Operations Management of the Royal Mint - Case Study Example

Chelladurai P., VLBJCAS., April 20, 2007 “The Royal Mint Case study” Q1.What is the concept of Mint’s Products? Basics Product form This refers to the selling of the same product but at various prices. Consider mineral water for example. The packaged mineral water in can costs $10 and the same mineral water in bottle costs $5 and in packet costs $2. Here, at least the quantity varies but in some cases, the quantity remains the same or even less but charged more. This is also referred to as Product form pricing. In the Royal Mint case, the company mints coins of various countries and the product forms vary considerably. i.e. the material needed for minting euro, pound or dollar coins are the same but the pricing is as per the face value of each currency. This is the product form concept. Some of the concepts applied in Mint’s Products are: Economies of Scale The Objective of Royal Mint is to provide the Government with coinage at a competitive price. It is clear that Royal Mint wants to establish itself as a low cost producer through economies of scales i.e. Mass Production at a reduced cost. Forecasting Demand Companies plan and forecast the demand according to the future needs of the market. Forecasting demand assists in decision making with respect to investment in plant and machinery, market planning and future sales. Some of the popular forecasting methods include Time series methods Judgmental Techniques Causal methods (Econometric forecasting) In this Case, Royal Mint Estimates the demand on Time series basis. In the UK, the Treasury contracts with Royal Mint on an annual basis for the likely requirements for coin in 12 months. The Mint meets every three months with executives from the UK clearing banks to discuss their currency requirements in the shorter term. These estimates are then updated at weekly planning meetings and the demand is forecasted and Royal Mint follows a Just in time work schedule. Based on these estimates, the raw material is procured and safety stock is maintained. Agile manufacturing/Just-in-time production This explains the production process of Royal Mint. The Manufacturing process is flexible and can run to produce any of the UK and most overseas coins without long change over periods. Agile manufacturing is the ability to accomplish rapid changeover between the manufacture of different assemblies. Rapid changeover is further defined as the ability to move from the assembly of one product to the assembly of a similar product with a minimum of change in tooling and software. Rapid changeover enables the production of small lot sizes, allowing for `just-in-time production. Inventory Control – Safety Stock Inventory control is a planned approach of determining what to order, when to order and how to order and how much to stock so that costs associated with buying and storing are optimal without interrupting production and sales. Safety stock is an important measure to be calculated regarding inventory. This ensures efficient purchasing, storing, consumption and accounting for materials. This also ensures that there is no shortage of product and there is adequate supply of product to customers. This improves delivery time and increases the reliability measure of a company. Inventory Control must be established to avoid huge accumulation of inventory. The Order level and Order quantity must be estimated prior to avoid shortages and reduce the customer lead time. These estimations in practical aspects are not accurate to the core. The estimations might be either higher or in some cases below the exact demand. To avoid this discrepancy, Safety stock is determined. In order to ensure that additional stock is maintained to meet the customer demand, the Safety stock level can be calculated as per the following formula. Safety stock = (Maximum Lead time – Normal Lead time) * Consumption rate Q2.Explain the criteria which the Mint will need to take into account when it designs new coinage. The criteria which the Mint will need to take into account when it designs new coinage are: Procurement of raw materials or Increased Price of Raw materials Production process Machine Maintenance (Breakdown and deterioration) Problems Cash flow problems Quality Management Problems Material Wastage and scrap Increased analysis and repair More working process inventory More Inspection and testing hours Increased cost of goods/services More Process Bottlenecks Delay in shipment of materials Stamping Changing the content or composition of coinage Inventory Problems Overtime – Labor Problems Criteria Explanation or Potential Costs Inventory Costs Inventory Holding/Carrying Cost including cost of money, cost of insurance, warehouse occupancy costs, additional handling costs and repairs caused by crowding will be on the rise Purchase or Production cost becomes significant when availing price discounts. The cost per unit held in inventory will suffer a loss due to high price discounts that the company has to provide its buyer to move its products Capital cost is the opportunity cost that a company foregoes in maintaining inventory. The cost incurred in maintaining inventory could be invested elsewhere to make a profit. Ordering or procurement or acquisition or Replenishment cost including Transportation costs. This takes into account all costs incurred from calling the quotations to the point at which the items are taken to stock. The cost of placing an order varies from one organization to other. Shortage cost includes back order costs, Loss of future sales, Loss of customer goodwill. In this case, this is absent. Increase in Labor Cost due to Overtime High Operating Cost leading to low profits Profit = Revenue – cost. Here if cost increases, Profit decreases. Gross Margin Return of Inventory is an effective measure to keep track of Inventory. It indicates the benchmark figure of a particular company’s Inventory level. Replacement Costs on the rise due to poor quality Quality Costs Cost of control Prevention costs include Quality planning and Engineering, New product review, Product and process design, Process control, Cost of Burn in tests, Quality training and workforce development. Appraisal costs include Testing and Inspection. Cost of Failure of control Internal failure costs include Scrap, Rework, Retest, Failure Analysis, down time, Yield losses and down grading. External failure costs include Warranty Charges, Complaint adjustment, Returned product/material and Liability costs. Disadvantages or possible outcomes if raw material price increases Slows down the inventory turnover Depletes valuable storage space Reduces return on investment. Low profitability, low revenue Low productivity Decline in market share Lower Customer satisfaction Changing the content or composition of coinage In order to overcome the aforesaid pitfalls especially to combat increase in price of raw materials, Royal Mint had changed the composition of new coins. The major issue has been the threat of intrinsic raw metal cost exceeding the face value of the coin: something which has been most prevalent in those countries facing high inflation and which leads to coinage being withdrawn from circulation by those wishing to capitalize on the return available from the base material. In the UK, the smaller denominations were reaching that point and the Mint had to change the composition of that 2P and 1P coins to a steel core with an electroplated copper outer layer. This reduced the unit cost of the coin and also added to its expected life time because it used a less expensive base metal. This new format of coin represents the biggest change in the manufacturing process of coins to occur over the past few years and the pioneering of the electroplating technique whereby a mild steel core is electroplated with copper and nickel or brass resulted in a process which will aid the conservation of materials. The reduction in costs is also being achieved without a noticeable reduction in the recognized value of the coin. Another consequence of the electroplating procedure is that the coins have magnetic properties due to the presence of the mild steel core and this has caused initial problems for vending machine manufacturers. So the content change is having problems and these have to be rectified and content or composition has to be changed to maintain the place of Royal Mint with the same features of the previous coinage. The end customers mustn’t experience any drastic changes in the coin usage or experience any problems as mentioned above. Q3) How might the concept of simultaneous design be applied in the design of coinage? Simultaneous design or engineering: Reducing lead times in the manufacturing process or service delivery system has already been highlighted as an increasingly important order-winner. Similarly, speed to market with new product/service designs and developments is becoming a significant competitive factor in today’s markets. The increasing priority of speed is based on the recognition that it can simply negate the competition. Reducing the length of each step The steps involved in designing a new product/service or system systematically reviewed in order to find ways to complete the work in less time. This includes a systematic review of work methods and the setting of target times for completing the tasks involved. In many companies, stages in product/service developments have been traditionally scheduled to be undertaken on a sequential basis (i.e. step2 starts when step1 is completed and so on). However, by reviewing each set of tasks, companies find that one step can infact be started before the previous step is completed? The reduction of overall lead time can be dramatic. The principle which leads companies to change, where possible, from the sequential to a parallel format in completing some or all steps in the development processes known as Simultaneous or Concurrent Engineering. Application to Royal Mint From the case, the process can be approximately formulated as follows 1.1 Coinage Manufacturing Process Raw Metal Blank coin Stamping Edges Milling Finalizing Source: Primary Simultaneous Design can be applied to Royal Mint only to the sub processes. The Main processes of Raw material to Blank coin to Stamping die to Edges Milling and Finalizing could be done only sequentially as after the completion of one step only the next step could start for different countries currencies. However, through economies of scale concurrent or simultaneous design could be applied to the sub processes. i.e. converting the raw material to Blank metal needs a lot of sub steps like heating, molding, cutting etc. These processes can be done concurrently like first cutting and then molding or vice versa. This might be one of the ways of applying Simultaneous Design to the design of coinage. Q4) a) Assuming that the UK government opted to join the Euro, Outline the impact this would have on Royal Mint. Change in manufacturing process design Estimating the coinage demand quite accurately Enhanced Inventory control Improved quality Faster stamping and minting of coins compared to the present scenario Efficiency would improve A new plant for minting currencies other than EURO to be established Increased orders Higher Profitability More Economies of Scale Strategy change b) Discuss the Royal Mint Strategy responses to this development. Make or Buy decisions The most popular decision that a Business takes to cope with the fluctuating demand is whether to Make or Buy. A business must analyze their various costs of production involved in producing a product and compare it with cost of buying the product from an external supplier. If the cost of buying is less than cost of producing the product, then companies can opt for buying the product. This could be extended to each phase of the production cycle. From the experience curve of Royal Mint, Make vs. Buy decisions are to be made. Considering the manufacture of coins, it includes various phases of production cycle. Royal Mint can adopt the ‘Make or Buy’ Concept here. Royal Mint must analyze the various phases of its production cycle and arrive at the costs of each phase. From this analysis, Royal Mint would be able to find which production phase reduces overall production and the cost associated with it. Now outsource this phase to a niche player, who is good at this part of production phase till the contract finishes. This would reduce the Cost of production for Royal Mint considering Overtime Man hours, Machine breakdowns, Wear and tear, scraps, reduced development and production life cycle and minimizing Inventory, material handling and non-value added costs. Another Option is to establish a separate unit for minting Euro coins and adopt the simultaneous design for the manufacturing process as depicted in the following diagram 1.2. Adopting these strategies would make Royal Mint a competitive cost leader and attain its objective “To provide the Government with coinage at a competitive price”. 1.2 Coinage Manufacturing Process for Mint’s Euro Plant Raw Metal Blank coin Stamping Edges Milling Finalizing Source: Primary References: 1) Telsang, Martand. Production Management, S. Chand First Edition, 2005. pg. 70-75, 140-154, 218-228. 2) Terry Hill, The Essence of Operations Management, Prentice Hall of India, 1995. Pg. 29-31. 3) www.findarticles.com 4) www.furninfo.com 5) www.valuebasedmanagement.net 6) http://en.wikipedia.org/wiki/Computer-aided_design Read More