The Great New Zealand Carpet Bag Company. A case study

Term Paper (Advanced seminar) 2010 34 Pages

Business economics - Operations Research


Table of Contents

Executive Summary

1. Introduction
1.1. Definitions
1.1. The Case

2. Analysis
2.1. Operations objectives
2.1.1. Definitions
2.1.2. Customer Satisfaction
2.1.3. Resource Utilization
2.1.4. Relationship Customer Satisfaction and Resource Utilisation
2.1.5. Product Life Cycle (PLC)
2.1.6. Financial Obligations as foremost problem
2.2. Operating System Structures
2.2.1. Basics
2.2.2. Limitations
2.3. Capacity Management
2.3.1. Definitions
2.3.2. The Factory with its Production Unit
2.3.3. Measuring Capacity
2.3.4. Determination of Demand
2.3.5. Capacity Management Strategies
2.4. Production Scheduling
2.5. Quality Performance
2.5.1. Definition
2.5.2. Applicable Quality Standards
2.5.3. Performance Measurement
2.6. Summary Analysis

3. Policy Change

4. Implementation and ongoing Performance
4.1. Customer Service
4.2. Resource Utilisation
4.3. Capacity
4.4. Marketing
4.5. Inventory and Supply Chain
4.6. Internal Communication and Management Style
4.7. Quality and Control of Resources
4.8. Scheduling
4.9. Sustainable Performance

5. Conclusion


Reflective Statement

Executive Summary

The New Zealand based manufacturing company “The GNZCBC” in New Zealand produces high quality hand luggage. In the first three years there was a high demand for the novel product “carpet handbag”. In year four, the demand is dropping abruptly which results in high levels of debt, loss in profit and a significant stock surplus. Given the circumstances that the GNZCBC is being threatened with bankruptcy due to its failure to meet its financial obligations, this paper presents a business plan to enable the organisation to prevent bankruptcy and to achieve sustained performance. Further, the paper analyses the current situation of GNZCBC and makes recommendations to overcome past failures of the company.

Operations management objectives and current weaknesses are analyzed in Chapter 2. It is found that the foremost and immediate issue is the financial crisis, i.e. the bank is pressing for the repayment of a loan of $ 2,000,000. Further, the organisation is challenged with various difficulties such as low efficiency caused by a tremendous overcapacity in stock and an unplanned operating system structure. Hence, the performance and profitability of the company is poor.

Thus, the author will come up with a business plan to overcome the situation and turn the business around with a business policy change in chapter three. Actions consist of changing the operating system structure, closing retail shops, moving the head-office and drastically reduction in staff, input and output stock. Further, it is suggested to quit leasing contracts for storage space since they are simply not needed.

The last chapter provides the implementation of the policy change and offers recommendations for ongoing performance. Particularly, cost cuts and communication are major topics to deal with as well as the operation system structure and the total supply chain approach.

The conclusion gives an overall review and summary of the actions taken to make the company achieving lender compliance and continuing business successfully. Substantial improvement in efficient resource utilisation to draw profit and become sustainably profitable is one of the key steps. Further actions include the implementation of both Just-in-time and Enterprise resource planning systems as well as applying forecasting models while focussing on core competency. Hence, the company has got a new base of operations to start with and a basis to negotiate with the bank in order to prevent seizing.

1. Introduction

1.1. Definitions

“Operations management is the ongoing activities of designing, reviewing and using the operating system, or systems, to achieve outputs as determined by the organization” (Wright & Race, 2004, p.8). Wright and Race (2004) stated that operations management is decision-making ranging from long-term decisions such as strategic ones to short-term, day to day decisions, defined by the business policy. The business policy is in turn worked out from the mission statement, its objectives and resources leading to customer satisfaction as can be seen in Figure 1.

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Figure 1: Manufacturing operation flow system (Derived from Wright & Race, 2004, p.7)

A company’s aims are usually limited by its mission statement which was “hypothesized to be a function of an individual’s information environment, level of work unit commitment, trust in management, and organizational role” (Fairhurst et al., 1997, p.1). The mission statement should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decision-making. It provides "the framework or context within which the company's strategies are formulated" (Hill &Jones, 2008, p.11.). The reason for the existence of such a mission is customer service (Wright & Race, 2004) which in turn is the offer of goods to the customer. Operations management is responsible for the delivery of the products.

Wright and Race (2004) mentioned another restriction, i.e. the amount and quality of tangible and intangible resources as well as structure of the organization, which influences the objectives of the organisation. “The aim of operations management is to use these resources as efficiently as possible to achieve the highest level of customer satisfaction within the constraints of policy objectives, available resources and the system structure” (Wright & Race, 2004, p. 9). The mentioned elements of constraints are shown in Figure 1.

Wright and Race (2004) asserted that although there has been a shift back in manufacturing, companies should have the aim to satisfy the market as well as the customer in terms of quality since “market expectations of the level of quality are driven by perceptions of what technology is promising and by perceptions of what the competition is offering” (p. xix).

According to the above, a manufacturing operations system is the way how resources such as staff and equipment are applied and employed to transform inputs into outputs (goods). After the transformations the customer pulls the goods from the system (Wright & Race, 2004, p.9). This can be seen in Figure 2.

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Figure 2: Constraints of an operations manager (Wright & Race, 2004, p.9)

According to Wright & Race (2004), the inputs can include materials, people, and real estate and in particular cases information systems, distinguished in tangible inputs (e.g. raw materials such as carpet) and intangible inputs (e.g. human capital).

1.1. The Case

The GNZCBC-Case was taken from Wright, J. N., & Race, P. (2004). The Management of Service Operations (2nd ed.). Singapore: Seng Lee Press.

2. Analysis

This chapter will analyse the operations objectives, operation system structures, capacity management and quality assurance/control of the organisation followed by a brief overview of all findings.

2.1. Operations objectives

2.1.1. Definitions

According to Wright (2010), the two main operation objectives of an organisation are customer service and resource utilization.

According to Giltman & McDaniel (2005), customer satisfaction is a measure of how products and services delivered by a company meet or even exceed customer expectation; it is widely seen as a key performance indicator. Wright & Race (2004) stated that “customers’ expectations are influenced by what they have previously experienced, by what the competition is claiming to provide in advertisements, by what the media is saying and by the promises of technological improvements”(p. 20).

Hence, customer satisfaction should be the first target of a company in a highly competitive market accompanied by an integrated element in its business strategy. Every customer requires different features from different products from every organisation. The products offered need to meet these requirements, otherwise the product will fail in the long-term. To figure out these requirements set by the customer, companies need to install some instruments to survey the customers’ needs and desires. This is mostly done by the marketing department by means of market research. This process helps to retain existing customers as well as obtain new ones (Joby, 2003; Kessler, 2003).

Standards of quality will always be determined by the business policy, competition, stakeholders and by the factors shown above. However, there is a need to create sustainable customer satisfaction through an effective and efficient operation, i.e. use of resources in a sustainable way and the removal of non-value adding actions since resources are limited in quantity and quality; e.g. People, IT, Equipment and Machines, Raw materials etc. (Wright & Race, 2004). According to all the constraints arising in a company the overall aim should always be to generate a higher output than the input is.

2.1.2. Customer Satisfaction

Wright & Race (2004) stated that management is likely to rely on the marketing department in order to find out crucial customer satisfaction factors. However, it may happen requirements are misinterpreted. That creates a gap between what the customer wants to get and what the management expects the customer wants to get. This matches the first gap in the SERVQUAL model pointing out the difference between customers’ expectations and management perceptions of customers’ expectations (Zeithaml et al., 1988). That is why the main approach to measure customer satisfaction respectively dissatisfaction is a GAP Analysis. Basic requirement is generally specification, time and cost, i.e. meeting the customers’ expectations of what he is prepared to receive as well as availability time-wise and reasonable price setting (Wright & Race, 2004). As said, these are the basic requirements, but to gain a competitive advantage, the company must put in more effort to satisfy the customer and to retain the customer. Wright & Race (2004) stated that, additionally to specification, time and cost there is quality included to be part of the requirements; quality in this case means the two dimensions of customer satisfaction and resource utilization.

The most crucial specifications for the handbags made out of carpet are basically a bag made of a specific material (carpet) with a reasonable price to carry some typical assumed goods of a woman such as a wallet, glasses, hand cream, cell phone etc.

Since the samples, Mr Simpson took to large department stores in Auckland and overseas, triggered happiness and excitement regarding the high quality of the product itself, it can be assumed that the specification of the product is met. It can be assumed that the most appealing reason for buying it is the novelty of carpet as material for bags which is deemed to be a fashion item.

Regarding the price, it can be assumed, that the price is reasonable. Thus, Mr Simpson’s original policy is always to keep the price below the competition. He had purposely set the price at 10% below the wholesale price of other comparable bags. One drawback can be found though in the Australian stores, where the actual retail price was found to be higher than comparable products. Especially here, more effort is needed to set a new competitive price. However, large orders in the first year indicate that the launch price was not high enough and could have brought larger profit.

The initial customers are the retail stores that demand the following: Firstly, they want to have high quality fashionable bags. However, the company did not switch over to producing conventional luggage soon enough after the high demand of carpet bags plummeted. Secondly, the time line of ordered goods might be acceptable for the retailers if they could rely on it; but, the performance regarding delivery times is poor. Thirdly, since the price is below other wholesalers’ levels, the retailers are able to sell with a substantial margin. However, the price might even be too low, since the product is a high quality one.

The basic specification of the product is to provide a high quality fashion bag. Secondly, the product delivery dates need to be met. Thirdly, the price of the product is supposed to be competitive, particularly below the price level of competitors. Hence, some gaps are occurring as can be seen in Figure 3.

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Figure 3: Objectives and Gaps in the organisation GNZCBC (Derived from Wright & Race, 2010)

2.1.3. Resource Utilization

As previously highlighted, the three most important resources for the GNZCBC are plant and machinery, staff and supply.

Regarding plant and machinery, there is also scope for improvement, particularly in stockpiling. The company has proven to use inefficient and costly machinery. Additionally to its own warehouse, the company is renting some extra storage space. Generally, the plant and machinery is able to meet customer demand.

Staff is another key resource. Although the operation requires well trained staff (skilled and knowledgeable) to produce high quality products, there is significant over-staffing (currently 108 factory workers). Since orders dropped and stock of finished goods rose, this has to be addressed to reduce costs and to reallocate available tasks. Mr Chong intends to give some factory staff maintenance work. However, this can be seen as non-value adding as they are still costing the company their salaries but do not improve profit or customer satisfaction. The allocation of people can be seen in Figure 4.

Supply can be seen as a cause for not satisfied demand and missed profit due to unreliable local suppliers who hindered the production process. . That means that the timing of input of material is not suitable with the ratio of output of finished goods. That is why the system structure is changing in a negative way (see chapter 2.2.1). As a consequence, the company developed an unhealthy culture of stockpiling of raw materials, burdening the cash flow.

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Figure 4: Development of staff size according to operational area

As can be seen above, the office staff number is growing up to 95 in year five which is 42% of the whole company staff, compared to 17% at the start up. An upgrade of office staff might have been necessary due to expansion and augmented coordination demands (such as purchase of raw materials). Nonetheless, it can be assumed that, 95 employees might be unnecessary and thus, a waste of money and in turn, capacity. The ratio between head office staff and factory staff and retailers has failed. It is obvious that the administrative staff does not produce and thus, do not generate profit. Instead, they just cost money. The retail stores employ 25 staff which seems to be eligible to be reduced. Overall, resources are used ineffeciently.

2.1.4. Relationship Customer Satisfaction and Resource Utilisation

There is a relationship between customer satisfaction (CS) and resource utilization (RU) as can be seen in Figure 5.

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Figure 5: Imbalance of objectives RS and CU (Wright, 2010)

As can be seen in Figure 5, a high focus on resource utilisation causes a decrease in customer satisfaction and vice versa. In case of the GNZCBC, the overvalued focus on CS results to weak utilisation of resources. The operations managers’ task is to remain the balance between both RU and CS. The operations managers’ decisions are constrained according to the business policy which determines the concentration on both CU and RS. The operations manager is supposed to weigh up the relative priority of interfering objectives and thus, by securing an adequate level of customer satisfaction accompanied by a justified and sufficient use of resources (Wright & Race, 2004).

2.1.5. Product Life Cycle (PLC)

The original product was a novel idea when GNZCBC started. That caused a rapid increase in the demand for three years from the stage of introduction until maturity stage, followed by a dramatic drop in demand from year four (see Figure 6: product life cycle). The novelty of the product increased the profit for the company during the launch and growth stage heavily. As Wright &Race (2004) stated regarding fashion items, “growth can be explosive and decline equally rapid” (p.152). Both Chong and Simpson had no experience in the fashion industry and were not aware of that fact. They missed to get advice from launch experienced managers that could have assisted them in the forecast of demand for fashion items in each stage of the PLC. That would have had helped them to make the right decisions with regards to stockpiling. As a consequence GNZCBC has built up significant stock.



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Auckland University of Technology – Management
great zealand carpet company



Title: The Great New Zealand Carpet Bag Company. A case study