Mat402 Operational And Financial Management

Front 1

Question 1
d) On the basis of the results to questions (a), (b) and (c) which machine would you recommend
and give your reasons. Explain any apparent differences in the recommendations based on ratios
for each result between the machines.
[5 marks]

Back 1

The results from parts (a) and (b) show that the results are identical. The payback period and return-on-investments are the same so up till this point neither machine shows any signs of weakness compared to the other. However, in part (c) where the Net present value was calculated, it would appear that machine A is the better machine to purchase. The negative NPV from machine B indicates that purchase of this piece of machinery would lead to an investment which would subtract value from the firm, whereas machine A would add value to the firm. For these reasons I would recommend the purchase of machine A.

Front 2

Question 2
In the last ten years many manufacturing operations have outsourced some of their core activities.
a) Identify the perceived benefits associated with outsourcing.
[5 marks]

Back 2

Some perceived benefits of outsourcing are:
- offload non-core functions.
- reduce costs.
- improve speed and service.
- increase customer satisfaction.
- save on manpower and training skills.
- minimise capital expenditure.
- spread risk.
- control operating risks.
- reduce the risk of technological obsolescence.

Front 3

b) What are the risks involved with outsourcing? Include in your answer a relevant example.
[11 marks]

Back 3

Some risks involved with outsourcing are:
- the quality of the product may not be the standard you were striving for.
- it is difficult to accurately assess the reliability of suppliers.
- you do not know if you are being offered a good deal.
- what are the savings measured against.

An example of outsourcing is within the IT sector and the company API group. They specialised in packaging and security products used by consumer goods firms. In 2002 it was recorded that the firm had 1000 employees and an annual turnover of approximately £120 million. The IT budget was set at 2.5% of turnover and required 25 full time employees.

The decision was then made to outsource manufacturing in two ways:
(a) Architecture of IT systems moved to BT.
(b) Implementation of oracle on-demand involving hosting and management of hardware, software and applications.

The result of these changes produced beneficial responses:
1) IT operational costs were reduced by 40%
2) Firms experienced higher quality IT support from new suppliers.
3) External expertise better than found internally.
4) Users of the system experienced and enjoyed higher levels of service than before leading to higher productivity.

Front 4

c) Explain some of the key corporate social responsibility issues the firm (from your example in b)
has had to take into account.
[9 marks]

Back 4

When firms outsource it is important that the lowest price per unit is achieved but it should be questioned 'at what cost?' Firms should be more concerned about the impact of their products on the environment, welfare of workers, welfare of the communities they serve and the working conditions imposed.

'Low value added' mass production is in the rise in China. This major manufacturing power within the last decade has been greatly fuelled by Western firms outsourcing their production items to China. The major attractions it has to offer are the low wages and vast pools of labour. Chinese firms use OEM (original equipment manufactures) by Western firms. In 2000, outsourcing based on OEM reached $75 billion in the electronics sector alone worldwide. Chinese firms benefited hugely from strengths of western firms they supplied and obtained advanced equipment and technology. Chinese manufacturing sector grew at approximately 15% per annum. However, with the demand being so high, not everyone in China benefited. It is well known that Chinese workers are underpaid and have poor working conditions.

Should the API group wish to outsource to countries like China. It would only be deemed fair that they are provided with a decent and acceptable wage, good working conditions and the necessary safety conditions required.

In the following decision areas the following corporate social responsibilities should be taken into account:
1) Product/service design: customer safety, social impact of product.
2) Network design: employment implications of location, plant closure, vertical integration.
3) Layout of facilities: staff safety, disabled access.
4) Process Technology: staff safety, noise damage, repetitive/alienating work.
5) Job design: staff safety, stress, unsocial working hours.
6) Capacity control and planning: working hours fluctuations, relationships with sub-contractors.
7) Inventory planning and control: warehouse safety.
8) Supply chain planning and control: Transparency of cost data, prompt payments.
9) Quality planning and control and TQM: customer safety, staff safety, stress.
10) Failure prevention and recovery: customer safety, staff safety.