Case Analysis

 

Critical thinking, creativity, and problem-solving are among some of the top skills needed by employers in the supply chain industry. This assignment will stretch your critical thinking, require research, and allow you to utilize your problem-solving skills to recommend solutions. The purpose of this assignment is to synthesize, research, and propose your own solution to the attached case.  

Use your resources to best assist you located here:

https://www.youtube.com/watch?v=ZuQ200JAViA

https://www.youtube.com/watch?v=MxyQKUzvuhA

Identify and thoroughly understand a relevant business problem, issue or goal. Your first step in creating a successful business case is to clearly identify the business problem, issue or goal that your business case will address. Hold a brainstorming session with your business's decision makers and managers in order to understand the problems that arose and the business goals surrounding the problems.^[1]

• It is crucial to clearly define the problem and parameter of the solution. There should be an agreement about the scope between the person authorizing the business case and those who will execute analysis.
• Justification for the project could be based on the benefits to business operations, strategic direction goals, and/or cost benefit analysis.

Brainstorm about potential options for resolving the business case problem, issue or goal. Both during, and after your initial business case brainstorming session, you should discuss potential solutions and plans with key personnel and management. Identify multiple options for implementing your business case plan in order to determine the most feasible option for resolution.

 

• For example, if the business case plan revolves around entering a new market, there should be a brainstorming session held in order to determine that different marketing strategies required to make the new market entry a success.
• Don't just go off and write the business case independently, because successful approval and implementation is dependent on support from relevant business stakeholders and managers.

 

Review your business's mission statement. Once you have identified potential business problems, issues or goals, and potential options for resolution, you should briefly review your business' mission statement. A well-drafted mission statement should have been created during the initial business planning process, and typically includes a brief explanation of the business's objectives, competitive/market advantages and a short explanation of the business's philosophies and goals. Consider whether your business case is in-line with the mission statement in terms of complying with and furthering business goals, objectives and philosophies.^[2]

• Reviewing the mission statement can allow you determine whether the business case and proposed resolution options further the ultimate mission and goals of the business.
• In most cases, you will be following the directions of a superior whose responsibility is to confirm compatibility between mission and the alternative solutions you provide.

Determine who should write the business case. Typically, one or two people take on the duty of writing a business case. With just one or two writers, the tone and style of the business case will remain consistent. The writer(s) should have knowledge and expertise regarding relevant business operations, and must be open to accepting input from other team members and business leaders.

Write down the problem statement. This statement should provide a straightforward explanation of the identified business problem or issue, and discuss the business areas that the business case must address for successful implementation.^[3]

• Use the first sentence of the problem statement to concisely present the problem, issue or goal that the business case seeks to resolve. For example, if the business problem is the need to generate additional lines of revenue the problem statement should begin with a statement that: "[Insert business name] is interested in expanding its current revenue stream by [business case's proposed answer to the business problem]."
•  
• Get the approval of those requiring the report before continuing.
• Create a proposed solutions statement. Express the projects and options proposed by the group as a solution to the business problem, goal or issue. Explain in detail how the proposed change/plan addresses and resolves the problem, issue or goal. Include what should be accomplished by implementing the proposed business case plan.
• Indicate what is needed to implement the solution or project, including items like a monetary budget and increased labor numbers. Anything that is needed to complete this solution should be explained in the proposed solutions statement.
• Explain the methods used, and the research conducted in order to come up with the business case plan's proposed options.
• Include information about meetings with surveyed departments and target audiences.

The 10/20/30 Rule of PowerPoint

I suffer from something called Ménière's disease—don't worry, you cannot get it from reading my blog. The symptoms of Ménière's include hearing loss, tinnitus (a constant ringing sound), and vertigo. There are many medical theories about its cause: too much salt, caffeine, or alcohol in one's diet, too much stress, and allergies. Thus, I've worked to limit control all these factors.

However, I have another theory. As a venture capitalist, I have to listen to hundreds of entrepreneurs pitch their companies. Most of these pitches are crap: sixty slides about a "patent pending," "first mover advantage," "all we have to do is get 1% of the people in China to buy our product" startup. These pitches are so lousy that I'm losing my hearing, there's a constant ringing in my ear, and every once in while the world starts spinning.

To prevent an epidemic of Ménière's in the venture capital community, I am evangelizing the 10/20/30 Rule of PowerPoint. It's quite simple: a PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. While I'm in the venture capital business, this rule is applicable for any presentation to reach agreement: for example, raising capital, making a sale, forming a partnership, etc.

Ten slides. Ten is the optimal number of slides in a PowerPoint presentation because a normal human being cannot comprehend more than ten concepts in a meeting—and venture capitalists are very normal. (The only difference between you and venture capitalist is that he is getting paid to gamble with someone else's money). If you must use more than ten slides to explain your business, you probably don't have a business. The ten topics that a venture capitalist cares about are:

1. Problem
2. Your solution
3. Business model
4. Underlying magic/technology
5. Marketing and sales
6. Competition
7. Team
8. Projections and milestones
9. Status and timeline
10. Summary and call to action

Twenty minutes. You should give your ten slides in twenty minutes. Sure, you have an hour time slot, but you're using a Windows laptop, so it will take forty minutes to make it work with the projector. Even if setup goes perfectly, people will arrive late and have to leave early. In a perfect world, you give your pitch in twenty minutes, and you have forty minutes left for discussion.

Thirty-point font. The majority of the presentations that I see have text in a ten point font. As much text as possible is jammed into the slide, and then the presenter reads it. However, as soon as the audience figures out that you're reading the text, it reads ahead of you because it can read faster than you can speak. The result is that you and the audience are out of synch.

The reason people use a small font is twofold: first, that they don't know their material well enough; second, they think that more text is more convincing. Total bozosity. Force yourself to use no font smaller than thirty points. I guarantee it will make your presentations better because it requires you to find the most salient points and to know how to explain them well. If "thirty points," is too dogmatic, the I offer you an algorithm: find out the age of the oldest person in your audience and divide it by two. That's your optimal font size.

So please observe the 10/20/30 Rule of PowerPoint. If nothing else, the next time someone in your audience complains of hearing loss, ringing, or vertigo, you'll know what caused the problem. One last thing: to learn more about the zen of great presentations, check out a site called Presentation Zen by my buddy Garr Reynolds.

 

Use this spreadsheet to assist in your decision-making:

Revenue
Base sales volume	82,400
Average selling price	$98
Gross Margin	35%
Customer satisfaction factor - Generally positive reviews increase year over year sales. - Overly negative reviews reduce year over year sales. - Neutral reviews keep sales volume flat.	10%
Neutral Reputation Based on Reviews	Y1	Y2	Y3	Y4	Y5
Forecast - Units Sold	82,400	82,400	82,400	82,400	82,400
Marginal Revenue	$0	$0	$0	$0	$0
Change to Gross Margin	$0	$0	$0	$0	$0
Positive Reputation Based on Reviews	Y1	Y2	Y3	Y4	Y5
Forecast - Units Sold	82,400	90,640	99,704	109,674	120,641
Marginal Revenue	$0	$807,520	$888,272	$977,060	$1,074,766
Change to Gross Margin	$0	$282,632	$310,895	$341,971	$376,168
Negative Reputation Based on Reviews	Y1	Y2	Y3	Y4	Y5
Forecast - Units Sold	82,400	74,160	66,744	60,070	54,063
Marginal Revenue	$0	-$807,520	-$726,768	-$654,052	-$588,686
Change to Gross Margin	$0	-$282,632	-$254,369	-$228,918	-$206,040
Replacement Parts to Purchase (Reputation based on failure rate)	Y1	Y2	Y3	Y4	Y5
Neutral reputation	2,060	2,060	2,060	2,060	2,060
Positive reputation	824	906	997	1,097	1,206
Negative Reputation	3,296	2,966	2,670	2,403	2,163

 

What will this scenario do to the product's reputation?	Negative
	Year 1	Year 2	Year 3	Year 4	Year 5
Capital Expenditures
None
Total Capital Expenditures	$0	$0	$0	$0	$0
Gross Margin Impact	$0	-$282,632	-$254,369	-$228,918	-$206,040
Acquisition Expenses
Cost of imported items	$453,200	$407,880	$367,092	$330,385	$297,347
Cost to ship imported items	$82,400	$74,160	$66,744	$60,070	$54,063
Replacement stock for defects	$18,128	$16,313	$14,685	$13,217	$11,897
Cost to ship replacement items	$39,552	$35,592	$32,040	$28,836	$25,956
Total Acquisition Expenses	$593,280	$533,945	$480,561	$432,508	$389,262
New Expenses
Depreciation
Production Labor
Additional Warehouse Space
Customer Service staff	$31,200	$31,200	$31,200	$31,200	$31,200
Total New Expenses	$31,200	$31,200	$31,200	$31,200	$31,200
Pre-Tax Income Impact	-$624,480	-$847,777	-$766,130	-$692,626	-$626,502
Cumulative Pre-Tax Income Impact	-$624,480	-$1,472,257	-$2,238,387	-$2,931,013	-$3,557,515
Cash Flow Impact	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Cumulative Cash FlowImpact	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!

 

What will this scenario do to the product's reputation?	Neutral
	Year 1	Year 2	Year 3	Year 4	Year 5
Capital Expenditures
None
Total Capital Expenditures	$0	$0	$0	$0	$0
Gross Margin Impact	$0	$0	$0	$0	$0
Acquisition Expenses
Cost of imported items	$535,600	$535,600	$535,600	$535,600	$535,600
Cost to ship imported items	$82,400	$82,400	$82,400	$82,400	$82,400
Replacement stock for defects	$13,390	$13,390	$13,390	$13,390	$13,390
Cost to ship replacement items	$24,720	$24,720	$24,720	$24,720	$24,720
Total Acquisition Expenses	$656,110	$656,110	$656,110	$656,110	$656,110
New Expenses
Depreciation
Production Labor
Additional Warehouse Space
Customer Service staff	$15,600	$15,600	$15,600	$15,600	$15,600
Total New Expenses	$15,600	$15,600	$15,600	$15,600	$15,600
Pre-Tax Income Impact	-$671,710	-$671,710	-$671,710	-$671,710	-$671,710
Cumulative Pre-Tax Income Impact	-$671,710	-$1,343,420	-$2,015,130	-$2,686,840	-$3,358,550
Cash Flow Impact	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!
Cumulative Cash FlowImpact	#VALUE!	#VALUE!	#VALUE!	#VALUE!	#VALUE!

What will this scenario do to the product's reputation?	Neutral
	Year 1	Year 2	Year 3	Year 4	Year 5
Capital Expenditures
Equipment	$340,000
Installation	$10,000
Total Capital Expenditures	$350,000	$0	$0	$0	$0
Gross Margin Impact	$0	$0	$0	$0	$0
Acquisition Expenses
Cost of imported items
Cost to ship imported items
Replacement stock for defects	$13,390	$13,390	$13,390	$13,390	$13,390
Cost to ship replacement items	$24,720	$24,720	$24,720	$24,720	$24,720
Total Acquisition Expenses	$38,110	$38,110	$38,110	$38,110	$38,110
New Expenses
Depreciation	$70,000	$70,000	$70,000	$70,000	$70,000
Production Labor	$166,400	$166,400	$166,400	$166,400	$166,400
Additional Warehouse Space
Customer Service staff	$15,600	$15,600	$15,600	$15,600	$15,600
Total New Expenses	$252,000	$252,000	$252,000	$252,000	$252,000
Pre-Tax Income Impact	-$290,110	-$290,110	-$290,110	-$290,110	-$290,110
Cumulative Pre-Tax Income Impact	-$290,110	-$580,220	-$870,330	-$1,160,440	-$1,450,550
Cash Flow Impact	-$570,110	-$220,110	-$220,110	-$220,110	-$220,110
Cumulative Cash FlowImpact	-$570,110	-$790,220	-$1,010,330	-$1,230,440	-$1,450,550

introduction

 

This case uses a marginal analysis of several options that will solve a problem. It takes revenue and expenses that are affected by the problem and ignores those that are not affected. It's a common way to focus on the impact of a decision without information that can cloud the issue.

 

This should not be confused with an income statement even though it is in the same format. A full profit and loss statement includes all revenue, direct production expenses that lead to a gross margin, general and administrative expenses, and taxes. This analysis is likely to have you choosing a solution based on the lowest cost. Revenue is a factor in terms of how supply chain activities affect it. 

 

Read the case, and review the analysis spreadsheet. Focus on the forecast first with emphasis on the financial impact of quality issues on a company's sales over and above the scrap, rework, and product replacements that poor quality creates.

 

Note that each option's spreadsheet has the exact same rows. Rows are populated with values when they apply to the option and are blank when they do not apply. This preempts management questions at presentation time. "Where's (fill in the blank)?" has sidetracked many a presentation to management.

 

Background

 

You are the Director of Purchasing at Endurance Products, Inc. Endurance produces and distributes compact, attractively priced exercise equipment. The company's mission is:

 

Outperform the competition through successful partnerships while maintaining effective communication, consistency, superior service, and honest, active marketing programs. Stamina Products Inc. will continue to pursue excellence. Whether it's the design of our equipment or our exceptional customer service, we are truly dedicated to building a healthier, stronger you.

 

You supervise production of the Endurance folding exercise bike with a built-in heart rate sensor. The bike, which has a suggested retail price of $98.00 at Walmart, Amazon, QVC, and various other outlets, is popular among apartment dwellers and others with limited space for storing exercise equipment. The gross margin on the bike, 35%, isn't spectacular; but it's a profitable product that will contribute more as sales grow because there will be no incremental G&A expenses tied to growth for the foreseeable future.

 

Figure 1: Endurance Exercise Bike

The product requires simple assembly by the consumer. The frame is ready to use after the pedal box, the seat, and the handles with sensors and the heart rate monitor are attached. Total time to unpack and assemble the bike is 25 minutes for most buyers.

 

Price, which is significantly lower than competitors' folding bikes, is Endurance's competitive advantage for this product. However, consumers of fitness equipment demand quality even at the low end of the market.

 

Demand

 

Endurance shipped 82,400 folding bikes in the fiscal year that just ended on January 31, very close to its forecast. An increase in the upcoming year is unlikely due to some recent quality issues that must be addressed, so a volume increase is not in this year's forecast.

 

Demand was distributed evenly month by month with one exception. New Year's resolutions caused January to account for 20% of a year's total sales. Timing of shipments for January sales always is the key to capitalizing on the demand spike. Retail outlets are preoccupied with holiday related sales through December 25th. They do not want to add inventory until then; but when December 26th arrives, they want three weeks of steady delivery to match demand.

 

Endurance ships approximately 6,000 units per month February through December. It ships just over 16,000 at the end of December and into January. The company analyzed the costs and risks of matching production to demand and decided to produce at a constant monthly rate instead. Bikes are packaged and stored in a nearby warehouse. The growing inventory is depleted when the January demand spike occurs. The warehouse space costs $0.25 per square foot per month plus $0.10 per square foot for utilities. To date, Endurance has not used more than 30% of the facility's 50,000 square feet of space.

 

Process

 

All parts of the bike are imported from non-US suppliers to be packaged and shipped from Endurance's Indiana operation. The only assembly performed in Indiana is attaching the heart monitor to the hand handles. Endurance packed those two parts separately and had consumers join them, but that process proved challenging for many users. Providing the pre-assembled handle-monitor part preempted warranty claims, eliminated the need to have a tech service team, and increased customer satisfaction as shown in sellers' product ratings.

 

Frames, hand handles, and the pedal assemblies are made in Mexico. Frames and handles are made by The Permaneo Company in a former auto parts factory outside of Mexico City. Pedal assemblies are made by Aguante Enterprises of Ciudad Juárez, a joint venture of The Permaneo Company and El Paso's Might-Could Enterprises. Both businesses have been reliable, low cost providers.

 

The heart rate sensor was made in China through January of 2019; but after six months of 25% tariffs with no end in sight, Endurance decided it no longer could absorb the extra import cost on such a tight margin product. Several potential suppliers bid on the contract; and a Malaysian company, Ketahanan Industries, won the business.

 

Problems

 

The change to Ketahanan Industries as the source for heart rate sensors has not met expectations. Ketahanan produced the assembly for $5.50 per unit, $1.00 less than the next lowest cost bidder. Shipping cost is $1.00 per item, the same as it was when it was shipped from China. The problem is that nearly 4% of the sensors stopped working within 90 days of use. The failure rate had been less than 2% when they were made in China. Endurance replaces failed sensor units at no charge.

 

Because online reviews are disproportionately filed by dissatisfied customers, the folding bike's ratings fell. On Amazon, for example...

 

 

 

 

Table 1: Ratings of online reviews

Rating	Before Ketahanan	After Ketahanan
5 star	70%	53%
4 star	15%	17%
3 star	15%	10%
2 star	0%	10%
1 star	0%	10%

 

Marketing data suggests that high and low ratings influence sales either positively or negatively by 10% of the year's forecast.

 

Endurance has the right to deduct the cost of defects identified through its packaging process; but because bikes can be stored in the warehouse for up to 11 months before they're sold and it will take time after that for sensors to fail in the field, there is no provision for recovering the cost of items that fail months after delivered.

 

Students' Assignment

 

As the director of Purchasing, you will lead the team that will recommend the course of action Endurance will take to address this supplier induced quality issue. The team will consider the following three options.

 

1. Stock replacement parts and add one person to the customer service team to handle the complaint calls, package replacements with directions, and quickly ship them to customers.

 

• Shipping the replacement part costs $12.00.
• Customer service reps earn $15/hour including benefits.

 

1. Take the business to the company that bid $6.50 when you selected Ketahanan Industries.

 

• You can expect to get a failure rate reduction to 2.5%.
• You will continue to replace failed parts at the lower failure rate with a part time customer service rep who works 20 hours/week.

 

1. Make the sensors yourself using space in the warehouse currently used for storage. Facts about this option:

 

• This will require a 3400,000 capital expenditure for equipment plus $10,000 for installation and testing before the operation goes live.
• Inbound shipping cost will be eliminated.
• The highly automated production process will require only 4 full time employees who will earn $20/hour including the cost of benefits which adds 25% to the hourly wage rate.
• The failure rate will be under 1%.
• The operation will take 50% of the warehouse space leaving room to store packaged bikes until annual sales exceed 110,000 units. Then Endurance will have to acquire another 20,000 square feet of warehouse space, the minimum available at any given time.

 

Questions

 

1. Each spreadsheet has a question at the top of the page. It asks, "What will this scenario do to the product's reputation?" All are set to a default of "Neutral" in cell B1. Which option is best when all of them are set to neutral?

 

1. Now choose a response (Neutral, Positive, or Negative) for each option based on what you read in the case, and respond to the following:

 

• Explain why you chose as you did.
• Based on how you assigned an impact to the product's reputation, which option is the best one? Why?
• Compare options 1 and 2. What was the impact of changing to the more expensive supplier? Why did that happen?

 

1. If your CFO tells you that the primary goal for the next year is to conserve cash, which option will you recommend? Why?

 

1. If there are no financial restrictions, which option will you recommend to management? Why?

Transcribed Image Text:

PARE PARE