INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Elizabeth’s Country Wares

A report submitted to
Instructor: Prof. Meenakshi Sharma
Academic Associate: Girija Shankar Semuwal

In partial fulfilment of the requirements of the course
Written Analysis and Communication – I (2016-17)

By
Sarvesh koyande
Ref No: 16304
Section: B

On
2 July, 2016

Memo

To: Mrs.Elizabeth Hines, Owner and Operator, Elizabeth’s Country Wares
From: Sarvesh Koyande
Date: June 19, 2009
Re: Recommendation and action plan for Elizabeth Hines

With reference to your request for a recommendation on the decision that benefits ECW the most, I am enclosing a detailed analysis of the situation, possible options and my recommendations along with the action plan for near future.

My recommendation would be to purchase computer system and printer/scanner for decal printing along with one kiln to improve efficiency.

Executive Summary

Elizabeth’s country Wares (ECW) is country houseware and ceramic pottery business based in WoodStock Ontario. ECW’s owner and operator, Elizabeth Hines, wants to produce 3000 units of Country Pitchers (CP), her primary product, in response to growing interest in CP product line.
To achieve this, ECW could either purchase decal printing setup to print CP designs, or buy decals and apply them in warehouse or else outsource the consignment to ceramic manufacturing company in china. The course of Action would be decided based on net profits earned and long term benefits.
It is recommended that Hines Purchase the Decal Equipment.
(100 words)

Table of Contents

Situation Analysis 1 The Problem Statement 2 The Options 2 Criteria for Evaluation 2 Evaluation of Options 2 Recommendation 3 Action Plan 3 Contingency Plan 4 Exhibits 5

The Report

Situation Analysis
Elizabeth Hines is interested in increasing her production capacity of CP’s to match the demand of 3000 units expected in coming year. ECW has no prior experience in large scale production of single product since its products are handcrafted earthenware, with only three people working in the workshop. Elizabeth Hines is looking at the large scale order as an opportunity to expand the business as she does not want to slave away in the production line, doing repetitive work. She wants to dedicate her time to ambitious ventures like making creative pottery and marketing them.
Hines can dedicate only 8 hours per week to the production of CP’s where she paints designs on the CP’s. This constrains results in a bottleneck in the production, producing only 2000 units in the year (Exhibit - 1).
If she decides to setup a decal printing system in her warehouse, it will be useful not just for current period, but will be an asset for future use as well. The yearly maximum capacity of kilns for this case is 5190 (Exhibit - 2) .Thus the production can exceed demand easily. For a batch of 3000 units the cost of production of each CP excluding the cost of decal and setup cost is $11.15. Including the cost of depreciation for entire year and other setup cost the total production cost incurred when printer setup is bought is $40042.5 and $52442.5 for case of purchased decals (Exhibit - 3).Thus the production cost of former case is cheaper. Even if the cost of acquired assets ($6600) is considered as liability, Initial case is still preferable.
Cost incurred as a result of outsourcing production is $25350, which is almost half of cost due to other options. However, the there are many uncertainties involved in this option, for example, quality check of paint, quality check of clay, delay in shipment, noncompliance on behalf of Chinese company and many more. All these complications can be sorted by legal contracts and safety tests. But failure to deliver will cost ECW its valuable clients. Since Hines does not have prior experience with Chinese company she must not risk compromising her major large scale production or else she will lose to her competition in subsequent years.
Finally, After working 20 years in the pottery business, she aspires to expand her business and the demand for her earthenware is known to have risen from previous years, hence she must not choose to outsource the job as of now. So, From the options of decal machinery setup and decal purchase she must choose the former to increase her returns.

The Problem Statement
Elizabeth Hines is interested in a manufacturing technique to fulfil the expected demand of 3000 units of CP’s to ensure gains as well as a better future for ECW.

The Options
There are three courses of action possible: 1. Purchase Decal Equipment and Kiln: Generate all requirements at warehouse 2. Purchase Decal from seller: This does not require major investment 3. Outsource the deal to China: Warehouse can be used to work on other projects

Criteria for Evaluation
In the order of priority, the criteria are: 1. Manufacture 3000 Country Pitcher units in current year 2. Maximize the net profit margins 3. Adherence to Quality and Safety Standards 4. Setup Sustainable Business

Evaluation of Options
Option 1: Purchase Decal Equipment and new kiln
Introducing a computer system and printer for Decal production along with a third kiln will result in making the business independent. This option will incur a production cost of $40042.5 with an investment of $6,600. Accounting for the depreciation of Decal technology, this option will generate net margin of 46.6%.

Option 2: Outsource Production of Decals
Outsourcing decal production will save investment in decal technology. However the cost of each decal is increased by $3.88 (200%). Each new design requires an establishing cost of $500 however since only 3 different designs are in demand, only $1500 will be incurred as setup cost. Outsourcing Decal production will cause Cost price of each CP to increase to 30% than previous option, and a profit margin of 30.0%.

Option 3: Outsource CP Production to China
Cheap labour costs in China will reduce the production cost of each CP to a nominal $8.45. Furthermore, outsourcing will free up the production facility, workers time and Hines’ time as well to focus on other ventures. However, Hines abides by safety standards and there is high probability that Chinese manufacturer use Lead Paint, which is not acceptable to Hines. The profit margin will be $49,650.

Recommendation
It is recommended that the Elizabeth Hines should purchase new equipment which include, computer, printer and kiln.
Action Plan 1. Purchase and setup computer system, printer and kiln. 2. Ensure that system is not affected by high temperature of neighboring kilns. 3. Produce more than the expected 3000 units and market and advertise CP along with Butter Churn Lamps.

Contingency Plan 1. The system may fail causing the production to halt, in which case either Hines must continue with stenciling the CPs or have a worker trained in advance to tackle stenciling work 2. If printer/computer is expected to be out of order for a long time, decals can be obtained from decal supplier. One type of design will suffice for this period 3. Greenware must be stockpiled so that, if the greenware worker quits there is enough stock for the decal and kiln workers to continue their work such that kiln is utilsed at maximum capacity.
(Number of Words: 920)

Exhibits
Exhibit 1: yearly production estimate as per current rate | maximum weekly capacity | maximum yearly capacity | | Greenware Worker | 504 | 26280 | | Elizabeth Hines | 38.4 | 2002.28 | (Bottleneck) | Kiln Worker | 84 | 3000 | |

Exhibit 2: yearly production estimate of 3 kilns | 3 Kilns | 2 Kilns | 1 Kiln | | Days | 225 | 50 | 90 | 365 | CP's per day | 18 | 12 | 6 | | Total CP's | 4050 | 600 | 540 | 5190 |

Assumptions: kilns are used at optimum level.

Exhibit 3: cost estimate of CP for total production, for initial two cases | minutes | cost/unit ($) | | greenware | 20 | 5 | | sponge borders | 2.5 | 0.625 | | first-second kiln | 8.75 | 2.1875 | | second -third kiln | 0.17 | 0.0417 | | sanding | 2.00 | 0.5000 | | material and energy | - | 2.6 | | additional energy | - | 0.2 | | SUM TOTAL(a) | | 11.15416667 | | | | Print Decal case ($) | Outsource Decal case ($) | | (a)x 3000 | | 33462.5 | 33462.5 | | decal cost(unit price x 3000) | | 5640 | 17280 | Initial cost | Depreciation cost, computer | | 140 | - | 700 | Depreciation cost, Printer | | 600 | - | 3000 | Depreciation cost Kiln | | 0 | 0 | 2700 | Installation cost | | 200 | 200 | | Deisn setup Cost | | - | 1500 | | TOTAL COST OF PRODUCTION | | 40042.5 | 52442.5 | |

Assumptions: Useful life of computer system and printer is 5years Each CP requires one decal