bensonhill creations plc (“bcp”) · it is the retailer’s job to promote the bcp products...

tutor2u™ AS BUSINESS STUDIES OCR PRE-ISSUED CASE STUDY JUNE 2004 Module 2873

Bensonhill Creations PLC (“BCP”) Business Behaviour Case Study Commentary This is the main part of the toolkit. It analyses the Bensonhill Creations PLC (“BCP”) case study in the context of the OCR Unit 2873 specification and covers some of the key application, analysis and evaluation points that you need to think about as you do your revision. It also provides analysis of the data provided in the case study © Tutor2u Limited 2004

TABLE OF CONTENTS 1 MARKETING.....................................................................................................................................................................................................3 1.1 The Market, its Definition and Structure .........................................................................................................................................................3 1.2 Market Research and Analysis.......................................................................................................................................................................7 1.3 Marketing Planning.......................................................................................................................................................................................12 2 ACCOUNTING AND FINANCE.......................................................................................................................................................................15 2.1 Budgets ........................................................................................................................................................................................................15 2.2 Cash Flow ....................................................................................................................................................................................................16 2.3 Costs ............................................................................................................................................................................................................18 2.4 Investment Decisions ...................................................................................................................................................................................19 2.5 Final Accounts..............................................................................................................................................................................................21 3 PEOPLE IN ORGANISATIONS ......................................................................................................................................................................22 3.1 Human Resource Planning ..........................................................................................................................................................................22 3.2 Motivation and Leadership ...........................................................................................................................................................................23 3.3 Management Structure and Design..............................................................................................................................................................24 4 OPERATIONS MANAGEMENT......................................................................................................................................................................25 4.1 Operational Efficiency ..................................................................................................................................................................................25 4.2 Organising Production..................................................................................................................................................................................25 4.3 Quality ..........................................................................................................................................................................................................26 4.4 Stock Control ................................................................................................................................................................................................26

Unit 2873 Specification Area

Analysis & Evaluation

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1 Marketing

1.1 The Market, its Definition and Structure

What the Specification Requires You to Know: Definition and importance of the marketing process. Marketing’s relationship with other business activities. Marketing objectives and behaviour as a means of achieving corporate objectives. Customer versus product orientation. Marketing and overall objectives. Market segmentation: reasons and methods. Defining and measuring market share and market growth.

Market Definition: BCP is a manufacturing business that operates in consumer markets (toys and other children’s products). BCP does not sell direct to consumers (i.e. households). BCP’s customers are retailers and other toy distributors who buy products from BCP. The supply chain is summarised below

It is important that you really understand this supply chain. Remember, BCP does not sell direct to consumers. When it comes to thinking about the marketing mix, this will mean that some elements of pricing and promotional strategy are very unlikely to be available to the business. The key to BCP’s success lies in persuading “buyers” at the main retailers and distributors to stock their products – these are the people who place orders with BCP. It is the retailer’s job to promote the BCP products in-store and to advertise their outlets. The case study does not provide much information about the product range of BCP. All we are told is that the business was originally founded as a manufacturer of children’s umbrellas. Following its flotation on the Alternative Investment Market (“AIM”) in 1999 – highly unusual for such a small, one product business – the decision was taken to develop as a toy company. Thereafter the case study simply concentrates on the issues surrounding a popular new product launched in 2002 – the EzzeSleep. The quoted sales statistics for EzzeSleep in 2003/04 are “just over £1 million” which suggests that EzzeSleep represents around a quarter of BCP’s sales (total sales per the profit and loss account are £4.3 million). Sales increase by £1.3 million between 2002/03 and 2003/04 – so nearly all the increase was accounted for by the launch of EzzeSleep. This suggests that sales of BCP’s other products are not growing fast. No wonder that the BCP management team are so keen to exploit the opportunities and excitement generated by EzzeSleep!

BCP Manufacturer of Children’s Toys & Equipment

Toy Retailers and Distributors (e.g. Argos, Mothercare, Specialist toy shops)

Consumers buy products from retailers & distributors



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How Marketing at BCP Relates to Other Parts of the Business BCP is a manufacturer – so there is a very close relationship between the marketing and production functions. In your answers to the case study questions, remember that the Marketing Department is just one function of the BCP business – it does not operate in isolation. Finance and Personnel are important too – but the key relationship is between Marketing and Production. The Marketing Department needs to identify markets in which the business can operate profitably and develop a marketing strategy that generates profitable customer relationships in those markets. Remember that BCP has been operating in the UK children’s equipment market for almost 20 years. So it will have strong experience of how that market operates and what the implications are for production (e.g. seasonal peaks and troughs in demand; the requirements of the customers (buyers) in relation to aspects such as quality, delivery and price). The Production Department must ensure that BCP has the capacity to produce and deliver all the products in the four product groups at the right price, to the right quality and at the right time. Since BCP’s markets are so seasonal and volatile, it is important that there is close communication between the Production and Marketing/Sales teams. Marketing Orientation The evidence from the case study is that BCP has marketing rather than a production orientation. The business has a record of product innovation, and the use of character licensing demonstrates how a relatively simple product (e.g. umbrella) can be turned into something that children value. The well-established relationships with retail buyers will also act as an incentive to adopt a marketing orientation. The retail buyers will pass on their opinions about what customers want and about key trends in the market with BCP can reflect in their product designs. Marketing and Overall Objectives The most important point to remember from the case study is that BCP is an AIM-quoted company. In other words, the shares of BCP can be bought and sold by the general public. Whilst we are not given details of the structure of the BCP shareholdings, it is safe to assume that BCP has external shareholders in addition to shares held by Zoe Benson, Anita Hillman and other directors and management. Why is the AIM listing important? Because it influence the corporate aims and objectives of BCP – which in turn will shape the marketing objectives of the business. The share price of BCP will be affected by investor expectations about growth, profit and cash flow. BCP management will need to report regularly to investors on what their strategy is and how the business is performing. Because of the AIM listing, the corporate objectives of BCP will be more focused on:

Sales growth and profitability in the short-term Return on investment Cash flow generation



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The case study text provides little evidence of specific corporate or marketing objectives – although it would be a mistake to assume that these do not exist. The Marketing Director (Anita) is focused on “Product” – i.e. exploiting the potential of EzzeSleep and on changing the overall strategy of the business from being a toy manufacturer to being a product-design company. She is also keen to develop export sales to the large American market. The Sales Director (Peter) takes a more cautious approach. He is more focused on “Place” (how BCP can obtain best distribution for its products). To do this, he encourages the use of marketing research as the basis for taking marketing decisions. Market Segmentation: Reasons and Methods: Remember that market segments are distinct portions of a total market made up of customers with similar needs. At present, BCP operates in the UK toy industry. This is large and mature industry. Large – because annual sales in the UK alone (excluding sales of computer and video games) are now just over £2 billion per year Mature – because the UK market is not growing very fast, and it has several large manufacturers will significant market shares. You can see this from the chart below (Source: Reuters)



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The overall toy industry has many segments. The key ones are summarised in the chart below:

Some of these segments will be growing fast; others slowly; some will be in decline. In some segments there will be well established brands that are the clear market leader – for example Barbie and Bratz in the Dolls segment; Lego in the Building Sets segment. However, there are also hundreds of other brands and manufacturers competing for a share of this market. BCP has to compete against these businesses in its own segments. Measuring Market Share The case study does not provide specific information about BCP’s market share. However, although the business is AIM-listed, the reality is that the business is relatively small compared with other toy manufacturers. Assuming all of BCP’s sales are currently in the UK (the case study does not say whether any are exported) then BCP’s market share can be estimated as follows:

Data Source Calculation

BCP Sales / Revenue Profit and Loss Account: 2002/03 £2,865k

Adjustment to inflate BCP sales to retail value (+50%) £4,297k



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Value of Market at Retail Selling Prices Chart above (2002) £2,002,000k

Estimated BCP market Share 4297/2,002,000 0.2% market share

Using the above figure (remember – this is only an estimate), it is clear that BCP is a very small business in the context of the UK toy market. It faces bigger competitors with stronger brands who are better able to exploit economies of scale. So BCP needs to be clear what its marketing strategy is, and the ways in which it believes it can achieve competitive advantage.

1.2 Market Research and Analysis

What the Specification Requires You to Know: Sources and methods of data collection; primary and secondary. and Analysis Reasons for, methods of, and limitations of sampling.

Market research is an important feature of the BCP case study. You should expect at least one question on it. The examiner will want to test your understanding of how and when market research should be used, and how the different methods of market research compare. We will not repeat the theory of market research in these toolkit notes. However, you may find the following links to free revision notes helpful in supplementing your own class notes on this area: Introduction to Market Research Conducting Market Research Qualitative Market Research Quantitative Market Research Types of Research Uses of Market Research Sales Forecasting The key areas to consider in your preparation for the exam are:

The role of the retail buyer in providing BCP with information about the market, generally What kind of market research should BCP undertake in relation to the possible entry into the American market,

and who should do it?

Taking these two key areas in turn: Role of the Retail Buyer Retail buyers are a hugely important source of market research for BCP. It is worth stressing this point in your exam answers where relevant. The functions of ranging (product selection and buying) and pricing are central to the successful implementation of the business strategy of retailers. These tasks become even more important than in much larger retail businesses such as Argos and Mothercare – since a decision to buy a product for the retailer as a whole affects the stocks sold in many or all

http://www.tutor2u.net/business/marketing/research_introduction.asp

http://www.tutor2u.net/business/marketing/research_conducting.asp

http://www.tutor2u.net/business/marketing/research_qualitative.asp

http://www.tutor2u.net/business/marketing/research_quantitative.asp

http://www.tutor2u.net/business/marketing/research_types.asp

http://www.tutor2u.net/business/marketing/research_uses.asp

http://www.tutor2u.net/business/marketing/sales_forecasting.asp



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of the stores around the country. The buyer gets involved in deciding: Planning and selecting the range, type, quantity and quality of merchandise according to customer demand,

trends, store policy and budget; Sourcing new products; Regularly reviewing performance indicators with sales and margin reports; Reacting quickly to sales performance and liaising with the store's personnel; Making contact with customers to get feedback on the merchandise; Meeting suppliers (e.g. BCP) and negotiating terms; Writing reports, sales forecasts, and analysing sales figures; Participating in promotional activities (e.g. the launch of new product ranges) Attending trade fairs in the UK and abroad to choose and put together a new collection of products;

To be able to make these decisions, a retail buyer needs to have in-depth knowledge and understanding of what the end-consumers want (i.e. the adults who buy toys & equipment for their children). Retail buyers will study sales statistics; they will watch customers as they shop to see how shop customers respond; they will conduct their own market research into customers’ views on what they have bought. In other words, the retail buyer needs to become an expert on his or her product range. You can see, therefore, why it is so important for manufacturers like BCP to stay close to their retail buyers. They are a reliable source of up-to-date information about the market as a whole, and the needs of the retailer in particular. BCP recognise this. Peter MacKella points to the “well-established relationships with top British buyers” {line 31] and Anita Hillman has discussed the American opportunity with buyers in large retail stores.

Market Research into the American Opportunity Not surprisingly, some of the BCP management team are excited by the opportunity to sell the EzzeSleep into America. The US market is much bigger than the UK and the concept of “sleepover” parties is much better established. Anita’s estimate of potential sales of £12million (within 5 years) provides the prospect of BCP doubling their turnover from this opportunity alone – assuming the estimate is sensible. However, the opportunity carries some significant risks:

There is no evidence that BCP have exported successfully before Only Anita seems to have any understanding of the US market (based on her recent visits) The estimated sales from the US would have significant implications for BCP’s production capacity and

processes (assuming that BCP decide to manufacture themselves) BCP are likely to face substantial competition from existing US competitors The marketing investment required to enter the market may be significant; BCP have relatively low cash



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resources and they are a quoted company. What will existing investors make of the strategy and the likely costs?

Many British manufacturers have come unstuck believing they can replicate the success they have enjoyed in the UK by selling in the same way in the US. They have not understood that the US market is different (as Peter MacKellar points out).

Quite rightly, BCP needs to do some thorough market research to evaluate the US opportunity. The case study explains how Anita has obtained a proposal from an external marketing consultancy (“Chiltern”) to do the market research; Peter MacKellar has produced an alternative proposal. Appendix 1 summarises the two options. The examiner may ask you to compare and contrast the two market research proposals. You may be asked which proposal BCP should use – and why? You may also be asked to identify the other market research information that BCP should obtain (i.e. not included in either proposal) in order to evaluate the opportunity properly. We have outlined our thoughts on these questions below: Market Research Objectives and requirements for the US Opportunity: The objectives of the market research are to:

Provide the information that can enable the opportunity to be assessed properly Identify what the investment requirement is Reduce the risks involved in the investment required

BCP need a detailed understanding of

US industry structure (suppliers, distributors, customers) Market size and growth (how big is the toy bed market; how fast is it growing? How is the market segmented?) Market pricing – for similar and/or comparable products Distribution channels (retail stores; mail order; supermarkets, internet etc; how stock is ordered) Predicted demand for the EzzeSleep (forecast sales volume by distribution channel multiplied by forecast selling

prices) Existing competitors - how will the business fit into the export marketplace and how will competitors respond? What (if any) modifications are required to make product or service saleable (e.g. safety regulations; packaging

issues)

How the Two Research Options Compare:



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Chiltern Marketing Consultants’ Proposal (“Chiltern Proposal”) This is a more comprehensive proposal than the In-house Proposal The Chiltern Proposal uses stratified random sampling which generates a random sample of retail stores after

first identifying the largest US retailers. This sample is likely to focus BCP on the key buyers in the US market (useful).

However the sample selected does not cover other possible distributors such as mail order catalogue operators, supermarket groups (e.g. Wal-Mart, K-Mart) internet sellers (“etailers”). Are these alternative distribution outlets as important in the US market as they are in the UK? Could they be an alternative way to enter the market?

The Chiltern proposal makes much more extensive use of face-to-face interviews, targeted at the key decision-makers in the selected retailers. Generally, this method is best for gathering “qualitative information” since it is possible to obtain more detailed responses from the interviewee than, say, a questionnaire (suggested by the In-house Proposal). BCP will get a better understanding of how the market works, what customer needs are, and the nature of competition from the Chiltern Proposal. However, it would be worth including Peter MacKellar in these interviews too – since he will be the person responsible for dealing directly with US buyers.

Chiltern will analyse the data and produce the report. This adds to the cost of the market research (which is £40,000 more expensive than the In-house Proposal); however, it also has some advantages. The Chiltern consultants have expertise in analysing and interpreting the results of the interviews and questions. They can also give an independent and subjective view on what the research shows and what the implications are (there is a strong risk that the In-house proposal will produce results that are biased with the views of Peter MacKellar). The use of Chiltern consultants also results in a quicker report. The extra 2-3 months of time may prove crucial in establishing the US business in time for key buying periods.

The Chiltern Proposal does not seem to include a summary of the available secondary market research available (included in the In-house proposal). If the Chiltern Proposal is accepted, it should be amended to include a brief review and summary of the secondary data, so that no important market information is missed.

Peter MacKellar’s In-House Proposal: The In-house Proposal is substantially less detailed than the Chiltern Proposal – a sample of just 20 retail stores MacKellar suggests using quota sampling – this would involve him (or another person) finding and interviewing

the suggested number of retailers (20). This is a relatively quick and easy way of obtaining a sample, but it is not random and so it would not be possible to draw any kind of statistical conclusions from the data gathered. It is also prone to interviewer bias.

Again (see above) the In-house Proposal does not cover other potential distributors of the EzzeSleep. The use of questionnaires provides a way of gathering more quantitative data from the sample. However, it will

not be as good as the face-to-face interviews for developing a more detailed understanding of the way the market is structured. To obtain the kind of information that BCP needs for this research, the questionnaires are likely to be very long and detailed – which may significantly reduced both the quality of the answers given and the completion rate. The questions would also need to be carefully worded and structured.



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The In-house Proposal is estimated to take longer to complete than the Chiltern Proposal. Perhaps this is because Peter MacKellar is expecting to do the analysis himself. Perhaps it is because the questionnaire sample is being given plenty of time to respond. Either way, the suggested completion time (4-6 months) is too late for BCP to make a well-informed decision. The US market can change in that period.

Other Information that BCP Should Obtain: The market research could address the following areas: Recommendations for how BCP should set up their distribution in the US; for example, should BCP…

Sell direct to a retailer who then sells the EzzeSleep locally Use a sales agent who sells into the US retailers on its behalf Enter into a joint venture with an experienced US manufacturer – licensing the right to produce the EzzeSleep

(provides a share of management and profits/losses)- Note: joint ventures are complicated and potentially very expensive if they go wrong

Set up a local sales office and team. This is the most expensive option, but provides more control over the sales process. This option would also take longer to establish the EzzeSleep in the US market since BCP would need to recruit sales people and then wait whilst they establish relationships with key US buyers.

Recommendations for how BCP should protect their product design in the US: Intellectual property protection is more complicated when selling overseas Patents and trade marks only recognised and protected in the country of origin BCP need to secure protection in the US – which will be difficult if there is already a similar product on sale

there

If BCP is to manufacture the EzzeSleep in the UK and ship to the US, how should the transport be organised to meet the requirements of the market?

Who transports the goods? Does responsibility for transport depends on agreement with US retailers or another supplier? (E.g. BCP might be responsible for delivering supplies of EzzeSleep to a warehouse in the US from where the retail customers pick their supplies)

What mode of transport? The best mode of transport depends on whether the EzzeSleep is assembled in the UK, or the component parts shipped for assembly in the US, and how quickly they need to be delivered

May need more than one mode: e.g. sending goods by lorry to a port in the UK and then by ship overseas. The goods need suitable packaging and labelling.

Depending on the contract, BCP may also need to arrange insurance

Recommendations on how exports to the US would be financed (taking into account the “normal practice” in the US market (the Finance Director – Debbie Mant - needs to be involved in this research to make sure she gets all the information she needs).



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Exporting to a new country poses potential financial problems for BCP. For example, there may be a delay between shipping of goods and receiving payment for them. This will adversely affect BCP’s cash flow

US retailers or distributors who buy the EzzeSleep may not pay at all – increasing the risk of "bad debts". It takes time for a business like BCP to understand which customers they can trust.

Currency issues – will supplies of EzzeSleep be invoiced by BCP in US Dollars or Sterling? What is the normal practice? If prices are agreed in US Dollars, then BCP becomes exposed to fluctuations in sales and margins if the US Dollar/Sterling exchange rate changes. Invoicing in Sterling may make the EzzeSleep more or less price competitive when the exchange rate changes.

Which Market Research Proposal Should BCP Use? Whilst there is no right or wrong answer to this question, you should be prepared to express an opinion if the examiner asks you. Our view would be as follows: Answer:

Commission Chiltern Marketing Consultants to perform the work Extend the scope of the research to cover the key areas above (options for distribution; protection of product

rights; options for manufacture/transport; pricing/finance issues) Why?

Because the US opportunity is potentially the most significant marketing investment BCP have ever made and it is full of risks.

Because BCP is a publicly-quoted company with external investors who would expect the Board to take key investment decisions on the basis of independent, professional advice

BCP needs a detailed qualitative understanding of how the market works in the US which can only be obtained by in-depth interviews with people who know the market

The information needs to be detailed, but it also needs to be obtained quickly The additional cost of the Chiltern Proposal is more than outweighed by the benefits of using a professional

team to conduct the market research

1.3 Marketing Planning

What the Specification Requires You to Know: Formulation of marketing objectives, strategy and plans. The

As stated above, there is no explicit mention of marketing objectives – or indeed corporate objectives – in the case study. Instead, the case study points you towards considering three key aspects of BCP’s marketing strategy:

(1) The market research that needs to be done to evaluate the US opportunity (2) The proposed change in product focus from being a “toy manufacturer” to being a “product design company”



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integrative elements of a marketing plan: Product: the role of product development, product life cycle and portfolio analysis Price: based on cost, competition, customer Place: channels of distribution Promotion: above and below the line Calculation and interpretation for decision making of price elasticity

We have dealt with the US Market Research here In this section, we consider briefly the other key aspect of marketing planning and strategy: Should BCP be a Toy-Maker or Product Design Company? So far BCP has concentrated on the manufacture of toys and children’s equipment. Whilst the use of character licences helped develop sales (BCP pay the licensor a fee for the right to feature certain characters on their products), it was only the development of the EzzeSleep that created any real excitement and sales growth in the business. The implication from the case study (e.g. line 9-10) is that, as pure toy manufacturer, BCP is too small to compete with other toy competitors who:

Have much greater resources (e.g. their own brands; better distribution) Have bigger sales (remember – BCP has a very small market share) May have better distribution in the UK May source their production from lower-cost locations (e.g. Eastern Europe or the Far East) Achieve better gross profit margins than BCP (whose gross margin is just 20%) Enjoy bigger profits than BCP (in 2002/03, BCP only made profits of £206,000 – the year before the launch of

EzzeSleep

In short, the key question is whether BCP is just too small to be a successful manufacturer of toys. It lacks the size to exploit economies of scale; it doesn’t have the product range to make UK retailers take notice. If you support the view that BCP does not have the right assets to be a successful, profitable toy maker – what is the alternative? The experience with EzzeSleep suggests an alternative marketing strategy for BCP – as a product design company. What does this mean? A product design company would:

Invest in developing new product ideas that have commercial potential Identify the best way to produce or source the product, taking into account factors such as price, likely demand

(volumes), the distribution channel between producer and end-consumer etc Protect the designs and concepts that they develop (“intellectual property rights”) through protection

mechanisms such as patents and trademarks (this is a vital activity for such a company) Concentrate on developing the commercial potential of those product ideas rather than simply making them.

For example, a product design company might design a new product, outsource the manufacture to a low-cost producer (likely to be overseas) and focus efforts on finding distribution in a chosen market, or selling the rights to sell the product to others.

A product design company might never, therefore, actually get involved in manufacturing



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The key success factors for a product design company are, therefore (1) Expertise in design (coming up with products that meet the needs of customers better than existing products) (2) Ability to protect designs (3) Ability to identify the most profitable way to exploit the designs

It is also worth remembering that, from a financial perspective, a product design company has a much lower investment requirement than a manufacturing business. The investment is in the skills of the people employed rather than in tangible assets like factory plant and machinery. Which is the best option for BCP? The examiner may ask you for your views? Develop your argument along the lines set out above and then remember to express your opinion (to pick up the key evaluation marks). Form your own view. In our view…

BCP is too small to have its shares listed on the stock exchange and continue as a toy manufacturer. The returns earned by shareholders are just too low

BCP is too small to be able to compete effectively with much larger toy manufacturers – their economies of scale will always enable them to compete with lower prices, and they will enjoy better distribution from the key retailers, supermarkets and catalogue showrooms

BCP has insufficient financial resources to be able to significantly grow its manufacturing operations (see our comments in the section on Finance)

With the EzzeSleep, BCP has demonstrated its ability to come up with innovative products for children. If this kind of expertise can be developed, and new products similar to EzzeSleep developed, then BCP has the potential to become a much larger, faster-growing business.

There is not a strong logic for BCP to continue manufacturing all of its own products. This is a low margin, capital-intensive activity that, according to the profit and loss account, is adding little value.

BCP should consider outsourcing some or all of its manufacturing to lower-cost producers and concentrate on exploiting the commercial potential of its products through licensing and other distribution deals.



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2 Accounting and Finance

2.1 Budgets

What the Specification Requires You to Know: Their nature and purpose as an aid to decision making and control Comparison of budget and actual achievement

BCP’s budgeting process is not described. There is no evidence presented that the methods or standard of budgeting is a problem in the business. The initial sales forecast for EzzeSleep was exceeded by 100%; but this doesn’t mean that BCP management are poor at forecasting. This could have happened for several reasons:

Unexpectedly high orders from one or more large retailers Stock-building by retailers (which will reduce sales in subsequent periods) Unexpectedly public enthusiasm for the product (word-of-mouth recommendation is particularly important for

toys in the peak Christmas selling season)

No information is provided which lets us compare actual results against budget to see how accurate the budgeting process has been. The toy industry is described as being highly volatile. This means that:

There can be unexpected swings in demand There is a highly seasonal profile to demand – with a large proportion of sales concentrated in the pre-

Christmas period

Volatility in demand makes budgeting difficult and its also places pressure on the production and marketing departments to work closely together to ensure that production is able to meet sudden increases in demand.



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2.2 Cash Flow

What the Specification Requires You to Know: The importance of cash flow. Calculation and interpretation of cash flow forecast, cash budgets.

The only financial information in the case study relating to the cash flow of BCP has to be extracted by analysing the profit and loss account for 2003/04 (Table 4) and the balance sheet at 31 March 2004(Table 3). We have summarised this below:

£’000 Net Profit 294 Changes in working capital: Increase in stocks (745 – 556) (189) Increase in debtors (302 – 249) (53) Increase in current liabilities (671 – 594) 77 Operating Cash Inflow / (Outflow) 129 Payment of dividends (difference between Net Profit and Retained Profit: 294 - 198 (96) Repayment of long term liabilities (1,146 – 946) (200) Net Investment in Fixed Assets (3,238 – 3,142) (96) Other movements (balancing figure) 104 Net Reduction in Cash Balances (194 – 131) (63)

The main features to note about the information given are:

The cash outflow that arose in 2003/04 – despite an increase in profit. This was largely due to an increase in stocks (£189,000) and to the repayment of long-term liabilities (we are not told what these were)

The poor working capital position of the business at 31 March 2004. The working capital ratios for BCP can be calculated as follows

31 March 2004 31 March 2003 Current Assets (Stocks + Debtors + Cash) £'000 1,178 999 Current Liabilities £'000 671 594 Current Ratio Ratio 1.76 1.68 Quick Ratio (Current Assets exclude Stocks) Ratio 0.64 0.75



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The working capital ratios above provide a snapshot of the cash flow position of BCP at the balance sheet date. The deterioration of the quick ratio (from 0.75 to 0.64) suggests that BCP will find it difficult to pay its short-term creditors as these debts become due during 2004/2005 unless it can convert the high levels of stock into cash. BCP is a business with relatively little cash (unusual for a quoted business). The other point to note is that BCP is considering a range of investment options that require substantial investment. Put simply, it does not currently have the cash resources to be able to undertake those investments. You may be asked to comment specifically on the increase in stocks (£189,000) – which is one of the main reasons why BCP had a negative cash flow in 2003.04. We cover this point here in our notes on stock control.



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2.3 Costs

What the Specification Requires You to Know: Different types of cost: fixed, variable, marginal, direct, indirect and overhead. Contribution, its calculation and uses. Break even analysis as a decision making tool.

Summary of Recent Trading Results: The table below summarises the recent trading results of BCP based on the limited data provided in the case.

2002/03 2003/04 Sales £'000 2,865 4,293 Sales Growth % 49.8% Cost of Sales £'000 2,321 3,391 Gross Profit £'000 544 902 Gross Profit Margin % of Sales 19.0% 21.0% Operating Costs & Overheads £’000 338 608 Net Profit £'000 206 294 Net Profit Margin % of Sales 7.2% 6.8

Calculating Break-even: It is unlikely that you will be asked to do a traditional break-even calculation – since no information is provided about the volumes / output of BCP. Therefore it is not possible to calculate a “margin of safety” (which is usually expressed in terms of units of output) or a break-even level of output You may be asked a question that asks you to comment on the overall cost structure of the business and the implications for management decision-making. Among the points that would be worth making are:

BCP operates with low gross profit margins. Many manufacturing firms would expect to earn gross margins of around 30-40% of sales. BCP’s gross margin was 21.0% in 2003/04 although this was a slight improvement on 2002/03 (19.0%)

This suggests that retail buyers customers are either not prepared to pay high prices for BCP’s products, or that the production costs of the business are too high.

Net profit margin fell in 2003/04 due to the substantial increase in operating costs and overheads. We are not given any information about why this increase happened? It may be due to increased marketing spend due to the launch of EzzeSleep.

As a general point, it is worth pointing out that BCP is not a very profitable business – particularly for one that has its shares listed on the Stock Exchange (AIM). This level of profit is more typical of a small private manufacturing business rather than one that has external shareholders and a stock exchange listing. The financial results shown above would be unlikely to excite new investors – which would make it difficult for the business to raise new finance by selling more shares.



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No forecast financial information is given for 2004/05 or later years. The only forecast sales information provided relates to the potential US sales of EzzeSleep. Anita estimates

that these may be up to £12million within 5 years of entering the market. This kind of estimate has to be treated with great caution.

2.4 Investment Decisions

What the Specification Requires You to Know: Reducing risk in circumstances of uncertainty. Investment appraisal, Pay Back Period and Accounting Rate of Return.

In addition to the strategic issues raised by the US opportunity, BCP management are considering two alternative investment projects: our comments on these two projects are as follows: Purchase of Eight Additional Sewing Machines:

The total investment involved is £2.16 million (8 times £270,000) BCP does not currently have the financial resources to be able to finance this investment It might be possible to finance the sewing machines via leasing – although this would significant increase the

financial gearing (and risk) in the business It is highly unlikely that shareholders would be prepared to invest further in the company to finance the new

machines. The investment is targeted at the EzzeSleep product – allowing the sleeping bag decorating process to be

automated. The return from this investment is large a saving in direct labour costs – although we are not told what the annual saving might be. Neither are we given information about what the direct production costs of the EzzeSleep product are so that we can work out whether the labour cost savings might be significant enough to justify this substantial investment.

It is not clear why 8 sewing machines are required. Could BCP start with a lower number, and so reduce the risk of the investment?

There are alternatives to this investment. The most obvious one is to outsource the decorating process. If the process is straightforward (it sounds like it is) then there is almost certainly an alternative supplier with spare capacity who could take on the process and produce to the required quality. This would enable BCP to increase output without making the investment and may enable them to reduce the fixed costs of the business (outsourcing product turns the sewing process into a variable cost – i.e. an amount per sleeping bag produced).

The other benefit of outsourcing this process would be to reduce the amount of stocks held in the business – an important benefit since BCP needs to improve its control of working capital

Expansion of the Factory:

This project is about increasing the general capacity of the factory rather than increasing capacity of a single process (e.g. sleeping bag decorating)



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The investment required is similar to the Sewing Machine alternative – i.e., around £2 million. As above, BCP does not currently have the financial resources to be able to finance this investment

The increased capacity would give BCP greater flexibility in producing a wide range of products (the Sewing Machine investment is mainly targeted at the EzzeSleep)

However, it is unclear why the investment is required at all. BCP is operating at 80% capacity (i.e. it has 20% of spare capacity using existing technology and working methods). There may be other ways of increasing capacity still further at peak production times without building an extension. Have these been considered? These include working additional shifts, re-organising production methods (the Production Director is considering flow methods for example); bringing in temporary labour for peak production times.

There is no evidence of a clear business strategy that would justify the investment in the extension. What happens if sales of the EzzeSleep fall away in 2004/05 and later years (e.g. a lower priced competing product is introduced?). Are there new products in design that would utilise the additional capacity?

Finance Director Debbie Mant is expected to produce “quantitative” and “qualitative” evidence to support her recommendation, which will be over six years. The examiner may ask you to explain what this evidence might be. Our comments on this are as follows: Quantitative Evidence:

The quantitative evidence will comprise estimates of the future sales, costs and other cash flows associated with the investment decision

This data must only include relevant items – i.e. those which arise as a direct result of the investment. For example, the Sewing Machine investment should consider the incremental sales enabled by the increased capacity for sleeping bag decorating and the specific direct labour costs savings for this additional output.

The timing of relevant sales, costs and cash flows needs to be estimated with care. It is tempting to be too optimistic about when the benefits of increased sales or lower costs will be achieved.

The quantitative data needs to be estimated prudently (cautiously). Both projects represent a significant risk for BCP (since both would require the business to raise additional finance). Debbie needs to make sure that ALL relevant costs and cash outflows have been identified – and that the calculations include appropriate contingencies (allowances for things going wrong).

The quantitative evidence needs to include calculations of the financial returns under different scenarios. For example, there will be a “base case” (the expected outcome) but also a “downside” scenario – what happens if the projected savings or sales fall significantly short of expectations. New investors would expect to see this kind of analysis.

Qualitative Evidence:

Investment appraisal is often thought to be just about numbers, but there are important “qualitative” issues to



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address Are the alternative investment projects consistent with the business strategy that BCP wishes to follow? Do the projects suit the corporate objectives of BCP? Is BCP focused mainly on sales growth rather than

profitability? Is the focus on long-term growth in profits or should the business be concerned about short-term performance?

How will each project affect the corporate image of BCP? What are the human resources implications of each project? Does the factory culture or organisation need t

change in order for the best returns to be achieved? What is the degree of “risk” involved? What is the attitude of BCP management to risk; more importantly, what

is the attitude of BCP’s shareholders to each project? Operations – which investment most suits the current production capacity? What will the effect of both projects

be on product quality? To what extent are the quantitative calculations dependent on the current/future level of demand in the

economy? What happens if the economy moves into recession? Note, however, that the case study does not provide data that explicitly be used in a calculation of investment appraisal, pay back period or rate of return.

2.5 Final Accounts

What the Specification Requires You to Know: The role, purpose and limitations of the balance sheet and the profit/loss account.

See above analysis of the profit and loss account and balance sheet of BCP.



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3 People in Organisations General note about the Unit 2873 specification for People: As a candidate in June 2004, you are required to understand the significance of various management and organisation structures for the BCP business and its employees. The specification requires that you “should recognise the opportunities and constraints, in relation to people in organisations, created by the business/legal environment and to appreciate the contributions of selected management theories”

3.1 Human Resource Planning

What the Specification Requires You to Know: The relationship between organisation objectives and human resources. Work force planning, recruitment, selection, induction, training, severance (knowledge of the principles of employment law and the rights and duties of employees and employers). Labour turnover: determination and impacts.

Workforce Planning: This is the main area for you to consider in relation to BCP. If the business goes ahead with the investment projects being considered, then you may be asked to consider the implications for workforce planning. There is also a specific problem that has arisen in relation to the dismissal of an employee (Chris Welton) by a production line supervisor (Kelly Hassell). You are likely to be asked to comment on the approach taken by BCP on this matter. Looking at these two areas in a little more detail: Workforce Implications of the Investment Projects and US Expansion Remember that workforce planning is a process that identifies the number, type & levels of skills of staff needed to meet predicted sales: This process is managed by David Wong (Production Director)

Production at BCP needs to take account of the high volatility in BCP’s markets. Demand is highly seasonal and can rise of fall unexpectedly. So flexibility in production is important.

BCP has long experience of manufacturing in its markets – the existing production design and scheduling is likely to already reflect experience of what works best.

BCP operates with low profit margins. This may because of price pressure from the major retail customers. However, it may also indicate that production (including workforce planning) is not organised in an optimal way. Are there efficiencies available from doing thinks differently?

BCP need to audit the skills of the present workforce. Do they match those required? Are there training needs to be met?

Is BCP affected by external factors? E.g. implications of national wage rates, new legislation; skills shortages Production identifies how goods are to be produced i.e. what mix of technology and labour and what are the

best methods of production The two proposed investment projects will have different effects on workforce planning:

The investment in new sewing machines is expected to result in lower direct labour costs – i.e. fewer employees



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/ labour hours required. How would the workforce respond to this? The general increase in capacity from the factory extension is expected to result in an increased workforce.

Does the project identify what this increased workforce need is? Are the same skills required as the existing workforce – or new skills?

Dismissal of Chris Welton The problem has essentially arisen from a failure in communication. The production line supervisor is inexperienced and may not either know of, or understand the correct procedures for warning employees about their performance and the process for dismissing an employee. An employee can only be fairly dismissed for:

A reason related to the employee's capability or qualification for the job; A significant reason related to the employee's conduct; A redundancy (broadly, this is where BCP’s need for employees to do certain work has ceased or diminished or

is expected to do so); Some other substantial reason which could justify the dismissal

On the face of it, the employee may have a case against BCP for unfair dismissal, unless BCP can prove that Chris Welton was deliberately missing work so that he could enjoy leisure activities (hard to prove unless the employee is followed). BCP may, therefore, be taken to an Employment Tribunal. Chris Welton has three possible remedies for unfair dismissal, two of which involve his re-employment by BCP:

Reinstatement (Chris Welton is to be treated in all respects as though the dismissal had not occurred); Re-engagement (Chris Welton is to be re-employed but not necessarily in the same job or on the same terms

and conditions of employment); Compensation – Chris Welton is paid damages by BCP but does not return to work with them

In our view the first of these options would be preferable for BCP. If management move quickly to contact Chris Welton, this may still be possible. BCP also needs to review their procedures for informing/training production supervisors about the recommended procedures for employee discipline.

3.2 Motivation and Leadership

What the Specification Requires You to Know: Their role in achieving objectives. Motivation in theory (Taylor, Mayo, Maslow, Herzberg) and practice;

The BCP case study does not raise significant issues in relation to motivation and leadership. There is very little discussion of, or evidence presented relating to motivational issues amongst the BCP workforce. The case study states that the “employees of BCP are genuinely motivated”.



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enlargement, enrichment, rotation, team working, participation. Monetary and non-monetary motivation, management by objectives, delegation, empowerment; payment methods, bonuses. The impact of leadership styles on performance; autocratic, democratic and Laissez-faire and McGregor’s Theory X and Theory Y.

3.3 Management Structure and Design

What the Specification Requires You to Know: Principles of structure; span of control, hierarchy. Types of structure: centralised and decentralised. Effect on organisational performance.

The case study does not raise any significant issues relating to the organisational structure of BCP.



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4 Operations Management

4.1 Operational Efficiency

What the Specification Requires You to Know: Scale: factors effecting choice of operational scale. Tactics for short run over capacity production and impacts of operating under capacity. Economies and diseconomies of scale.

A summary of the evidence about BCP: BCP is a manufacturer Sales turnover of around £4-5 million per year – make BCP a small to medium-sized manufacturing business,

operating from one location The case study suggests that BCP is currently operating at around 80% capacity. The rapid growth in sales of

EzzeSleep has raised issues concerning future capacity, and two investment projects are being considered. These are dealt with here.

4.2 Organising Production

What the Specification Requires You to Know: Approaches to operation. Job, batch, flow, cell and lean. Reasons for choice and effects on efficiency.

The method of production used by BCP is a focus of the information in the case study. The main issue is the capacity to make EzzeSleeps. The business is operating at 80% of capacity following the recent success of the EzzeSleep. Production Director David Wong is considering using a flow system rather than batch system to increase production capacity for EzzeSleep. The EzzeSleep product is relatively simple in terms of design and manufacture. There is little customisation of the product other than the design of the material used for the mattress and sleeping bags. There are just two sizes – adult and child. Currently all BCP’s products are made using batch production. This is expected – batch production is the most common method of production for products such as bedding and mattresses. Batch production has the following advantages for BCP:

Efficiency – better productivity than job production Some production flexibility is retained; batch production allows BCP to produce different versions of a product to

meet different consumer and market needs (e.g. different designs; variations required for different markets)

The disadvantages of batch production include: Batch production can result in higher stock levels and work-in-progress. At any one time there will be raw

materials waiting for use, work-in-progress at different stages of production and finished stock waiting to be sold. These high stock levels eat up cash and space. Perhaps this is the reason for the increased stock levels at BCP which contributed to a cash outflow in 2003/04.

Batch production leads to more complex production organisation; production time can be lost switching from one batch to another, with machinery having to be re-tooled.

Would flow production be an advantage for BCP for the production of EzzeSleep?



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Flow production tends to work best when a business needs to achieve a high and continuous level of output, to match high and continuous levels of demand. Implemented properly, it can result in more efficient use of plant and machinery, the use of lower-skilled (and cheaper employees) and economies of scale. The flow method requires that a product is standardised. For BCP, the flow system is probably not a good idea

It is expensive to set up and maintain – it requires a substantial investment in plant and machinery Demand for BCP’s products is highly volatile – the factory probably does not need to maintain a continuous level

of production throughout the year The flow system eliminates flexibility – the product is standardised and mass-produced. Changes in tastes and

fashions cannot be easily accommodated (e.g. new character licences; changed colours)

4.3 Quality

What the Specification Requires You to Know: Importance: methods of ensuring quality. Built in versus inspected quality. Interrelationship between motivation, training and quality. Approaches to quality; quality assurance, TQM and continuous improvement. Establishing quality standards; bench marking.

There is no evidence presented in the case that quality is a problem at BCP

4.4 Stock Control

What the Specification Requires You to Know: Purpose and costs of stock. Determination of buffer stock, reorder level and quantities, lead time. Construction and interpretation of stock control charts. JIT as a means of controlling stock and improving quality.

According to the case study, BCP held stocks worth £745,000 at the end of March 2004. This was an increase of £189,000 on the stock level at March 2003 (Source: Table 1 Balance Sheet Extract). You might be asked to calculate a stock turnover ratio for BCP as part of a question on stock control: we have summarised the calculation in the table below:

March 2004 Opening Stock Value (Table 1: Balance Sheet Extract) £556,000 Closing Stock Value (Table 1: Balance Sheet Extract) £745,000 Average Stock During Year £650,000



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Reducing waste. Cost of Sales (Table 1: Profit and Loss Account extract) £3,391,000 Stock Turnover Based on Closing Year Stock Value: 5.2

The stock turnover period would need to be compared with similar competitors and previous periods to get a proper feel for whether stock control could be improved. If asked to comment on the stock data provided, you should also point out that the information given is very limited. For example, we don’t know what the split is between raw materials, work-in-progress and finished goods. This would give us more of an insight into the reasons for the increase in stocks during 2003/04. Note too that you are not provided with enough information to calculate stock holding data (e.g. economic order quantities) or draw stock control charts. One area the examiner may probe is the general area of how and why BCP should control its stock better (given the evidence of increasing stocks). You should consider the points below in your revision of this area: Firstly, point to the positive reasons why BCP may decide to hold more stocks:

- To meet customer demand better by acting as a “buffer” (e.g. BCP may be able to deliver shorter delivery times to retailers – and improve customer service by doing this)

- To ensure continuity of production (e.g. BCP’s production lines do not have to stop because of a shortage of raw materials)

- To take advantage of quantity discounts (e.g. buying more raw materials in one go might get BCP a better price) Then, point to the problems and costs associated with holding more stock:

- Increased stock holding costs (the finance required to buy the stock; the risk that some of the stock will become damaged or obsolete; costs of storing more stock)

There are various methods that BCP could consider to help them control stock better (if this is what is needed): - Just-in-time systems (JIT) – where purchases of raw materials are closely linked to sales demand on a daily or

week-to-week basis. There is a fairly continuous flow of raw materials into work-in-progress which becomes finished goods to go straight to a customer. This means that negligible stocks need to be held. JIT systems sound attractive – but they are very difficult to implement. It requires very close relationships between customers and suppliers.

- Re-order levels: the point at which stocks of raw materials are re-ordered can be changed using various mathematical models

- Review the number of product lines: we are not told exactly how many products BCP makes – but it may be possible to drop some products near the end of their product life cycle

bensonhill creations plc (“bcp”) · it is the retailer’s job to promote the bcp products...

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