British Telecom and Order Quantity Method - Assignment Example

OpManage/ pg In March 2002 British Telecom (BT) announced it would cut the wholesale line rental fees that broadband service providers were being charged for access to BT's Wholesale Line Rental (WLR) program. This was an attempt by BT to raise the number of digital subscribers to one million by the summer of 2003. (www.findarticles.com/p/articles/mi_mOUKG/is_2002_March_4/ai_84183038) It worked. Now, however, BT must focus even more of its attention on the wholesale side of the business. This is due to the amount of residential customers it is losing to lower cost rivals. "During briefings, executives were forced to concede that more than a quarter of a million customers have defected in the past three months alone." (http://www.cwu.org/uploads/documents/RD0410208%20%20BT%20Price%20Regualtion.doc). Not only are they losing customers, the regulator OFCOM has announced that it wishes BT to lower its wholesale rates by another 9%. OFCOM rules and directives such as the one requesting BT to lower its rates by an additional 9%, is part of the evidence showing that BT must operate in a strict regulatory environment. This environment affects BT's residential as well as the WRL scenario. The way the WRL works is that BT owns the communications infrastructure. OFCOM rules have forced BT to open this communications infrastructure to low-cost rivals by renting them access at wholesale prices. These rivals such as Carphone Warehouse (Talktalk) and Onetel then supply their customers with rates that allow the companies to take advantage, and to profit, from the wholesale rates. OpManage/ pg 2 The way that BT is combating these regulatory constraints, and an environment that helps their competitors, is by offering a wider variety of services that include broadband and mobile communications. Despite the public's voracious appetite for both of these services, BT still has some huge challenges to overcome. "We're managing a transition from the old world to the new," said Karen Witts, CFO of BT Wholesale. "Traditional revenues are declining and we have to match that with new wave revenues, but these revenues have lower margins" (http://www.financialdirector.co.uk/accountancyage/features/2147006). The wholesale division of BT then will become even more important to BT's financial success throughout the next decade. Other challenges the division will have to overcome include complying with the regulations (that may differ significantly) set in other countries that they wish to do business in. BT must also be very careful of not becoming overly dominant in the marketplace. If they do, OFCOM may step in and say "you are too big." OFCOM has already ensured that BT must give their competitors equality of price and the same access to BT's fixed lines as BT's own retail business has. The telecom industry is also very competitive and highly complex. BT has met some of these challenges and continues to do so, on a daily basis. In 2005 BT set up a new access division that is called Openreach. This separate entity will report all its results as a stand alone company and will provide wholesalers with 30 million access lines. The division is comprised of 30,000 people, 8 billion in assets and is projected to show 4 billion a year in revenues. OpManage/ pg 3 BT is known as the supplier's supplier of non-cable broadband in the UK. Of the 631,000 new homes connected to its broadband lines during the past three months, only 27% of those chose an actual broadband service from BT Retail, leading to the conclusion that although BT is concentrating (and seemingly doing a good job) on its wholesale division, its more profitable retail division may need the concentration as well. (http://www.ofcom.org.uk/consult/condocs/statement_tsr/statement.pdf). Unlike BT, a local soft drink bottler has different problems to face. The soft drink bottler must consider the possible production methods that are available for use, and then choose the one that is most efficient for the company. One of these production methods, and the one that is most commonly used is the Economic Order Quantity (EOQ) method. This is a standard formula used to arrive at a balance between holding too much or too little stock. This is especially useful for companies that produce perishable products, such as a soft drink bottler. The EOQ method is complex and usually is figured by software, but the formula itself is as follows; the square root of 2 times demand times order completion cost divided by carrying cost. The mathematical formula is square root of 2DS/C. It does not take a mathematical genius to follow the formula, but the production manager must understand where the numbers come from to plug into the formula. To achieve the highest rate of productivity the manager must use the correct numbers. To determine which numbers those are, you must look for the following items; 1). The number of items per order is the quantity (Q). OpManage/ pg 4 The number of the items that can be sold is D. D may be the forecast demand for that particular good. The cost of placing the order is used for S. The final number to find is the carrying cost (C) which is the cost of the items held in inventory. The reason why EOQ is so popular is that (with few exceptions) the model always works. If there are no savings an error in the calculations may have occurred or the model does not fit the case. Another instance that will affect the EOQ is if a discount is offered. A discount will cause the basic EOQ model to fail. To use a discount in determining a EOQ you must use the EOQ model with quantity discounts. Http://www.acm.ndsu.nodak.edu/slator/restaurant/questions/ques.html). As an example of how EOQ works for a soft drink bottling company the following scenario is presented. The production manager must first ascertain two factors in determining how much or how little product to use. To determine these numbers he must look at past figures and future forecasts. In Coca Cola's annual report is shown a number of different divisions of drink. Soda sales are measured by both volume and variety. Sales volume is measured in two ways, by gallons and by unit cases of finished products. Gallons are actually a unit of measurement for concentrates. Unit cases are measurements of syrups, finished beverages and powders, with most of the revenues based on gallon sales. (Coca-Cola Annual Report, 2005). The report continues by comparing sales from various years, by various countries, and by the different variety. This comparison can help the production manager to produce product with more efficiency and in a more timely manner. OpManage/ pg 5 Another interesting aspect of the annual report was that it noted a percentage decrease in sales due to two less shipping days in the year. It also forecasted a percentage increase in 2006 due to one more shipping day in the year. These are all events that the production manager must keep in mind if he is going to accurately produce enough (and not too much) product. "Since the early 1970s, production planning systems have evolved from material requirements planning (MRP) through manufacturing resource planning (MRPII) into enterprise resource planning (ERP) with simultaneous development of related control systems such as theory of constraints (epitomised by OPT), just-in-time (JIT), etc. One key area for all manufacturing companies is the planning and control function. The difficulty experienced by many companies is not only in examining available software, but also in understanding the match between business needs and the capabilities of that software (http://www.ingentaconnect.com/content/mcb/068old/1999/00000010/00000004/art00001). Using software to efficiently integrate the volume-variety production method is a common sense approach to business, and one that the soft drink bottler should do immediately. The soft drink bottler needs to consider what type of production would work best for the business. Judging between high volume production and high variety production is part of the process. High variety manufacturing is usually at the opposite end of the spectrum when compared to high volume production. OpManage/ pg 6 A soft drink bottler would probably have to integrate the two methods in such a way as to provide high volume for the more favorite drink flavors and lower volume for the drink flavors that do not sell as well. When we compare soda bottlers to a factory that produces chocolate, we find many similarities but also many differences. Those are a couple of the things that a chocolate factory production manager must consider when putting together a stock control method. For a chocolate factory manager who wishes to reduce the uncertainty of raw materials supply during its optimum usage EOQ is probably best. The Just in Time (JIT) method would not work because the supply of raw material during the highest usage time of the year may not be possible. JIT is a method that allows for very little inventory carrying costs because the producer is delivering the products "just in time". A soft drink bottler could probably accurately forecast the usage or production needed and decide on how much raw material it would need to accomplish such efficient production well in advance, as would the chocolate factory. The difference between the two would be that the soft drink components lasts for a lot longer time than does the raw material to make chocolate. JIT only orders product as it is needed, not months in advance. Many people assume that JIT means that all the components to manufacture a product should arrive "just in time". This is true but only in part. "JIT is actually a quality initiative with the goal of eliminating wasted steps, wasted labor and wasted cost." http://www.inventoryops.com/economic_order_quantity.htm). EOQ can actually be used in conjunction with JIT, because EOQ is used to determine which components fit into the JIT model, and it would certainly be cost effective to do so. OpManage/ pg 7 Another method that may not work as well as JIT or EOQ, (although it seems like a great idea for companies in general) is Total Quality Management (TQM). TQM infers a common sense approach to improvement in quality of the entire business environment. Popplewell states the following; "TQM seeks to involve every employee in the process of improvement to achieve new standards in product and customer service and to reduce wasted effort." http://members.aol.com/AllenWeb/terminal.htm#Total. It's a great concept for business that are seeking to improve their operations overall, but how it would be justified in using it in producing soft drinks in a timely manner is pretty obscure. It does little to guarantee a success in bottling drinks in a cost effective manner. So we are back to the EQM for the soft drink bottlers use. To use EQM the bottler must remember to have accurate product costs, activity costs, forecasts, history, and lead times. These are all crucial in making an inventory model like EOQ work efficiently. If the soft drink bottler can assimilate the correct material into the program it should work best for that particular entity. (http://www.inventoryops.com/economic_order.htm). The quality characteristics of a soft drink bottler, or a chocolate factory is very different than what constitutes quality characteristics for the service sector. The service sector must satisfy customers immediately. An example of a quality characteristic for a hotel would be its Housekeeping department. This department must ensure that its customers are happy with the way the rooms are cleaned on a daily basis. OPManage/ pg 8 At the Hillside Hotel is an Executive housekeeper that wishes to establish a quality control program. She wishes to ensure that the employees work efficiently and effectively. She uses the following chart to implement her strategy. Sample Day Average Rooms # Observations Range 1 2.5 10 1 2 3 10 1.1 3 2 10 0.8 4 2.8 10 0.8 5 3 10 1.1 Total 13.3 50 0.8-1.1 Mean 2.66 2.12-2.92 She decides that if each housekeeping employee can average 2.66 rooms per hour the entire department will achieve efficiency. She implements a program that sets goals for her employees at 2.66 rooms per hour per employee. If they hit this mean figure then they will be rewarded with a scaled bonus that is graduated based on the mean and raising to the high range of 2.92. If the employees do not achieve the mean then they will receive demerits on a graduated scale all the way down to the low end of the range (2.12). If they receive to many demerits during the month they will be put on probation. If the problem continues then the effected employee can be discharged. This is one way to give the good employees incentives to do even better, while placing the employees that are lazy or are not doing their jobs in a situation where they can be replaced. OpManage/ pg 9 REFERENCES http://www.cwu.org/uploads/documents/RD0410208%20%20BT%20Price%20Regualtion.doc accessed Jan 30, 2006 www.findarticles.com/p/articles/mi_mOUKG/is_2002_March_4/ai_84183038 accessed Jan 30, 2006 http://www.financialdirector.co.uk/accountancyage/features/2147006.) accessed Jan 30, 2006 http://www.ofcom.org.uk/consult/condocs/statement_tsr/statement.pdf. accessed Jan 30, 2006 Http://www.acm.ndsu.nodak.edu/slator/restaurant/questions/ques.html). accessed Jan 30, 2006 Coca-Cola Annual Report, 2005. pg 8-10 http://members.aol.com/AllenWeb/terminal.htm#Total, accessed Feb 1, 2006 http://www.inventoryops.com/economic_order_quantity.htm) http://www.ingentaconnect.com/content/mcb/068old/1999/00000010/00000004/art00001 accesses Feb 1, 2006 http://www.uoguelph.ca/dsparlin/Process.htm accessed Jan 31, 2006 Read More