Cheapchip Cookie Companys Procurement Strategy - Essay Example

Module one Answers Mission ment: We are committed to satisfaction through a process of ensuring a high quality product, a fair price and an efficient service. 2. Long run strategies: Quality control measures in keeping with current international standards. A mixture of pricing policies and strategies to ensure a fair price for the product. A competition strategy to achieve long term sales growth and market share. Cost minimizing efforts to keep costs down to a minimum level. Seeking to promote a brand name under the existing product strategy. Finally, introducing efficiency maximizing work practices at every level. 3. Value chain: (a). The CheapChip Cookie Company’s procurement strategy will be focused on suppliers who are within a given radius of the town where the baking facility is located. (b). As for operational activities, the company will generate more value by controlling baking processes to obviate waste of material and labor hours. (b). As for outbound logistics, the Company will use its own available vehicles( so that only the cost of gasoline will be incurred) to deliver its goodies in a more hygienic and secure form. (c). Marketing and Sales would be carried out in keeping with a closely-knit network of sales out-lets and distribution points. (e). Services will be carried out to top off the value chain process by institutionalizing a customer care strategy in which customers’ complaints will be received and grievances redressed accordingly. 4. Balanced scorecard for CheapChip Cookie Compnay: Perspectives Strategies Success factors Measures Market dynamics Reactive marketing Sales growth Percentage rise Cost Cost control A fall in VC Percentage fall Revenue Revenue maxim. Increasing sales Margin of safety Quality Kanban Brand loyalty Market penetration Finance Minim borrow. cost Rise in margins Cost per sale Module 2 PRODUCT COSTS PERIOD COSTS VARIABLE COSTS: VARIABLE COSTS: Direct material cost: Selling costs: Direct labor cost: 1. Sales margins to distributors Variable overhead costs: 2. Lighting and other arrangements 1. Indirect material cost 3. Packing and parceling costs. 2. Indirect labor cost 3. Indirect operational cost: Variable Administrative Costs: FIXED COSTS: 1.Stationery 2. Overtime pay Fixed overhead costs: 3. Other materials such as office supplies 1.Rent FIXED COSTS: 2. Electricity bills Selling costs: 3. Equipment 1. Transport 2. Storage 3. Salaries to sales staff Fixed administrative costs: 1. Staff wages 2. Rent 3. Insurance The purpose of cost tables: These cost tables enable the management to identify the following critically significant aspects related to its cost management accounting process: Since every business organization has a tendency to focus its attention primarily on direct material cost and direct labor cost, the incidental and accidental costs may be disregarded. This is a costly error. Variable overhead costs contribute a significant percentage to the overall cost of production. This particular aspect needs constant watching by the management because it is here that cost-cutting measures need to be adopted in advance to maximize profit margins. Next, fixed overhead costs must also be managed with much care because here electricity and gas costs might rise even without the knowledge of the management. A significant percentage of businesses are faced with the threat oc closure nowadays because of the rising energy costs. Next, selling costs must be controlled in order to maximize the contribution. Finally, cost centers or cost drivers as they are known in accounting jargon, must be identified before costs are allocated to them. Failure to do so will lead to confusion as to which area of the business has higher costs and which less. Confusion leads to mismanagement and losses. Module 3 Budgetary estimates for CheapChip Cookie Company C1 $ 0.50 x 100,000 C2 $1.00 x 100,000 C3 $1.50 x 50,000 C4 $ 2.00 x 75,000 Sales Rev. p.a. $ 50,000 $ 100,000 $ 75,000 $ 150,000 Variable costs: D Materials $ 7000 $ 14,000 $ 14,000 $ 26,000 D Labor $ 6000 $ 12,000 $ 13,000 $ 20,000 Overhead $ 4000 $ 8,000 $ 4,000 $ 14,000 SG & A costs $ 8000 $ 16,000 $ 9,000 $ 18,000 TV Costs $ 25,000 $ 50,000 $ 40,000 $ 78,000 Contribution $ 0.25 per unit $ 0.50 $ 0.70 $ 0.96 Fixed Costs Overhead $ 5000 $ 10,000 $ 11,000 $ 15,000 SG & A Costs $ 7500 $ 15,000 $ 17,000 $ 19,000 Total FC $ 12,500 $ 25,000 $ 28,000 $ 34,000 Net inc/loss + $ 12,500 + $ 35,000 + $ 7,000 + $ 38,000 B/E point 70,000 50,000 40,000 35,416 B/E ($) $ 35,000 $ 50,000 $ 60,000 $ 70,828 Safety margin 130,000 units 110,000 units 70,000 77,082 O. leverage* 2 2 5 1.89 * Operating Leverage may be defined as the ability of a firm to use its fixed operating costs (rent etc.) to magnify the effect of changes in sales on its earnings before interest and tax (EBIT). The formula for Degree of Operating Leverage (DOL) is: Sales Revenue – Total Variable Cost ------------------------------------------------------------- Sales Revenue – Total Variable Cost – Fixed Cost My assumptions for the above calculations: 1. At the rate of one cookie per day consumed by each student the total number of sales per annum would be 180 x 10,000 = 1,800,000. 2. An eight-hour per day constraint would set the maximum number of cookies of different categories to be baked at 112 x 16 (at the rate of 112 per 30 minutes) = 1792. 3. Number of cookies of various categories that can be baked during 180 days are: 1792 x 180 = 3,22,560 while my budgeted annual sales stand at 3,87,082 (the margin of safety output). I assume that the difference of 64,522 cookies can be baked with some overtime work assigned to full-time workers. 4. All my figures show annual output, sales, costs and revenues except the contribution. 5. I have assumed sales of 100,000 cookies of C1 type, 100,000 cookies of C2 type, 50,000 cookies of C3 type and 75,000 cookies of C4 type. 6. Margin of safety was reached after adding Fixed Cost of each type of cookies to a desirable revenue target and then dividing it by the contribution. 7. Annual depreciation charges according to the straight line method will be $ 22,000 x 20/100 = $ 4,400 plus $ 1000. 8. I have taken into consideration the total variable costs at twice the direct labor cost per batch of cookies. 9. Additional total fixed overhead costs of $ 20,000 have also been considered. 10. I have set the Degree of Operating Leverage at a very low level for three product types, since the Company is a starter with considerable fixed costs, including their own vehicles. Report My calculations of the break-even points or output levels are based on a realistic assumption of what is desirable and achievable given the capacity constraint imposed by the 112 batch of cookies per 30 minutes. Working hours per day cannot be stretched beyond 8 unless overtime payment is given to those workers who willingly work after the 8-hour shift during the night. My calculations of costs both fixed and overhead are based on realistic estimates that included the additional costs of selling cookies such as the cost of 0.25 cents per cookie sold. Also I have taken into consideration the total fixed cost as equivalent to $ 40,000 per year excluding the depreciation charge. I have assumed a breakeven point of 70,000 cookies per annum of type C1 which is priced at $ 0.50. Even if the Company wishes to have higher figure as its breakeven point, the supply constraints will not allow such a move. However the margin of safety has been set at 130,000 cookies of type C1, per annum. Though the Degree of Operating Leverage is lower at 2, the Company has the advantage of constant sales to fixed costs. By selling 130,000 cookies at $ 0.50 each the Company can make $ 65,000 a year. A higher DOL is much riskier because of fluctuations in demand. As for the type C2 cookie breakeven point is 50,000 cookies with a margin of safety set at 110.000 cookies per annum. This is fairly achievable and practical given the commitment of the management to achieve sales and profit targets. I have typically put weight on the fixed cost factor again to show that the DOL ought to be lower, i.e. 2. With indirect labor costs set at a lower level, it is almost untenable to have a higher DOL. If the margin of safety sales figure is achieved the Company will make $ 110,000 per annum from this type of cookies. Next, there is the type C3 sold at $1.50 each. The Company cannot do better than this. The overheads rise much faster as the specialist labor required for a specialist product will demand higher wages. I have taken this into account plus the inevitable consequence of a corresponding increase in the fixed cost level for these products. Baking times may be prolonged with the effect that utensils will be used extensively to achieve the desired quality and taste. Yet I have come out with a formula to increase its DOL simply because, the type C3 cookies come at a middle level for an average student to serve the purpose of both affordability and a wholesome meal. A breakeven point of 40,000 cookies and a margin of safety of 70,000 put the DOL at 5. It is one of the least desirable for it puts the Company sales at a greater risk of fluctuations thus increasing its fixed cost per sale vis-à-vis the profit margins. Finally, the type C4 cookies are the most expensive in the range. Given a psychological pricing strategy in a school, the Company cannot do much to achieve higher sales targets unless it has available to itself the different price elasticity of demand for each product. Its breakeven point of 35,416 cookies gives us a realistic measure of its market potential, because the price set at $ 2.00 per cookie might be little higher from the average student’s viewpoint. Its margin of safety is 77,082 cookies annually and therefore the Company may have to raise its appeal by placing on its quality and quantity both. If the margin of safety is achieved, the Company will earn $ 154,164 per year from the sales of this type. It is an achievable sales target providing that the students purchasing patterns are closely followed. Its DOL is 1.89. This means the least amount of demand fluctuations for the product. I have focused my attention on the Company’s budgetary constraints to work out the most appropriate estimates to achieve a realistic profit target through a price-sensitive selling strategy. Given the monopolistic power within the school premises the Company might enjoy a degree of freedom in determining the sales strategy though the assumption that every child will eat a cookie a day may not be true because the abundance of published literature on the subject tends to have a negative impact on demand for cookies nowadays. The presence of trans-fats or hydrogenated fats might discourage some kids from eating cookies. Initially I constructed my sales figures on hypothetical data based on the assumption that each type of cookies can be made only so many, subject to capacity constraint. Then through the introduction of break-even analysis I have stretched the capacity to a maximum level including some overtime work. My assumption that workers will be doing an eight-hour per day shift is reasonable enough given the compulsion to maintain the freshness of the product. Home made cookies are preferred when they are fresh. This is a marketing strategy that has to be taken seriously when food is sold from the oven directly to be consumed on the spot. Operating leverage is used for operational or profit planning. For the same purpose, the cost- volume –profit analysis or break-even-analysis is used. It may be mentioned that the reciprocal of margin of safety is the operating leverage. A low margin of safety indicates that a firm has not got enough risk-bearing capacity as measured by variation in sales. A low margin of safety is the result of high operating costs, while other factors remain constant. High operating fixed costs lead to high degree of operating leverage and as a result the firm is exposed to more operating risk and vice versa. Operating leverage occurs when fluctuations in sales are accompanied by disproportionate fluctuations in operating profit. This is due to the existence of fixed costs in the cost structure of a firm. The absence of fixed costs in the total cost structure of a firm will not lead to a disproportionate change in profit of a firm due to a given change in sales. So if there are no fixed costs there will be no operating leverage. A 20% sales target is easily achievable since the Company has nothing much to worry about debt. If it has borrowed heavily to finance its operations there will be a huge pay back commitment to the lenders such as banks. For example I have assumed that tentatively all four margins of safety are reachable and that totals up to 387,082 cookies a year. Total sales revenue will be $ 434,164. This is a reasonable revenue target given the absence of competition, though we don’t have data for different elasticities of demand. Finally my advise to the management of the Company is to have information on operating costs such as on a day-to-day basis how much the cost of operations keeps on changing from a fixed and known average. For example if operating costs rise consistently and erode earnings of the Company, its net profit margins will be insignificant. It is all the more essential to have solid information on cost of borrowing also because inevitable circumstances may arise to compel the management to borrow in order to finance its daily operations. Such a situation will drive the management to seek loans at very high cost. This will erode its profit margins again. The Company must be careful in selling on credit too, though students may not demand cookies on credit in general. A few credit sales a day might result in accumulated losses amounting to thousands. Further, as a good principle of management the Company must adopt a strategic approach even though there is no competition within the school. Strategic management helps a firm to achieve certain landmarks such as pre-set sales and profit margins. It also helps to control costs. Rising costs have an inevitable impact on the business both in the short run and in the long run. My future plans for the Cheapchip Cookie Company I hope to continue this highly valued relationship with the company in my capacity as the consultant. Therefore it is necessary for us to discuss different operational arrangements to put in place a long term management strategy with its primary focus on the future developments such as structural changes, diversification into other areas and new products, the possible serving of a low-priced drink to our customers and even the development of a franchise. I will continue to serve your Company as the consultant in financial management in the future so that you might be able to expand it on the lines suggested above. Read More