Section A – This ONE question is compulsory and MUST be attempted
Introduction
QTP Co produces timber framed windows for builders’ merchants, property builders and property maintenance companies. It does not sell windows directly to the general public. Members of the general public (and small building companies) can buy QTP windows through the builders’ merchants supplied by QTP. These builders’ merchants supply a wide range of products for property maintenance and improvement. They are usually located in large warehouse premises on the outskirts of towns and cities.
There are three primary raw materials (or components) for the windows which QTP makes.
– Timber (wood) which it orders from timber suppliers. Worldwide demand for timber is increasing and timber prices are relatively high and supply of some of the specialist timber which QTP requires is often in short supply.
– Glass which it orders from specialist glass manufacturers.
– Fittings, such as bolts, latches, handles, etc which it sources from a number of small specialist producers.
QTP has a number of departments. This scenario considers just five of these departments and each of these departments is exactly aligned with activities of the value chain. They are:
– Inbound logistics and procurement
– Production
– Outbound logistics
– Marketing and sales
– Service
Production takes place on one dedicated production line where one machine (and supporting labour) undertakes all the tasks concerned with converting the components into the finished windows. There are no plans to buy a second machine or open up a second production line. Production takes place from 08.00 to 17.00 (nine hours). Although employees take breaks, these are organised so that the production line is always staffed. It is not possible, because of technical and environmental constraints, to extend the working day or organise a night shift. The company is effectively restricted to a nine-hour working day. Setting up and setting down of the machine has to take place within this nine-hour day.
Outbound logistics has a small fleet of vehicles which are used to deliver finished windows to the customer. Effective scheduling of this fleet is currently a problem and vehicle maintenance is becoming more expensive as the vehicles get older.
Standard and bespoke windows
The company offers both standard windows and bespoke windows.
Standard windows are made to a specification decided by QTP and they are produced to inventory. These windows are advertised in the company’s catalogue and on its website. Customer orders for these windows are supplied from inventory and next day delivery is promised. The production of these windows is based on sales forecasts made by the marketing and sales department. These forecasts are used by the inbound logistics and procurement department to place orders for the raw materials for the windows. Because relatively large orders for components are placed in advance, QTP usually obtains significant discounts on published component prices.
Bespoke windows are produced to a specification required by the customer, usually resulting from consultation and negotiation between the marketing and sales department and the customer. They are made to exactly fit the customer’s needs, in terms of timber type and quality, glass specification, window size and types of fitting. The marketing and sales department provides the customer with a proposed delivery date. A copy of the order, and the proposed delivery date, is also given to the production department, so that they can schedule the making of the windows and to inbound logistics and procurement so that they can order specific components for the windows.
At present, there is often a conflict between the production of standard and bespoke windows. It is essential that QTP achieves the promised delivery date for bespoke orders. To achieve this, it is often necessary for scheduled runs of standard windows to be postponed so that bespoke windows can be produced. This leads to less efficient use of the machine and labour (due to set up and set down time) and also to components for standard windows being held in inventory for longer than planned. Furthermore, component prices for bespoke orders are usually higher, reflecting smaller volumes and the need to fulfil tight deadlines. Bespoke window production and delivery to customers usually takes place as quickly as possible, to ensure that promised deadlines are met and inventory storage of finished windows minimised.
In the past, it was possible for bespoke orders to use common components bought in for standard windows. However, this led to continual disruption of the production of standard windows and now components for standard and bespoke orders are kept quite separate and are stored in different areas of the warehouse.
In general, the marketing and sales department prefers to make bespoke sales, rather than sales of the standard windows. They believe that bespoke windows provide exactly what the customer wants and this distinguishes QTP from its competitors who are more focused on selling standard windows. Unlike these competitors, the marketing and sales department at QTP contains staff who are experienced in window design and applications and customers value this. There is evidence that some important customers purchase their standard windows from QTP even though they could buy similar windows cheaper elsewhere, because they value QTP’s flexibility in supplying them with bespoke windows. The marketing and sales director claims that, ‘we have sales people who really understand windows and what customers want and need. We are not trying to sell them windows off-the-shelf, just because we have them in inventory.’
Furthermore marketing and sales staff claim that bespoke windows deliver higher revenue and higher profit to QTP than standard windows. However, this is challenged by the production manager who would prefer production to be focused on standard windows. Sales staff are currently rewarded on the basis of average revenue per window. At present, approximately 30% of QTP’s sales volume is for bespoke windows, but this share is increasing annually.
Table One shows selected data for the production of standard and bespoke windows.
Table One: Selected QTP data: standard window and bespoke window production
Note (1) Transport costs concern distribution costs of finished goods to customers. Costs of inbound components are borne by the supplier.
Note (2) Time taken to set up the machine for a single production run of windows to one specification.
Note (3) Time taken to set down the machine (resetting parameters, cleaning, etc) from a single production run of windows to one specification.
Note (4) Time of a single production run of windows to one specification.
Important: The machine is restricted to a nine-hour working day. Set up time and set down time must be within this nine-hour working day.
Management concerns
Senior management at QTP is exploring the possibility of moving the company to solely standard window production OR solely bespoke window production. They are also investigating issues in the five departments which are aligned to the activities of the value chain. They previously employed a business analyst who provided them with an analysis of the service department at QTP, documented in Appendix 1. Management has engaged you as her successor and they now require similar analyses for the remaining four departments.
Appendix 1: Analysis of service department in the value chain
Required:
QTP management would like you to prepare a briefing paper which:
(a) Analyses the current issues in the remaining four departments under consideration (inbound logistics and procurement, production, outbound logistics, marketing and sales), with appropriate reference to each department’s role in the value chain. Appendix 1 Figure One is representative of the approach required. (20 marks)
(b) Evaluates the financial case for EITHER producing and selling standard windows only OR producing and selling bespoke windows only. The evaluation should include both options and could include any comments you have on the limitation of the data given in Table One. However, you should assume that the data given in this table accurately reflects the current situation. (12 marks)
(c) Analyses how the company could restructure elements of each of the remaining four departments (and hence the value chain) in the future for EITHER a switch to only standard windows production OR a switch to only bespoke windows production. Appendix 1 Figure Two is representative of the approach required and it clearly shows that you should include BOTH options in your analysis. (14 marks)
Professional marks will be awarded in question 1 for the structure, tone, coherence and clarity of your briefing paper. (4 marks)