wanted their departments to operate. Money was scarce – most of
the start-up capital was used to purchase expensive machinery and equipment. Mike struggled to
track what was happening with the finances and often had to use an overdraft. In 1991, Mike
introduced a budgeting system to help with managing the company finances. By 1994, Mike had
inspired his workforce, developed a motivated and committed management team and found
enough customers to create a profitable business.
Ongoing success 1994–2009
3. DWS Ltd grew to employ 120 staff. The business gained an outstanding record of customer
satisfaction and extremely high levels of repeat business. Financial performance was excellent,
allowing growth to be financed using retained profits. Mike's approach to Human Resource
Management remained clear. He always expected 100% commitment from his staff. In return,
staff were paid salaries above the national averages for the industry. The company invested
heavily in training and at the beginning of 2008, Mike persuaded his fellow Directors to introduce
a works council. Since its introduction the works council has met monthly and discusses major
strategic issues facing the business. Mike has been described as a charismatic and inspirational
leader whose staff are fiercely loyal to him and the business. The Human Resource data provided
in Appendix A seems to support this view.
Responding to challenges 2009–now
4. Since 2009 DWS Ltd has been experiencing increased competitive pressures.
Problems have been caused by foreign rivals:
Improving their quality so that it is now much closer to DWS Ltd's levels.

Charging lower prices.
5. In response, DWS Ltd has worked to boost its operational efficiency. In 2010 Mike introduced a
new approach to operations. This new approach involved three elements:
Just in Time production with smaller, more frequent deliveries of inventory.
A 'right first time' approach to quality assurance which involved extensive training for staff.
The creation of kaizen groups to discuss how to make improvements to the business’s
systems and processes.
Mike estimated that introducing lean production cost around £3 million.
An investment decision
6. The company aims to set objectives that balance profit and Corporate Social Responsibility. Its
environmental performance is of particular interest to Mike. Prompted by increasing energy costs,
the business is currently considering whether to invest £1 million in a project to fit solar panels to
the roof of its factory in order to generate most of its own power from renewable sources. This is
expected to lead to lower annual energy costs, although there will be some running costs – see
Appendix D.
The future
7. Mike is under pressure from several Directors to adjust the corporate strategy for the next five
years. Foreign rivals are becoming ever more competitive and most of Mike's attempts to cut
costs have only seen limited success. Mike's proposal for the new strategy is to produce only the
very highest value added, technically difficult items. This would involve stopping attempts to keep
prices competitive by cutting costs. Some Directors would prefer the business to move
downmarket instead. They want to target a wider market segment by reducing labour costs and
levels of customer service as well as some expensive elements of being a socially responsible
business.
8. The agenda for next week's Board meeting will feature discussion of:
The proposed investment in solar panels.
Corporate strategy for the next 5 years.
9. The group of unhappy Directors plan to present a SWOT analysis of DWS Ltd to Mike at the
meeting.
Appendix A Human Resource performance data for DWS Ltd
versus Industry average
2003 2008
DWS Industry DWS Industry

Ltd average Ltd average
Labour turnover (%) 5 15 2 10

Employee costs as a
60 48 65 50
% of turnover
Appendix B Operations data for DWS Ltd versus Industry

average
2008 2013
DWS Industry DWS Industry

Ltd average Ltd average
Faults per 1000

5 12 1.5 8
units made
Cost of 1 tonne of
sheet metal (£)
1100 1000 1350 1050
(DWS Ltd’s raw
material)
Average value of
finished goods 4 5 0.1 3
inventory (£m)
Appendix C Selected financial data for DWS Ltd
2008 2013 2018
Number of customers
2400 2000 1500
placing orders
Revenue (£m) 36 40 33
Profit for the year (£m) 3 2 0.2
Appendix D Investment appraisal data on fitting solar panels to

reduce energy costs
Initial investment = £1m
Year Reduction in Running costs to

energy costs (£m) maintain solar panels
(£m)
1 0.3 0.2

2 0.7 0.3
3 1.0 0.3
4 1.3 0.3

Source: Galin plc
Galin plc
Galin is a large multinational company that sells products in 10 different categories, including
fabric care (e.g. washing powder), home care (e.g. furniture polish) and hair care (e.g. shampoo)
products. It has 50 different brands and in 2018 achieved global sales of $60 billion.
Galin has chosen to have a regional organisational structure, dividing the world into six regions:
North America, Europe, Asia, Latin America, the Middle East and Africa. There are major
differences between these regions: for example, in terms of market conditions, labour markets
and economic factors.
In 2018 Galin invested 3% of its sales revenue into research and development (compared with
an industry average of 1%) and owned 55 000 patents. Its new products achieve high profit
margins. When developing products, Galin encourages collaboration between people in different
jobs.
An objective of the company for 2019 is to increase labour productivity.

Source: Sunport PLC
Sunport PLC
Background
1. Sunport PLC is a multinational company, manufacturing and selling various consumer goods,
focused on household cleaning, personal care and foods. The business has manufacturing
facilities in 85 countries and it sells in nearly 200 international markets, with its Head Office in the
UK. The business has seen great success under Chief Executive Martin Smith. This included
fighting off a takeover bid from a major rival. Success was recognised with substantial bonus
payments to the senior managers in the form of shares in the business.
A socially responsible PLC
2. During his 10 years in charge, Martin committed the business to a socially responsible approach.
He championed the need to act responsibly to all stakeholder groups, arguing that forming
effective long-term relationships would increase profits. Martin was particularly keen to encourage
relationships with suppliers who shared Sunport PLC's values. This allowed a joint approach to
new product development and reliable deliveries from loyal suppliers.
3. Some shareholders questioned Martin's approach, claiming he spent more time attending
conferences about climate change than increasing profit for the business. Although dividend
payments fluctuated, the company's share price rose consistently. Recent financial results are
shown in Appendix A.
Organisational structure
4. The company's organisational structure is split into three regions. Each of these regions is then
split according to three product-based divisions of Household Cleaning (HC), Personal Care (PC)
and Food (F).

5. This structure is designed to allow regional variations to be addressed as the company's market
research (see Appendix B) has shown major differences between the global regions. Martin's
leadership style involved delegating decision-making to a local level. This allowed staff, within
each region, to select the right suppliers and develop their own marketing mix. Head Office has
always provided a clear mission for the company as a whole, allowing Martin to spread his vision
of a socially responsible business throughout the organisation.
Balanced Scorecard
6. The company's use of Kaplan and Norton's Balanced Scorecard has been credited with
contributing to its success. The performance of every business division is assessed from four
perspectives (see Appendix D). This has allowed the business to avoid short-termism in its
approach to decision-making.
A new boss
7. Martin Smith retired at the end of 2019. He has been replaced by Elaine Filer, Sunport PLC's
former Chief Finance Officer. Elaine has a reputation as a leader who makes decisions herself
and then tells managers what to do. She is expected to drive through a strategic change focused
on increasing profit margins throughout the business. Her view is that personal care is the most
successful division in Europe. Elaine wants every division in the business to achieve an operating
profit margin of 12%. This should help to please a small group of unhappy shareholders who are
concerned that the company’s returns could be higher if the senior managers prioritised profit
over other social responsibilities.
A strategy for the future
8. Although the company is not expected to abandon its socially responsible approach, Elaine has
announced her intention to introduce cost reduction measures including:
Centralising decision-making at Head Office, which would remove some duplicated activities,
such as the selection of suppliers.
Changing to cheaper suppliers.
Reducing spending on initiatives designed to improve the company's environmental
performance, including abandoning the company's current aim of only using recyclable
materials in its packaging.
Appendix A Sunport PLC selected financial results
2016 2017 2018 2019
Sales turnover (£bn) 48 51 52 54
Operating profit (£bn) 4.6 4.5 4.8 5.1
Average operating profit margin of major rivals in 2019 = 12%

Appendix B Sunport PLC market research data on food buying in various regions (2020)
Three most important issues for food shoppers Index of Sunport

PLC’s food prices
First Second Third (Europe = 100)
Recyclable
Europe Taste Value for money 100
packaging
Speed of
North America Branding Taste 118
preparation
Rest of the world Value for money Taste Branding 84
Appendix C Quotes from a recent article on the global food industry in a business magazine
'food manufacturers who have centralised manufacturing facilities have found any economies of scale
in production are cancelled out by increased transport costs'
'transporting food products long distances is very expensive as products can be bulky, fragile,
perishable or require refrigeration'
Appendix D Selected data for Sunport PLC – European region, 2019
Perspective Measure Household Personal Food

cleaning care
Operating profit margin

Financial 9.7 12.2 8.8
(%)
Staff retention (%) 88 74 76
Learning and
% of employees who
growth
are proud to work for 90 65 85
Sunport PLC
% of recyclable
materials used in 100 55 85
Internal packaging
processes
New products in
12 10 12
development

% of customers who
would recommend
Customers 90 80 75
Sunport PLC products
to a friend

Source: AM plc
AM plc (Aerial Manufacturing plc)
The past
Aerial Manufacturing plc (AM plc) manufactures toys. For 20 years the business has made remote-
controlled toy aircraft, drones and helicopters. These have been sold through retailers in the UK.
Shortly after the company was founded, it moved all its manufacturing operations to a factory in
China. This allowed AM plc to take advantage of cheap manufacturing costs – primarily due to the low
wages paid to factory workers in China at the time. The company's headquarters – including its
product design department – stayed in the UK.
A new boss
A new Chief Executive, Roger Hicks, was appointed a few months ago. Prompted by shareholder
dissatisfaction over low profitability, he was given two main objectives:
increase sales turnover quickly

increase dividend payments to shareholders by 2025.
Roger immediately analysed the existing strategic position of the business. He knew that recent rises
in wage rates in Chinese factories meant that wage rates there are now closer to those in the UK. He
analysed performance data from the AM plc factory (Appendix A) and visited the factory. He found
what Blake and Mouton would describe as a 'produce or perish' style of management. Unlike similar
factories in China, which use a 'middle of the road' style, AM plc's factory relied on a high division of
labour where each worker completed one small repetitive task. Supervisors were paid a bonus
according to the output per worker for their section. As a result, rest breaks had been shortened and
shifts extended by supervisors desperate to achieve bonuses for themselves. Following his review,
Roger knew things had to change and introduced a new corporate strategy.
A new corporate strategy
AM plc will no longer make toys or sell through retailers. Roger's new strategy will build on the
company's existing expertise in manufacturing remote-controlled aircraft and drones but targeting
different customers. AM plc will design and manufacture sophisticated drones to be used by
businesses which need an aerial capability as part of their operations. Drones are used in many
industries including agriculture, construction and distribution. Roger intends to produce a range of
drones specialising in inspection, high-quality video footage and parcel delivery.

AM plc will be selling directly to businesses. Roger is confident that this strategy offers opportunities
for huge growth as it is founded on the company's core competence of designing and manufacturing
drones. Instead of trying to be a cheap supplier in the mass market for toys, the business will switch
to a strategy of focused differentiation. Differentiation will come from being a long-established
business in the industry with exceptionally high-performing and durable products. Market research is
encouraging, with sales forecasts shown in Appendix B.
A new site
Roger believes he must move AM plc's manufacturing back to the UK. His operations director has
identified two possible sites for a new factory. Site A is 30 miles from London. The area offers an
attractive place to live and work, easy access to many potential customers' headquarters and good
transport links to the rest of the UK. Site B is in the North West of England. After the recent closure of
a nearby car factory, local unemployment is high. Site B is £2m cheaper than Site A and close to a
port, therefore offering easy shipping for exports. Further data about each site is in Appendix C.
A new factory
Roger's vision of the new factory focuses on highly skilled workers using advanced robotics. Output
will be of exceptionally high levels of quality, but with the flexibility to adjust the products being made
to suit individual customers' specific requirements. Roger will use a 'Just in Time' system at the new
factory. This will have implications for the frequency and size of deliveries, cash flow and the inventory
turnover ratio.
Building a factory will be a complex process involving thousands of different activities. Roger
understands the challenges involved in planning and managing a project of this size. In a former job
as project manager for a multinational manufacturer, he had supervised the construction of several
factories. He intends to use network analysis to identify the critical path. The existing factory in China
will be closed in ten months and Roger is confident the new factory will be operational by then.
Finances
Roger has allocated a total budget for the change in strategy of £10m. Much of that will be spent on
the new site, factory and production equipment, with the rest available for marketing. He has a bank
loan arranged to borrow up to the full £10m.
Roger is confident that his decisions will lead to success in meeting his two objectives.
Appendix A 2020 performance data on AM plc's Chinese factory and similar factories in China
AM plc Average for similar

Chinese factories in China
factory
Unit cost £23 £25

Productivity (units of output per worker per month) 240 200
Labour turnover 40% 15%
Defect rate per 1000 products 80 10
Appendix B Sales forecasts for AM plc based on quantitative market research
Years after change Sales volume (units sold) Sales value (£m)
of strategy
Year 1 2300 11.5
Year 2 2800 14
Year 3 4000 20
Year 4 6000 30
Appendix C Information on possible sites for AM plc's new factory
Site A Site B
Initial investment (purchase of land plus factory

£8m £6m
construction and production equipment)
Average selling price per unit £5000 £5000
Fixed costs per year £6m £4.5m
Variable costs per unit £2500 £3000
Maximum capacity (units per year) 10 000 8000
Appendix D Extracts from latest annual accounts for AM plc
£m
Sales turnover 22
Cost of sales 20
Inventories 5
Other current assets 1

Current liabilities 6
Non-current liabilities 5
Total equity 15

Source: Disrupted supply
Disrupted supply
DT is a UK-based business manufacturing circuit boards which it sells to other businesses. All of
DT's output is exported to Europe. The components that DT uses are sourced in the UK.
The supplier of a vital component closed suddenly in early 2020 disrupting DT's supply chain.
DT's usual pattern of inventory control for this component is shown in Figure 1.
DT was forced to buy this component from a new and more expensive supplier.
DT stated: 'We had no contingency plan. It was impossible for us to find alternative supplies
quickly enough to fulfil all our existing orders. The new supplies had higher levels of defects.'
Figure 3: Inventory control chart showing DT's usual pattern before disruption

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Essay Questions Bank: Topic 4 - Operations

School name: The Sheffield College

01 A business decides to make increasing profits its main objective.

Justify your view.

The Sheffield College Page 1

The Sheffield College Page 2

The Sheffield College Page 3

The Sheffield College Page 4

The Sheffield College Page 5

The Sheffield College Page 6

The Sheffield College Page 7

The Sheffield College Page 8

Should AM plc invest in building its new factory at Site A or Site B?

Use quantitative and qualitative information to justify your view.

The Sheffield College Page 9

The Sheffield College Page 10

The Sheffield College Page 11

In 2010 Mike introduced a new approach to operations in response to competitive pressures

The Sheffield College Page 12

Galin wants to increase labour productivity.

The Sheffield College Page 13

Justify your view.

The Sheffield College Page 14

The Sheffield College Page 15

AM plc will use a 'Just in Time' system at its new factory.

To what extent do you agree that this is a good idea?

The Sheffield College Page 16

The Sheffield College Page 17

Logger Boards Ltd

keep all of its environmentally friendly systems

The Sheffield College Page 19

Current Forecast for first year in

Productivity (units per

Total cost per unit (£s) 350 350

Output (units per year) 2500 3000

Capacity (units per year) 2500 7500

Fixed costs £125 000 £250 000

Percentage of waste that is

Table 1: Balance sheet (statement of financial position) extracts

Current assets 246

Current liabilities 120

The Sheffield College Page 20

Total equity 1000

Table 2: Income statement extracts

Sales turnover 1125

Cost of sales 750

Profit for the year 230

The Sheffield College Page 21

Table 3: Market and VL Information

Market size £50 million

VL market share 15%

Costs of sales for VL £3.25 million

The Sheffield College Page 22

Table 4: Financial forecast data for vegan male shower gel

Fixed costs £15 000

Total variable costs for 1000 units £750

Selling price £6.75

Amount spent on toiletries in last

The Sheffield College Page 23

How much would you be willing to