Operational Management Issue - Cadbury - Assignment Example

Operational Management Issue - Cadbury Executive Summary In broad perspective operations management signifies the issues that are related to the capacity planning and the process planning with the aim to increase the efficiency and reduce the cost. The report will analyse a case study of Cadbury and will deal with the main concerns of the managers in choosing the conventional conch and the new technology conch process. It will try to throw light on the differences in the flexibility between the two conch machines. It will also try to explain the effort made by the company to compete for sales of its various chocolate products. The report will further proceed with a short note upon the implication of the Kraft takeover of Cadbury for the capacity. In order to support the views on the key operational issue of Cadbury, various theories, principles and techniques will be discussed in operational management. Finally the report will cater recommendations for the choice of the appropriate equipment that can better serve the purpose of the company. Table of Contents Brief Discussion of the Relevant Operations Management Theories, Principles, and Techniques 3 The Main Concerns When Choosing Between the "Conventional" Conch and the New Technology Conch Process 5 Strategies of Cadbury to Compete For Sales 6 Transformation of Sales in 2000s and Possibilities for Further Increment in Sales In 2010 7 Discussion on ‘Flexibility’ 8 Differences in Flexibility between the Two Types of Conch Machine 9 9 Implications of Kraft’s Takeover of Cadbury for Capacity 10 Recommendations 11 Conclusion 12 References 14 Bibliography 17 Introduction The term operations management is related to the design as well as the management of the products, services, processes and supply chains. It also embraces the acquisition, the development along with the utilisation of the firms’ resources that are required by the firm in order for delivering the services and goods that their clients want (MITSloan, 2010). Operations and production management are concerned with the transformation of inputs into output with the aim to meet the demands and needs of the customers when distributed. There are five main factors under the productions and operations management that need to be incorporated. They are product, plant, processes, programmes and people (Tutor2u, n.d.). The case study provided is about Cadbury Ltd that was founded by Quaker John Cadbury in Birmingham, England in the year 1794. Production of the chocolate bars began in the year 1866 by his sons which proved to be successful and in this regard the business was moved to a larger site on the edge of the city. The company is the market leader in the UK chocolate confectionary and exports its products worldwide. The major problem or the issue related to the case study has been with regard to purchase of the additional plant in order to increase the capacity in the chocolate making department. Therefore, the report will try to deal with this operations management issue of the Cadbury and will throw light on certain other issues of the company like takeover of Cadbury by Kraft. Brief Discussion of the Relevant Operations Management Theories, Principles, and Techniques There are multifarious theories and principles that are related to the operational issues of the Cadbury’s. One of them has been the capacity planning theory which can be explained in brief. The capacity planning has been a strategic function. The capacity of any process can be increased if another facility is build or by changing the process. On the other hand, the spare capacity can be reduced if the facilities are closed. They can further be utilised for other products. The capacity may be increased by renting the extra space. The chief aim of the capacity planning is to match the available capacity in order to forecast the demand over a period of time. The process is also referred to as resource requirement planning. Capacity planning should still have flexibility in order to make short term adjustments. Various factors which encourage the organisation to increase the capacity are high profits, continuous changing product mix, low cost of the spare capacity that can be utilised for certain other task and high cost of unmet demands. On the contrary, the major factors resulting in the organisation that delay the increase in the capacity until the last moment is the capital cost (Waters & Waters, 1999). Another theory that can be related to the operational issue of Cadbury is the process selection. Process planning refers to the planning that involves complete analysis of the product and the processing requirement. It is also concerned with the decision related to the purchase of the machinery versus their internal manufacture and numerous techniques that are involved in selecting among the competing processes. The process selection connote an economic analysis that helps to determine which process should be selected when the operations can be performed by more than one process (Shim & Siegal, 1999). Manufacturing strategy is another theory that can be relevant to solve this kind of issues in the Cadbury. It consists of sequence of decision that enables the organisation to achieve a desired manufacturing structure, infrastructures along with set of explicit abilities (Brown, 2005). JIT or just in time is another theory that can be related to the operational issue of the Cadbury as the main objective for the managers was to fulfil the demands without any delay. The concept was originated in Japan by the Toyota Motor Corporation of Japan. The main feature of the technique is that there is no idle time which means that the inventories are not kept in the warehouses, there is no requirement of the extra workers to be employed and utmost care is taken to check that the spaces in the facilities are utilized fully. Many advantages will be derived if Cadbury implements the JIT technique. The technique will help the company to decrease the cost, the flexibility of the production systems will increase. Moreover the defective rates or the wastage can be minimised while providing greater satisfaction to the customers. If Cadbury implements the concept of JIT, then it will be able to choose the appropriate machine that is required as per the flexibility of the company. Moreover it will be able to provide its customers new and improved products at a faster rate (Nel, 2007) The Main Concerns When Choosing Between the "Conventional" Conch and the New Technology Conch Process The case study has been focused on the decision regarding the purchase of additional machine. However, it has been found that the views of the managers have been different in this regards. Few of the managers feel that the purchase of this new technology process will increase the overall capacity of the plant. However, others believe that the conventional system must be purchased as the new technology method may change the taste of the product. Hence the main concern of the managers has been related to the change that may occur if the New Technology Conch Process is employed. As opined by one of the managers that at least 70 percent of the customers especially in the UK, are able to distinguish the taste of CDM from the competitors. Conching has been significant in the creation of the Cadbury Dairy Milk flavours and texture. Therefore, certain managers believe to adhere to the conventional system that they have been using since the last 80 years. Another concern has been the high cost of the new process when compared to the conventional conch. It was estimated by the finance manager that the cost of the new process would be 2 million pounds as opposed to 1.5 million pounds for conventional conching of similar capacity. The conventional conch was useful in minimising the fixed cost burden of the extra capacity and would also ensure low cost production without any kind of risk associated with the new processes. On one hand when certain managers were concerned about the cost and the quality that could be availed from the new conch technology, many others were highlighting the benefits of it. They argued that the new conch would allow saving of relatively huge amount of money. They further argued that there will be reduced material wastage which is the crucial factor of any production house. Strategies of Cadbury to Compete For Sales Cadbury plc is one of the confectionery company producing 7.3%, 27% and 7.4% of the world’s chocolate, gum and candy respectively. The company relies more on the competitors like Hersheys, Mars and Nestle. In the first and the second half of the year in 2007, the sales of the company was nearly split. During Easter the sales of the Cadbury’s Crème Eggs are strong. The company has been focusing on increasing the sales of the product by implementing various strategies in response to the changing needs and demands of the customers. The company views various factors that would affect the sales of the product. For instance, during hot season the sales of chocolates fall. In order to respond to this kind of changes, the company has developed ice cream e.g. Flake ice cream. In response to the growing popularity of the organic food, the company has bought Adams Confectionery, Bubilicious and Halls Soothers. Since the confectionery market is becoming dormant, the sales of the chocolates are expected to fall. Therefore, the Cadburys has been trying to develop alternatives in response to the falling sales of the confectionery. The sales of the Cadbury’s product went down in the year 2008 because of the high concern of the people for healthy living. Therefore, it introduced Dark chocolate containing lower sugar and lower calories. The other product was Highlights chocolates and drinking chocolate which had no added sugar designed especially for the health conscious customers. Then it decided to introduce Trident which is the established product of USA. The product was introduced in light of the falling sales of the gum market. Even though it was a risky strategy taken by the Cadbury as Wrigley held 98% of the market, the sales of the Trident increased within six weeks (Ilkley Grammar School, 2008). Transformation of Sales in 2000s and Possibilities for Further Increment in Sales In 2010 It was in the year 2000; the management had set their goal to build Cadbury into the biggest business in the global confectionery market. They bought Adams, which was a chewing gum company. However, in the year 2006, the company reported health and hygiene defamation. The UK factories forced the recall of nearly a million chocolate bars, damaging the sales and thus incurring a heavy fine. In the year 2007, the sales of the Cadbury were boosted because of the new advert. The annual turnover of the company reached £6 billion. The deal made with the Kraft in the year 2010, was quite sensitive as Cadbury became the highest profile sale to date (Geography in the News, 2010). According to Partos (2008), although the consumption of the amount of the chocolate has been decreasing, there has been rise in the sales value by 10 percent in 2006 and 2007. In the year 2008 the company expected five percent growth that pushed the British chocolate market to £2.23 billion in value by the end of the fiscal year. Moreover, according to Chocolate confectionery report published in 2008 the trend was estimated to continue in order to stem the chocolate market reduction, with the growth in the chocolate market estimated to be 17 percent in the five years till 2013 (Partos, 2008). Discussion on ‘Flexibility’ In today’s world the term flexibility refers to the production of the customised products at reasonable price with high quality that can be delivered to the customers quickly. There are different approaches to flexibility. The manufacturing approach signifies the capability of producing the different parts without retooling. The operational approach of flexibility explains the capability to effectively and efficiently produce highly unique and customised products. According to customers approach, flexibility refers to the capability to exploit the various areas of the speed of delivery. The capacity approach of flexibility explains the ability to alter the production level either by increasing or decreasing it. It also connotes shifting of the capacity quickly from one product to another. Although variations may arise in the term flexibility, there is general consensus about the core element. The manufacturing flexibility consists of three levels. They are basic flexibilities which consist of machine flexibility, material handling flexibility and operation flexibility. The system flexibility consists of volume flexibility, expansion flexibility, routing flexibility, process flexibility and product flexibility. The aggregate flexibility consists of program flexibility, production flexibility and market flexibility. The companies need to implement innovative, technical and organisational efforts in order to reach high flexibility. There is requirement of the flexible processes in order to permit low cost switching from one product line to another. This will be possible if there are flexible workers with multiple skills, which will help them to switch easily from one task to another (University of Kentucky, 2010). Differences in Flexibility between the Two Types of Conch Machine The new technology conch machine is expected to save around £140000 in the primary processes. Moreover, the new conch is expected to reduce material wastage at change-over. The biggest benefit is expected to be found in the secondary departments as there will be additional control of coating thickness, less quality and production problems. However, the time that will be required to craft and install the new technology conching machine is expected to be more than 6 months. Therefore, in this regards it can be argued that the new conching machine is not that flexible for the company. It was discussed by the managers that the conventional conching machine will provide better flexibilities in terms of cost, quality and time. The conventional machine is expected to be identical to the existing machines that the company owes. Therefore, it provides more flexibility to the management as they are acquainted with the methodologies and techniques. Moreover, the conventional machine will not require much time to install. The other flexibilities as provided by the conching machine are the standard quality as set by the company. It was argued that the taste of the product is going to remain the same if the conventional conching machine is purchased. Implications of Kraft’s Takeover of Cadbury for Capacity According to Tall (2010), the takeover of the Cadbury’s by the US firm Kraft has been the matter of concern for the Cadbury. The reason is that the major historic brand is being snapped up by the non UK business. Secondly, there are possibilities of job losses. Moreover, the Royal bank of Scotland has a major role to play where the British government has a majority stake holding in lending the money to Kraft for funding its acquisition of Cadbury (Tall, 2010). There are several reasons for which it is believed that the proposed acquisition by Kraft will weaken the company’s capacity in order to deliver the sustainable value to all its existing stakeholders. Moreover their stand point is based upon the long term vision of Cadbury rather than a one-off capital gain. The acquisition of the Cadbury by the Kraft would bring changes in the management style, excessive debt which leads to unacceptable risk to the employees, shareholders value and the brand reputation. It will also take away the control of the company from the UK (Unite the Union, n.d.). However, according to the International Business Times (2010), the first quarter of 2010 has been buoyed by the good operating momentum globally. There has been an improvement in the volume/mix in comparison to the fourth quarter of 2009 which contributed to the growth in the income and the margin expansion for the Kraft Foods’ business. There was increment in the net revenues in the first quarter by 26.0 percent to $11.3 billion (Vencio, 2010). The acquisition of Cadbury by the Kraft food helped Kraft to boost the Kraft footprint in the confectionary market that increased the market share (Gupta, 2009). Recommendations In light of the issues related to the operations of Cadbury, it can be recommended that the management chooses to purchase the conventional conching machine as it has several advantages as opposed to the new technology conching machine. The conventional conching machine would provide considerable flexibility. Moreover, time is one of the factors that need to be considered during the production of goods and services. Company need to take into account that the production doesn’t gets hampered and delayed because of the wrong decision taken by the management. Since the new conching machine required considerable amount of time and money and the process was rejected by most of the managers, it can be recommended that the management should opt for the conventional conching machine. Conclusion The report highlighted the key operational issues related to Cadbury. The main issue was the decision of the purchase of additional plant. Therefore, the report provides suggestion to the company in order to select the appropriate equipment aiming that the production doesn’t gets hindered and also to boost the efficiency. Cadbury has been acquired by the Kraft foods. Therefore, the report demonstrates the implication of the acquisition upon Cadbury. It has been stated in the report that according to certain analysts the acquisition may have negative affect upon Cadbury. The acquisition would bring changes in the management style, excessive debt which will bring unacceptable risk to employees, shareholders value and brand reputation. It has also been claimed that the control of the company will swing from the UK to the USA. Kraft claims that the acquisition will help the company to increase the reputation as well as the market shares. Since Cadbury is the leader in the confectionery market of the UK, it is evident from the report that the sales of Cadbury has been fluctuating since 2000. In order to meet the unanticipated changes and to compete in the market the company has been continuously encouraging new strategies and has been innovating in order to increase the sales of the product. Three kinds of theories have been discussed that relate to the operation management issue of Cadbury. The term flexibility has great implication in the production process. In recent times, the term flexibility has been referred to the production of the customised products at low cost that constitute high quality and can be delivered to the customers on time. There are diverse approaches to the flexibility and their meaning differs accordingly. The report also tries to distinguish between the flexibilities that lie between the two of the conching machines. The degree of flexibility fluctuates between the two types of conching machines. The managers of Cadbury need to have the production process that will increase the flexibility and will reduce the cost of the overall operations. 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