1 November, 2012The Intellect Mob Jots Business Challenges and Strategic Recommendations Manipal University – Dubai, UAE ABHILASH LEELADHARAN, ADRIAN GEORGE FERNANDES, FIONA ARLEEN MATHIAS, SYED AHMED ALI MENTORS NAME: DR AFTAB RIZVI INDEX S.NO TOPIC 1. INTRODUCTION PAGE 1 2. FAULT IN NEW FLYING SPACESHIP TOY OPTIONS RECOMMENDATIONS 2 3. DELAY IN CHRISTMAS PRODUCT DELIEVERY RECOMMENDATIONS NEGOTIATION PROCEDEURE 5 4. NEAR SHORING PROPOSAL IN VOLDANIA FINANCIAL ANALYSIS STRATEGIC ANALYSIS OPERATIONAL ANALYSIS 7 5. EDUCATIONAL APPLICATION- 9 TO 11 YEARS SUITABILITY FEASIBILITY ACCEPTABILITY 10 6. CONCLUSION 11 7. 8. 9. 10. APPENDIX 1 APPENDIX 2 APPENDIX 3 APPENDIX 4 12 13 14 15 Introduction Jot is a toy company located in Europe Started in 1989. Its success is based mainly on the brand image of the organization and a good foothold in its local market. The business model is such that it only caters to children above 3 years and below 9 of age. It specializes in its designs and adds basic electronic features in its toy which make it light up, or say something; an attractive feature for children. All of Jot’s manufacturing is done in China and storage facilities for these products are rented in Europe. Jot is facing several issues which, if not dealt with prudently can be disastrous to the organization in terms of profitability and goodwill. (Appendix 1 SWOT analysis). Some of the challenges Jot faces are, fault in the flying spaceship toys, and delay in delivery of Christmas toys. Jot also has a couple proposals to analyze; shifting of manufacturing from China to Voldania (a European country) and diversifying product line from toys to educational apps for ages 9-11 years. The intellect mob will analyze these situations in detail and provide the optimal solution to Jot for perusal. The scenarios are prioritized based on The direct impact on Jots financial and operational condition if not dealt with the time when the challenge occurs and response time needed long term effects on Jot’s Business operations The most critical problem is the fault in the flying spaceship toy as a “defective” product in the market would heavily tarnish brand image, goodwill and also lead to loss in future sales. The second scenario that will require immediate attention is the delay in delivery of Christmas toys, this will cause a problem with retailers without whom Jot cannot function. The third priority is given to the proposal of shifting manufacturing to Voldania in Europe and the last priority is given to the introduction on the new 9-11 age group educational application as its delay does not affect the organizations working. 1 Fault in new flying spaceship toy Jot’s haste in introducing the flying spaceship toy, to meet the Christmas season demand hassled to unexpected setbacks. The problems arose due to design flaw resulting in emission of heat, associated to the insulation around the electrical circuitry which is compromised when the toy is overcharged. There have been twelve reported cases, two of which have complained emanation of smoke from their toys. All major retailers have shown discontentment. The possibility of tarnished brand image arises as a result of the composition of loss of reputation in the eyes of the retailers as well as the customers, resulting in loss of market share. The negative publicity resulting from this problem will also affect sales drastically. Jot has the following options in order to tackle the problem at hand 1. Writing off the product completely is an option, which will show the retailers and customers that Jot does not give substandard products to its customers, but this may lead to loss of market share. Writing the product off completely will lead to exponential losses as a result of scrapping 6000 units worth €24 each which will be incurred due to the refunds given to all retailers, further cost will be incurred in recalling products from retailers and consumers which is about €3 per product. Miscellaneous cost will include cost of storage till the product is dumped, apology campaigns to customers and retailers, and also the damage to goodwill will be incalculable. 2. Investment in modification of the insulation around the circuitry in the spaceship will present an opportunity to show Jot’s dedication to its retailers and customers by showing them the extent to which Jot is willing to satisfy its customers. After the additional €10 for the insulation, the initial €24, recalling costs, and redistribution costs Jot is forecasted to cover its investment with no chance of profits assuming forecasts are 100% accurate (Appendix 2). The downside to this option is that if the product displays the same or any other fault for that matter, the brand image and goodwill will suffer greatly, leading to probability of losses. 2 3. A third, long term option is recalling the product, returning the money to all the customers and shipping it to China and using its parts to create a new product with a new design eliminating the chance of associating this product with the “flawed” product. The downside to this approach will be that the spaceship toy may not be in demand, or have smaller cheaper substitutes, the retailers may not respond well to the same kind of product due to the past experience. Also Jot will show a loss this year of €240,000 reducing its profitability substantially. 4. The final option is temporarily recalling the sold toys (2800 units) from retailers and consumers, and make changes in the charger of the toy. Installing an auto shutdown which turns the electrical supply off as soon as the battery is fully charged. This course of action will allow Jot to clear its brand name showing its customers that even a problem of 1% is taken seriously by the organization, to uphold customer satisfaction, illustrating the company’s corporate social responsibility. Recommendation We recommend option number 4 which is the most favorable path for Jot at this moment. The change in charger though -incurs cost- is comparatively cheaper than all other options presented to Jot. Appendix 2 shows details of costs of each of the options. Implemented correctly Jot can eliminate the problem while maintaining its brand name, goodwill and stay in the good books with the retailers and consumers as well. Chargers with automatic shutdown options are frequently seen in remote control toys. One supplier of the NI-CAD battery charger which is used for RC toys is available in South Africa, (Appendix 2 shows the costs involved in imports and redistribution). The profits made from this option are approximately three times any other option. We recommend that the toy should be recalled simultaneously while the chargers are being procured so as to resupply all the toys avoiding unnecessary waste of time, demonstrating efficiency. It is important to understand that the problem is not necessarily with the toy, customers are given clear instruction on the usage and battery charge needed. Yet temporarily 3 recalling the product in the name of corporate responsibility can allow Jot to use this as an opportunity to show its customers that the company is loyal to them and socially responsible. We also recommend Jot to post an apology letter to its customers, Fisher price toy manufacturing giant recalled around 10 million of its products on October 1, 2010 and posted an apology article by the CEO to the customers titled “because we are parents too”. This made fisher price very popular among its customers and increased its net sales in the following years. Jot can keep its heading as “we manufacture toys for our children”. Jot would be wise to provide new toys all together for the 2 cases which witnessed smoke from their products. 4 Delay in Christmas product delivery Gull, Jot’s supplier in China has declared that, he will not be able to deliver the assigned order of 2400 products completely, rather only 75% of it. The other 25% he claims will be delivered by 15th December 2012, instead of 4th November which is the deadline. There are two tasks present, first is what action needs to be taken against Gull for his breach of contract. Second, on accepting the partial order a decision needs to be made on the division of the order amongst big and small retailers. Recommendation In regards to the contract Gull has performed a material breach. To tackle this situation, we recommend Jot keep its retailers well informed in order to maintain their trust, and uphold Jot’s goodwill. The best option available to Jot is to renegotiate the contract’s terms with Gull and the retailers. Negotiating procedure 1. Consult with the retailers about the issue in hand, if they disagree to accepting 75% of the order now and 25% later then Jot is left with no option but to file a suit against Gull. However, if the retailers agree then Jot can for renegotiations. 2. A new contract should be created for the current acceptance of the 75% of the order. 3. The contract must also include a condition that if Gull does not supply the remaining 25% by December 15th then Gull will be responsible for the loss incurred by Jot, and the retailers. Dishonouring this contract would lead to an anticipatory breach of contract by Gull. 4. The contract should be terminated after all transactions are completed with Gull and thereof ending business with Gull, this will not affect Jot as future prospects of near-shoring are analysed in this report. 5. If these conditions are not accepted by Gull then Jot should go ahead with a suit which is in Jot’s favour. 5 From the 1800 products (75%) that will be delivered on 4 th November 2012 we recommend Jot distribute it to retailers in the percentage sale they contribute to Jot. Since 68% of the sales Jot makes are to the 7 major retailers, it is only logical to give them 1224 units (68%) of the total units they ordered, and supply the rest to the smaller retailers. When the 25% is received from Gull the remainder of the consignment must be supplied to the retailers. 6 Near Shoring Proposal in Voldania The proposal to shift production gradually from China to Voldania is one that if successful can prove to be the beginning of a new era for Jot. The stakes are high in such a proposal and hence a detailed and heavy analysis was done in 3 major segments of the proposal: 1. Financial Analysis: Liquidity: Two factors are the key to identifying the liquidity of the proposal: Distribution costs: The distribution costs are substantially lower from Voldania to Jot as against China to Jot proving Voldania to be the reasonable choice. Time: The time for the products to reach Jot from China as against Voldania to Jot is also analysed. Being situated in Europe it is only logical to assume that distribution costs will be cheaper in Voldania as opposed to China. Since distribution is the most cost saving activity in this proposal, the fact that it’s located near home, points towards the conclusion, if Jot were to opt for near shoring its liquidity would increase, it would take comparatively lesser time to place orders, get goods, and distribute it to the retailers. Since the cycle of distribution has become smaller, Jot will no longer have its money frozen in the excess time the China distribution system will take. Risk: The most basic financial risk that will be avoided is the foreign exchange risk, if it exists. If payment made to the Chinese manufacturer is in yen (¥) then automatically a risk or an opportunity risk arises, this is eliminated if the distribution is shifted to Voldania because it will share the same currency as Jot’s country. Also the “donation” of €25000 may not be incentive enough for the Voldanian official to smoothen the process. 7 Profitability: After analysing the 3 costs –i.e. labour, machinery, and distribution- it is clear that shifting Production to Voldania will be more profitable as compared to Production in China, (Appendix 3) From a financial point of view Jot would be Wise to go ahead with transferring distribution to Voldania –based on estimates- is less risky, presents higher liquidity and proves to be more profitable. 2. Strategic analysis: A switch of production to Voldania proves to be very profitable financially, but may cause harsh implications in China during the Transition. The production companies in China will not let go without a “fight”. Further the news of being cut off, may de-motivate the production into making mistakes, we suggest that Jot provide some clauses while renovating or install clauses in the already existing contracts which protect it from such “accidental” losses. The other aspect is the beginning of a new relationship with Voldanian manufacturers. Goodwill at this point will be the key aim of Jot making sure that the manufactures don’t feel manipulated. For Voldania, getting business from Jot will be an opportunity that they will not want to miss and hence Jot will be backed by the Voldanian manufacturers and government itself. In a study conducted by embassy magazine of London 75% of the respondents reported that they had an unfavourable view of Chinese made goods, a similar poll conducted by Zogby Research International showed 80% of respondents are apprehensive towards buying Chinese products. Voldania from a strategic point of view couldn’t have come at a better time where China is being looked down upon. Jot’s reputation may get effected if anyone were to leak out the idea of a “generous donation”, especially when Jot is talking about showing corporate social responsibility. Such “donations” often lead to smooth 8 completion of work and is a practice followed by almost all however this is unethical. Judging from a strategic point of view the transfer of production may pose some challenges but if they are dealt with utmost care, the potential gain can take Jot to a whole new era. 3. Operations analysis: Operational efficiency can be reached through Voldania through following ways: Use of machinery to produce toys reduces time waste, which would be present in a manual labour manufacturing. Delays due to labour strikes, political instability would be eliminated Quality control is easily checked Since production will be done faster the distribution will also become fast as Voldania is located closer in distribution and faster in production than China It will eliminate to some extent the need for Jot to store toys in rented warehouses –Just-in-time inventory system. The analysis done above thus proves that Voldania is an opportunity and Jot should not hesitate in grabbing. Not only will it reduce cost but also make efficient use of time but also increase Jot’s liquidity which will help in reducing the working capital crunch. 9 Educational application - 9 to 11 years A new proposition regarding a children’s application for the age group 9 -11 years has been put forward by Alana Lotz. This proposition entails an educational impression without losing the gaming experience. Evaluation of this proposition requires detail analysis of the idea and its perceived market. The analysis is divided into three aspects: 1. Suitability: There is no relation between the proposed idea of the application and the age group 9-11 years (target market). An understanding of the target market showcases a trend shift towards gaming applications which have an underlying notion of education as compared to applications wholly focussed on education with a touch of gaming. Statistical analysis conducted by NPD group showed that only 1% of games are based on children genres. The targeted age group shows little to none interest in simple education games. 2. Feasibility:: Jot’s bank has made it clear that it will no longer provide Jot with Loans, however the overdraft facility still allows a loan of approximately half a million Euros. The analysis of Angry Birds cost suggested that the initial cost of development and upgrading was €100,000 well over Alana Lotz estimate of €30,000. We wouldn’t recommend Jot to use the overdraft facilities because the interest on the overdraft is 12% which is very high. The average price of educational applications estimates up to €3 to €5, as mentioned above only 1% of spending from games is on children’s games; this includes educational and non-educational games. According to the Federation of American Scientists, Average annual wages for computer programmers is €56,270 for software engineers €64,210, for instructional coordinators €46,100, and multimedia artists and 10 animators €46,100 (refer appendix 4- employee structure – application development) From the above, it is clear that financially it is not feasible for Jot to launch the application. This plan can be implemented in later years when financial condition is stronger. 3. Acceptability: John Grun owns 30% of the shares and is sceptical about the idea, if his wife chooses to take side with him that will account for 60% of the total shares. Seeing the strategic and feasibility analysis we conclude that the risk associated to this proposition is too high. The costs are too high and the chances of success minimal. We recommend Jot to keep this idea aside, possibly for the future when the financial status is higher and we recommend changing the idea from education to edutainment where education is just an underlying notion. Conclusion The current challenges faced by Jot present incumbent opportunities which if seized can prove very fruitful for Jot’s future. Changing battery chargers for the flying spaceship will prove cost effective while maintaining brand loyalty. A law suit against Gull can be filed, but doing so will lead to unnecessary waste of time and badwill which can be completely avoided if Jot makes a new agreement with Gull while keeping the retailers in the loop. By shifting production to Voldania, we can not only save costs on manufacturing but also on distribution network making the assets more liquid. The idea of launching an application to diversify is an attractive one but is currently not feasible. Changing the genre to edutainment will prove more profitable and has a greater scope of appreciation in terms of current market trend but due to the lack of expertise and finance in this segment, Jot is not in a condition to exploit this opportunity currently. 11 Appendix 1 Strength Positive brand image Loyal customers Presence in different markets In house team of designers Relation with suppliers Licensed toys Opportunity Diversification of products Other age groups Near shoring Utilization of overdraft facility Public listing Corporate Social Responsibility Weakness Lack of finance Underdeveloped Research and Development department Manufacturing errors Leased warehouses Inappropriate IT systems Seasonal sales Threat Other toy manufactures Other game genres Increasing costs of manufacturing in China Substitute products Decrease in market share (defective and delayed products) 12 Appendix 2 Following is the table showing forecasts of all costs incurred per toy in each of the options in Euros (€). The selling price of the Product as established by Jot is €40 Option Option Option Option Costs 1 2 3 4 Production cost 24 24 24 24 Recall and apology cost 3 3 3 3 Shipment to China cost 4 Design cost 3 Raw material cost 2 Modification cost 10 Import of new product cost 3 Import from South Africa cost 3.4 Redistribution of goods 1 1 Total cost 27 37 40 31.4 -27 3 -40 8.6 Profit/ Loss (-) (deducting costs from sales) 13 Appendix 3 Year Quantity 1 2 3 4 5 60000 100000 140000 180000 220000 Labour time hours per unit Labour time per year Voldania China Voldania China 0.45 0.6 27000 36000 0.45 0.6 45000 60000 0.45 0.6 63000 84000 0.45 0.6 81000 108000 0.45 0.6 99000 132000 315000 420000 Labour pay per unit Voldania China 5 1.75 5.1 1.96 5.202 2.195 5.306 2.458 5.412 2.753 Labour pay per year Voldania China 135000 63000 229500 117600 327726 184380 429786 265464 535788 363396 1657800 993840 €663960 in favour of China Machinery per unit Voldania China 1.96 1.4 1.96 1.4 1.96 1.4 1.96 1.4 1.96 1.4 Machinery per year Voldania China 117600 84000 196000 140000 274400 196000 352800 252000 431200 308000 1372000 980000 €392000 in favour of China Distribution cost per unit Voldania China 1.2 3 1.272 3.18 1.348 3.371 1.429 3.573 1.515 3.787 Distribution cost per year Voldania China 72000 180000 127200 318000 188720 471940 257220 643140 333300 833140 978440 2446220 €1467640 in favour of voldania Total cost Voldania 324600 552700 790846 1039806 1300288 China 327000 575600 852320 1160604 1504536 4008240 4420060 totally €411680 is in favour of Voldania 14 Appendix 4 15