The Expendables Value Consultants - BSAP Case Study

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FACULTY OF

ENGINEERING

ST. AUGUSTINE

THE EXPENDABLES VALUE CONSULTANTS LIMNITED PHASE 2 INVESTIGATION OF BSAP COMPANY LTD.

BURTON ORR 97030002 TIMMY ALI 02724627 SEON CHARLES 04707759 ANTHONY HUTCHINSON 809001943 COLIN GREENE 04702931 SHAM RAMGARIB 04745587 BRENDON MUNROE 03770078

PRMG6012 – VALUE ENGINEERING AND MANAGEMENT

Professor Kit Fai Pun

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Letter to the Managing Director

The Expendables Value Consultants Ltd. #2 Serpentine Rd. Caroni Trinidad [email protected] 20th_{November 2010} Managing Director BSAP Company Ltd. Dear Mr. E.S. Chan,

The members of The Expendables Value Consultants Ltd. would like to express our gratitude towards your company for being hired to conduct a Phase-2 investigation into the issues your company is currently facing. It has been a pleasure working with you and our staff was glad to have contributed to the future success of your company.

The attached report contains a detailed diagnosis of the problems, feasible solutions for the problems, focal areas for further investigation in the final phase and recommendations on design, implementation and monitoring of an improvement programme.

The staff of The Expendables Value Consultants Ltd. can assure you that the recommended solutions will definitely improve the success of your company and establish a culture of value within your organization.

In the event of any further consultation, please feel free to contact us. Yours respectfully,

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I.E. Man

Lead VM Consultant

The Expendables Consultants Limited

List of Figures

Figure 2.1: Cause and Effect Diagram Showing Main Problem and Possible Causes....11

Table 2.1: Fibre Glass Content 2005 - 2009...17

Table 2.2: Short Term versus Long Term Concerns...20

Table 2.3: Operational versus Corporate Concerns...21

Table 2.4:Sales Data for CALBILD...22

Figure 2.2: Graph showing BSAP CALBILD Market Sales...26

Figure 2.3: Normal Distribution of Quality Standards for CALBILD...27

Table 2.5: Analysis of Quality Control Records form Machine 2 (29-01-10 to 18-02-10) ...27

Figure 2.4: Normal Distribution of CALCEIL samples...28

Figure 2.5: Normal Distribution of CALBILD samples...28

Figure 2.6:Graph showing the relationship of Compensation Costs and Average % Fibreglass with time...29

Figure 3.7: Cause and Effect Diagram Showing Feasible Solutions...30

Table 3.6: Feasible Options...34

Table 3.7: Projected Proportions among Options Generated...37

Table 3.8: Raw Material Costs Per Square Metre of CALBILD Board...38

Table 3.9: Raw Material Total Costs Per Tonne of CALBILD Board...39

Table 3.10: Compensation Practice Approach...41

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Figure 3.8: Graphs showing variations in Gross Profits for Compensation Practice &

Uplifting Approach...42

Figure 3.8: Graphs showing variations in Gross Profits for Compensation Practice & Uplifting Approach...42

Figure 5.9: Illustration of Value Management Framework within an Organization...51

Figure 5.10: Expertise/Knowledge Overlap of VM Study Team for BSAP Company...55

Figure A. 1: Normal Distribution Curve for Option 1...62

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List of Tables

Table 2.1: Fibre Glass Content 2005 - 2009...17

Table 2.2: Short Term versus Long Term Concerns...20

Table 2.3: Operational versus Corporate Concerns...21

Table 2.4:Sales Data for CALBILD...22

Table 2.5: Analysis of Quality Control Records form Machine 2 (29-01-10 to 18-02-10) ...27

Table 3.6: Feasible Options...34

Table 3.7: Projected Proportions among Options Generated...37

Table 3.8: Raw Material Costs Per Square Metre of CALBILD Board...38

Table 3.9: Raw Material Total Costs Per Tonne of CALBILD Board...39

Table 3.10: Compensation Practice Approach...41

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1 .0 Introduction

The BSAP Company limited has been experiencing problems relating to the quality of the CALBILD product produced by the No. 2 machine. The symptoms arising from this situation that this company is most concerned with are increased complaints, higher compensation costs, lower market share, lower competitive power, lower revenue and lower competitive power. The Expendables Value Consultants has been hired by the Managing Director to carry out a Phase-2 investigation into this problem. The objectives that are to be achieved in this investigation consist of the following:

• Detailed diagnosis of main problem(s) and identification of causes

• Feasible solutions for the problem(s)

• Focal areas for further investigation in the final phase, and

• Recommendations on design, implementation and monitoring of a improvement programme.

This report attempts to discuss the findings from the investigation carried out and present any necessary recommendations.

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2 .0 Diagnosis of Main Problem and Identification of Causes

After comprehensive analysis of the BSAP Case, the Expendables Value Consultants identified the overarching problem to be that of POOR product quality of the CALBILD product where significant batches fail to meet the B.S. strength specification of 86 Kgm.

A review of the memoranda provided by BSAP Company Limited has revealed the following symptoms of the overarching problem of poor product quality. These symptoms are listed below.

SYMPTOMS:

The following symptoms have been identified:

• Increase in complaints

• Higher compensation costs

• Lower market share

• Lower competitive power

• Lower revenue

• Poor company image

CAUSES:

The causes of these symptoms can be categorized into five major sections and represented in the cause and effect diagram shown below.

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The categories of the causes of the symptoms are as follows: • Communication • Personnel • Quality Control • Strengthener Material • Equipment

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2.1 Cause and Effect Diagram Showing Main Problem and Possible

Causes

Poor Product Quality (CALBILD) Strengthener Material Quality Control Equipment Personnel Communication Increase in Machine No. 2 variability from

2005 - 2010 Poor staff attitude towards quality Large Variations in production quality control Chaos between quality control of 2 products Mixing of quality control records provided Failure of staff to accept responsibility Absence of Standards Insufficient inter-department communication Lack of informal discussion Lack of maintenance Lack of investment Old / Substandard machine

Low fibre glass content Increase in

cost of fibre glass

Absence of alternative materials

to chose from

• Increase in complaints

• High Compensation Costs

• Lower Market Share

• Lower competitive power

• Lower revenue

• Poor Company Image

Figure 2.1: Cause and Effect Diagram Showing Main Problem and Possible Causes

2.1.1 Evidence of Causes

Reference is made to the memoranda and data collected from BSAP as evidence to the causes of the problems arising.

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COMMUNICATION

i. Lack of Formal discussions

Memorandum No. 2 clearly indicates that the Production Director was upset that the Sales Director raised the problem of outgoing quality at the Board Meetings without consulting him first. The memorandum seems to suggest that the Production Director’s style of communication is personal and informal, while the Sales Director communication style is more formal and objective as can been seen in Memo No. 1 & 4. The Managing Director responded almost two weeks after the Board meeting held on the 25th February 2010 on the findings of the Sales Director. This shows that managers are not communicating in a timely manner to solve the company’s numerous problems.

In Memorandum No.3 the Sales Director stated that he found the previous meeting was non-productive and there seemed to be disagreement on certain issues. It is also inferred in Memorandum 1 – Memo 2 that there is a lack of properly setting and circulating an agenda before a meeting, which adds to the inefficiency of a meeting.

ii. Insufficient Inter-department Communication

It also appears that the Sales and Production departments are disconnected when in fact they are supposed to be closely communicating because decisions made in both departments have company-wide impact.

Poor communication can also be seen through the difficulty of one department to attain data from another department. If there were suitable communication tools and methods in place and employees were trained in using these tools and methods this would result in timely and accurate distribution of information needed.

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PERSONNEL

i. Poor Staff attitude towards quality

Memorandum No. 1 outlines the statements made by the Sales Director concerning the working attitude of sales department. He stated that there seems to be a great deal of slackness in the selling operation. “The Sales representatives are far too prone to making unrealistic delivery promises and reporting of customer visits are sloppy. This is all due to their clear lack of directive as to what is expected of them”. If the sales representatives do not understand the uses or differences in CALCEIL and CALBILD they can sell the wrong product to customers who would in turn lead to increased customer dissatisfaction and resulting in increase compensation cost poor company image, and decreased market share.

In Memo No. 4, the Sales Director aired his belief that a great deal depends on the personal attitudes of the Production Managers concerned. In Memo No. 11, the Sales Manager stated that he believes all problems would disappear if the Production people were to roll up their sleeves and introduce procedures to meet quality specifications.

In Memo No.9, the Works Manager does not see a problem with quality variability as he believes it is comparable to that achieved by the main competitors.

It can also be inferred that employees may be dissatisfied with their compensation packages and in turn this is represented in their lack of devotion to their jobs. It also seems that top management is not trained in management skills and practices. There

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seems to be an overall lack of professionalism needed at the executive level of the company.

ii. Mixing of quality control records provided

In memorandum No. 4, the Sales Director indicated to the Board of Directors that some exploratory work in my department has revealed a number of serious problems in the quality. He believes that unless the problems are dealt with, the company’s ability to compete will be placed in jeopardy and future profitability endangered.

He indicated that quality standards on our many products vary enormously from one product to another and was unable to ascertain why the quality specifications for other products are not met. It is inferred that a great deal seems to depend on the personal attitudes of the production managers concerned.

The mixing of the records were discovered where the control records provided in Memo4 represented both CALBILD and CALCEIL products. The mixing of records can create misconceptions and be misleading to management.

iii. Failure of Staff to accept responsibility

Memorandum No. 4 seeks to infer that the Sales and Production departments appear to be disconnected when in fact they should operating as an integrated unit because decisions made in both departments have company-wide impact. Neither department is willing to take ownership of the problems. It also seems that employees of BSAP Ltd. are not held accountable for their mistakes and no proper evaluation system is in replace to ensure training and re-training of employees in their various roles.

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QUALITY CONTROL i. Absence of Standards

In Memo 1, the Sales Director informed the Managing Director that he has initiated a series of meetings with the area sales managers and they have already made significant progress in working out new procedures and methods, which hopefully, will lead to more aggressive selling. This statement seems to imply that there is a need to develop and implement new procedures and methods. Due to the lack of clearly outlined procedures, there is no system to guide consistency and support company performance. This can be seen by the Sales department inability to set delivery times and stick to them and reporting of customer visits which was deemed as being “ sloppy” by the Sales Director. Lack of clear standards has also resulted in a lot of money being spent to compensate customers as indicated in Memorandum No. 4.

ii. Chaos between quality control of two products

In Memorandum No. 7, the Technical Development Officer stated that he was puzzled by the frequency distribution of strength that was presented from No.2 machine. He stated that this data may refer to CALCEIL, another product containing fibreglass strengthener but not intended for the same application as CALBILD. A conclusion can de deduced that due to human error, the quality control records that were presented by the Sales Director were mixed up, as the data provided showed that both products were manufactured using the same machine.

The quality control records from Machine No.2 revealed that 57% of the data was referring to the correct product, CALBILD and 43% of data collected was referred to

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another product type, CALCEIL, which was attributable to one of the main causes for the high variability problem in product strength.

iii. Large Variations in Production Quality Control

Close examination of CALBILD samples revealed that the mean strength is still approximately 1.7 Kgm below the British Standard (BS) specification of 86 Kgm; and its standard deviation is 2 kgm greater than that of the initial level of 6 kgm that was achieved five years ago, when the machine was first commissioned.

The Sales Director disclosed that the quality standards on many products vary enormously from one product to another. He also stated that he was unable to discover why the quality specifications for other products are not met.

The Technical Development Officer stated that he understands what the company could stand to gain by reducing the variability. He believes increase investment is needed on No.2 machine in order to achieve this lower variability. We were also informed that the quality inspectors are told to reject a batch if the strength falls below 78 kgm. However batches with strengths in the range 70-78 kgm are sold as seconds. Batches lower that 70 kgm are scrapped. In this case 16 % of material are scrapped or sold as seconds. 40 % of accepted product will lie below the B.S specification of 86 Kgm.

STRENGTHENER MATERIAL i. Increase in the cost of fibre glass

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Memorandum No. 7 indicates clearly, as stated by the Technical Development Manager that there has been a 10% increase in the cost of fibre glass, the second rise in the last twelve months.

The Sales Manager stated in Memo No. 11 that they do not have data in the right form to show how the cost of customer complaints has varied with the proportion of fibre glass strengthener. He went on to explain that, some idea of the effect can be seen by displaying the cost of compensating the customer alongside the average % fibre glass for each of the years 2005-2009.

Table 2.1: Fibre Glass Content 2005 - 2009

Year Average % Fibre Glass Compensation Cost

($) 2005 47.8 100, 000 2006 46.2 140, 000 2007 41.8 260, 000 2008 39.3 320, 000 2009 37.5 400, 000

Overall, there has been a decrease of 10.3 % in fibreglass from 2005 to 2009.

In Memo 12, the Works Manager stated that BSAP Ltd. made the decision to deliberately decrease the fibreglass content over the years to cut production costs. However, BSAP Ltd. needs to determine whether lowering the fibreglass content is worth diminishing the company’s image and paying high compensation cost. This has resulted in decreased market share for the period 2006 – 2009.

Although BSAP’s market share has decrease from 2006, it appears that sales have increased (See Table in Memorandum No. 8). This indicates an increase in the local market due to expansion of the construction industry. This resulted in increased sales

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revenue for BSAP Ltd. It is to quite notable as well to observe that as the fiberglass content increases, the cost of wood flour and resin decreases (See Table 2 in Memorandum No. 7), thereby mitigating some of the increase in total unit price.

ii. Low fibreglass content

The Production Director informed the Board that the B.S specification of 86 Kgm can be achieved for CALBILD quite easily by introducing more fibreglass strengthener. There needs to be a minimum amount of Fibreglass strengthener used in the manufacturing process for CALBILD for the product to meet the specifications. In Memorandum No. 11, the Sales Director provided an estimate of the change in fibreglass content for the period 2005 – 2009. This is shown in the table below.

Year Average % Fibre Glass % Change in Fibre

Glass Content 2005 47.8 0 2006 46.2 - 1.6 2007 41.8 - 4.4 2008 39.3 - 2.5 2009 37.5 - 1.8

As the company started to lower the % Fibre glass in an attempt to reduce production costs it was in fact leading to the a decrease in the product quality and hence increased customer complaints .

iii. Absence of alternative materials to choose from

Inference is made in the memoranda since the Works Manager made a deliberate decrease in the fiberglass content to maintain production costs. It is also inferred that there may either be a sole supplier or a regulated industry price for this raw material to the Company since the cost of glass fiber has increased twice within the last 12 months.

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EQUIPMENT

i. Lack of investment

The Technical Department Manager believes investment is needed on No. 2 machine to lower variability however he is not sure if the economic climate would allow.

The Works Manager stated in Memo 13 that the decrease in fiberglass content over the years was to cut production costs.

ii. Lack of maintenance

Lack of maintenance is inferred in the case by the increasing variability or increasing standard deviation of the machine. This can be a combination of lack of maintenance, use of substandard parts, or lack of applicable knowledge in repair and maintenance of the machine. The cumulative effect of this over the 5 year period substantiates the sentiments expressed by the Technical Department Manager in the above point about investment being needed.

iii. Old/Substandard Machines

Evidence of use of old equipment in BSAP Ltd. is seen by the Works Manager being unable to keep an appointment because he had to attend an urgent meeting on the difficulties that Production is experiencing with No.4 machine. In Memo 10 the Technical Department Manager stated that he believes increase investment is needed on No.2 machine in order to achieve this lower variability.

It appears that the company is experiencing major problems with its production machine lines, mainly machine 2 and 4. These problems contribute to the product strength

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variability which in turn contributes to wastage, higher compensation cost and customer dissatisfaction.

iv. Increase in Machine No. 2 Variability from 2005 – 2010

The Technical Director, in Memorandum No. 10 indicated that a critical analysis was done into the query about the variability in strength of test samples of CALBILD from No.2 machine (See Table in Memorandum No. 4). It revealed that there is agreement that the standard deviation of 8 Kgms for these results is high compared with tests made when the machine was installed five years ago. According to records, the standard deviation achieved about five years ago was 6 Kgms. The Technical director stated that he sees no reason why this variability could not be achieved again with adequate control of the process. He also believes that the company could gain by reducing the variability even further since quality specifications could be achieved with lower fibreglass content. There is doubt however as to whether this lower variability could be achieved by improving quality control over and above that needed to reduce variability to the level in 2005. The lower variability, he believes could be achieved if investment on No.2 machine is done, however in the present economic climate he does not see this justifiable.

2.2 Short Term versus Long Term Concerns

The following table shows the short term versus long term concerns of the BSAP Company. Table 2.2: Short Term versus Long Term Concerns

Short Term Long Term

Machine Variability Decreased Market Share

Customer Complaints Undesirable Organization Culture Poor Quality Control Poor Company Image

Higher Compensation Costs Decreased Competitive Power Alternate Materials/Suppliers Total Quality Management

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2.3 Operational versus Corporate Concerns

The following table shows the operational versus corporate concerns of the BSAP Company. Table 2.3: Operational versus Corporate Concerns

Operational Corporate

Lack of machine maintenance Lack of capital investment into Machine No. 2

Increased variability of Machine No. 2 Poor Company Image Poor Quality Control Lower Revenue Ownership of Responsibility Lower Market Share Inefficient Meetings Lower Competitive Power Poor Communication between

Departments High Compensation Costs

Reduced Fibreglass Content Increased Customer Complaints

2.4 Diagnosis of Situations

Using the data provided in the memorandums, the following situations were analyzed in an effort to diagnose the main problem.

2.4.1 Market Share

Using the sales data for CALBILD (Memorandum 8), the following market share figures were calculated.

Constraints and Assumptions

• The assumption made in this calculation is that the BSAP sales presented represent both “First” and “Second” batches.

• One constraint is that the BSAP sales for the second quarter of 2010 along with the annual local sales are estimated figures.

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2.4.1.1 Analysis of Given Data

Table 2.4:Sales Data for CALBILD

Ye ar Quart er BSAP Sales (Tonnes)

Annual Local Sales

(Tonnes) Market Share

20 06 1 230 6,000 2 390 3 540 4 380 20 07 1 260 7,100 2 440 3 520 4 410

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Ye

ar Quarter BSAP Sales (Tonnes) Annual Local Sales (Tonnes) Market Share

20 08 1 290 8,300 2 503 3 505 4 490 20 09 1 350 8,800 2 560 3 540 4 460

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Ye

ar Quarter BSAP Sales (Tonnes) Annual Local Sales (Tonnes) Market Share

20 10

1 390

9,600

2 600

Calculation of Market Share

The BSAP market share for each year was found using the following calculation:

Sample Calculation:

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These results are presented graphically below.

Figure 2.2: Graph showing BSAP CALBILD Market Sales

From the graph shown in Figure 2.2, it can be seen that BSAP recorded a gradual decline in the market share between the period 2006 to 2009. This was then followed by an acute, steady decline from 2009 to 2010. This trend suggests that a problem exists with the CALBILD product. It is also known that the fibre glass content of the CALBILD product has decreased during 2005 to 2009 (Memorandum 11). Therefore, it can be deduced that the poor quality of the CALBILD product is indirectly responsible for this decrease in sales further resulting in a decline in the market share. This decline in sales creates a poor company image, lowers the competitive power and generates lower revenue.

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2.4.2 Quality Standards for CALBILD

BSAP’s existing standard accepts all products with strengths greater than 78 kgm. Batches with strengths between 70-78 kgm are considered seconds and those that are lower than 70 kgm are scrapped. This is shown in the following diagram.

Figure 2.3: Normal Distribution of Quality Standards for CALBILD

Table 2.5: Analysis of Quality Control Records form Machine 2 (29-01-10 to 18-02-10)

Order No. B.S. Standard Sample size Mean strength

(kgm) Deviation (kgm)Standard 824* Not given 43 64.9 7.1 825* 86 kgm 57 83.3 7.3 Sample Calculations Mean = Standard Deviation =

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Figure 2.4: Normal Distribution of CALCEIL samples

Figure 2.5: Normal Distribution of CALBILD samples

As shown in figure 2.5 above, out of the 57 samples of CALBILD, more than half of the population (63%) failed to meet the B.S. specified strength of 86 kgm. Additionally, approximately 41% of the samples lie within one standard deviation of the required mean (78-86

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kgm) and this would have been sold as ‘first second’. This area is also where most of the customer complaints and compensation are generated. Just about 10% of the samples would fall in the ‘seconds’ category and the remaining 11.5% would have been scrapped.

2.4.3 Compensation Costs

The actual relationship between compensation costs and the proportion of fibreglass strengtheners is not available (Memorandum 11) but an approximation of their relationship was obtained dividing the annual output by the annual fibreglass usage to compute the raw material cost and plotting it against the yearly compensation costs. This is shown in the following diagram.

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3 .0 Possible Solutions to the Problem

The following diagram illustrates some possible solutions to the problem that BSAP Company Limited is currently facing.

Good Product Quality (CALBILD) Strengthener Material Quality Control Equipment Personal Communication Decrease in Machine No. 2 variability from

Quality Control System Performance

appraisal system

Make aware of job descriptions Total Quality Management More informal meeting 2-way communication More maintenance Buy new machine More investment Alternative Supplier Increase proportion of fibre glass • Decrease in complaints

• Low Compensation Costs

• Higher Market Share

• Increase competitive power

• Increase revenue

• improve Company Image

Figure 3.7: Cause and Effect Diagram Showing Feasible Solutions

The above cause and effect diagram indicates feasible solutions which can be undertaken to alleviate some of the problems faced by BSAP Co. Ltd. It must be stressed that most of the solutions under the various headlines are general solutions based on the views of the consultancy

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team. It must be noted however that there are two solutions where sufficient information is available thus enabling our consulting team to deliberate in detail. These solutions are highlighted in red on the diagram. Below is a discussion on the proposed solutions.

COMMUNICATION

i. More informal meetings

Improved communication inter-department is crucial so as to enable successful liaison inter and intra departments. To improve this, our consultancy team suggests the use of the following methods:

(a) An open door policy which will foster more efficient decision making between employess and supervisors.

(b) Regular feedback be provided via suggestion box or debriefing sessions to improve quality of work

(c) A well computerized management information system linking all departments and enabling effective communication.

ii. Two way communication

To improve this we suggest a workshop for management and employees on communication skills. Additionally, a team can be appointed to deal with communications on a regular basis so as to boost employee morale.

PERSONNEL

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Implement a performance appraisal system to evaluate performance of employees and ensure employees receive re-training in their various roles if necessary. This ensures that staff is accountable and is linked to their functions and reporting structure.

Clearly defined job descriptions must be provided for employees and re-training is done as the need arises for revision of job descriptions.

QUALITY CONTROL

i. Total Quality Management

Implementation of a Quality Management System ( ISO 9001 :2008) which will require thatBSAP do the following

:-- Develop a set of procedures that cover all key processes in the business; - Monitor processes to ensure they are effective;

- Keep adequate records;

- Check output for defects, with appropriate and corrective action where necessary; - Regularly review individual processes and the quality system itself for effectiveness;

and facilitate continuous improvement ii. Quality Control System

• Establish formal direct feedback loop between production and inspection departments to ensure product quality is maintained during production runs

• Establish Measurable key performance indicators per department which utilizes a performance framework such as a Balance scorecard to assess and discuss ways to continuously improve performance. Production KPI’s should be based on a combination of both quality and quantity.

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STRENGTHENER MATERIAL

i. Increased proportion of fibre glass

By increasing the fiberglass content the following will occur:

- Improved quality of the CALBILD Board

- Reduced consumer complaints

- A greater market share

- Reduced overall cost of production

ii. Alternative Supplier

- Source and alternative supplier of make arrangements with present supplier to have reduced cost when purchasing in bulk.

EQUIPMENT

i. Purchase New Machines

BSAP should consider budgeting for a complete machine upgrade. New equipment coupled with proper training in its use will reduce variability in product quality.

ii. More maintenance

Establish clear maintenance procedures regarding equipment. This will include preventative maintenance and repair procedures.

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iii. More investment

More investment is necessary for the following:

- Training employees in the effective use, repair and maintenance of machines

- purchasing of new equipment to improve product quality

- Research and development to improve product quality

iv. Decrease in machine No. 2 Variability

Since reference is made substantially about the variability of Machine No. 2, we suggest that a trial be done to ascertain which product is best suited for manufacturing in this machine. Once this is done then this machine can be solely dedicated to a specific product. This will not only reduce variations in the setup of production runs but also optimize product quality and reduce cost of maintenance.

From the cause and effect diagram shown in Figure 3.7 there are numerous feasible options emerging from combinations of fibre glass content and machine variability. Each option identified will be analyzed based on two approaches i.e. Compensation Practice versus Uplifting Approach. Feasible Options

In this section the feasible options will be generated and the implications of each option will be analyzed. The following table contains a list of feasible options.

Table 3.6: Feasible Options

Optio ns Mean Strength of CALBILD/(kgm) Standard Deviation/Variability of No. 2 machine 1 83.3 8 (current situation) 2 86 6

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3 86 8 4 92 8 5 92 6 6 98 8 7 98 6 8 104 8 9 104 6

Option 1 – “Do Nothing” – This option involves leaving the present situation as is i.e. leaving the current fibre glass content unchanged (36.1 %) and the machine variability of 8. This situation yields a mean fibre glass content of 83.3 kgm.

Option 2 – This option involves increasing the fibre glass content to 38.3 % to yield an expected mean sample strength of 86 kgm. This option also involves changing the standard deviation of the machine to 6 kgm.

Option 3 – This option involves increasing the fibre glass content to 38.3 % to yield an expected mean sample strength of 86 kgm. The machine’s standard deviation is left unchanged in this option.

Option 5 – This option involves increasing the fibre glass content to 44.4 % to yield an expected mean sample strength of 92 kgm. This option also involves changing the standard deviation of the machine to 6 kgm.

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Option 7 – This option involves increasing the fibre glass content to 51.7 % to yield an expected mean sample strength of 98 kgm. This option also involves changing the machine’s variability to 6 kgm.

Option 8 – This option involves increasing the fibre glass content to 62 % to yield an expected mean sample strength of 104 kgm. The machine’s variability is left unchanged in this option.

Option 9 – This option involves increasing the fibre glass content to 62 % to yield an expected mean sample strength of 104 kgm. This option also involves changing the machine’s variability to 6 kgm.

3.1 Sensitivity Analysis of Options

In this section, the options that were generated above would be exposed to a sensitivity analysis which involves the application of the Compensation Practice and Uplifting Approach to determine which approach yields more profits. Sections 3.1.1 to 3.1.5 discuss the preliminary analyses whose results were used to execute the sensitivity analysis.

Compensation Practice

This approach involves using the existing standard for CALBILD which classifies all batches of strength 78 kgm or more as acceptable product. This approach requires that customers be compensated for any complaints. With this approach Grade 1 and 2 batches are sold at $5.00 per square metre and Grade 3 batches at $2.70 per square metre. In this approach Grade 1 batches are considered to be First (> 86 kgm), Grade 2 batches to be First-Second (78-86 kgm) and Grade 3 batches to be Seconds (70-78 kgm).

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Uplifting Approach

This approach involves the increasing of the acceptance level to from 78 kgm to 86 kgm. This is where whatever was originally considered as First-Second class (i.e. > 86 kgm) will be considered class. Grade 1 and Grade 2 batches will represent First and First-Seconds respectively and they will be sold at $5.00 per square metre while Grade 3 batches will represent Seconds and this product will be sold at $2.70 per square metre.

3.1.1 Projected Proportions of Production among Options Generated

Based on the generated options, the proportions of production was determined and presented below using normal distribution curves. These results are summarized in Table 3.9.

Shifting of Means, Adjustment of Machine variability and their implications

The diagrams presented in Appendix A: Normal Distributions for Options Generated shows how the various options affect the mean strength of CALBILD and the proportions of First, First Second, Seconds and Scrap produced. It can be seen that by increasing the percentage of fibreglass, the mean strength of the product increases. This produces more of the First class batch. Secondly, by adjusting the machine variability form 8 to 6, the amount of First Second produced is increased. This increase in First Second production could result in increased compensation costs.

Table 3.7: Projected Proportions among Options Generated

Options First First

Second Second Scrap Total

1 40.52% 35.90% 18.93% 4.65% 100% 2 50.00% 41.31% 8.28% 0.41% 100% 3 50.00% 34.10% 13.60% 2.30% 100% 4 83.00% 13.08% 3.62% 0.30% 100% 5 85.08% 13.90% 1.01% 0.01% 100% 6 93.57% 5.83% 0.58% 0.02% 100% 7 97.72% 2.24% 0.045% 0.00% 100%

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8 98.75% 1.19% 0.06% 0.00% 100%

9 99.86% 0.14% 0.00% 0.00% 100%

3.1.2 Raw Material Cost Per Square Metre of CALBILD Board

In order to determine the gross profits from each option, the costs to produce CALBILD product must be determined. Therefore, the following table was computed to reflect the total costs based on a 10 % fibre increase (as stated in Memorandum 7).

Table 3.8: Raw Material Costs Per Square Metre of CALBILD Board

Option s G.F% (1) G.F.O . Cost (2) G.F.N. Cost (10% increase) (3) Wood F Cost (4) Resi n Cost (1+3+4 ) Old Total (2+3+4) New Total 1 36.1 0.79 0.87 0.40 0.36 1.55 1.63 2 38.3 0.84 0.92 0.38 0.36 1.58 1.66 3 38.3 0.84 0.92 0.38 0.36 1.58 1.66 4 44.4 0.98 1.08 0.34 0.36 1.68 1.78 5 44.4 0.98 1.08 0.34 0.36 1.68 1.78 6 51.7 1.13 1.24 0.29 0.36 1.78 1.89 7 51.7 1.13 1.24 0.29 0.36 1.78 1.89 8 62.0 1.35 1.49 0.21 0.35 1.91 2.05 9 62.0 1.35 1.49 0.21 0.35 1.91 2.05 3.1.3 Conversion factor

The determination of a conversion factor was necessary since the costs in Table 3.8 represents cost per metre and the BSAP sales figures shown in Memorandum 9 are in tonnes. Therefore, these costs were recalculated to represent costs per tonne since the cost to produce a percentage of sales will be determined by multiplying the cost per tonne by the BSAP sales in tonnes. The calculation of the conversion factor is shown below.

Weight of standard sheet of CALBILD board = 31.5 kg 0.0315 tonnes Area of standard sheet of CALBILD board = 3.0 m × 1.5 m = 4.5 m2

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=> 1 tonne =

= 142.86 m2

3.1.4 Raw Material Total Costs per Tonne of CALBILD Board

Using the conversion factor that was determined above, the following table was produced. Table 3.9: Raw Material Total Costs Per Tonne of CALBILD Board

Option s G.F% Total (Cost per Square Metre) Total (Cost per Tonne) 1 36.1 1.63 232.86 2 38.3 1.66 237.15 3 38.3 1.66 237.15 4 44.4 1.78 254.29 5 44.4 1.78 254.29 6 51.7 1.89 270.01 7 51.7 1.89 270.01 8 62 2.05 292.86 9 62 2.05 292.86 3.1.5 Procedures Adopted

This section outlines the procedures for determination of the gross profit and compensation costs. This profit was determined by subtracting the cost of goods sold from the revenue. In the case of the compensation approach, compensation costs were also subtracted. The following formulas used to obtain revenue and cost of goods sold.

3.1.5.1 Calculation of Revenue

Revenue from Proportion = BSAP Sales (2010)*_{× Projected Proportion of Production ×}

Selling Price per sq/m × Conversion factor *see Section 3.1.5.4 for determination of BSAP sales for 2010.

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3.1.5.2 Calculation of Cost of Proportion of CALBILD sold

Cost of proportion sold = BSAP Sales (2020) × Projected Proportion of Production × Total

Raw Material Cost per tonne

3.1.5.3 Determination of Compensation Costs

Compensation costs for the Compensation Practice approach were determined by interpolating the data given in Memorandum 11 to arrive at compensation costs for each of the options generated.

3.1.5.4 Determination of Revenue for Quarter 3 and 4 for 2010

The BSAP sales for the remaining two quarters of 2010 were calculated using the same rate of change experienced during quarter 3 and 4 of 2009. From this reasoning, quarter three and four sales were determined to be 579 tonnes and 493 tonnes respectively. These estimations resulted in total sales for 2010 of 2062 tonnes.

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3.1.6 Compensation Practice Approach

The following table displays the projected gross profits for the options generated using the Compensation Practice Approach.

Table 3.10: Compensation Practice Approach

Optio ns Fibre % Glas s Gross Profit (Grade 1) / $ Gross Profit (Grade 2) / $ Gross Profit (Grade 3) / $ Compensati

on Costs / $ Gross Total

Profit / $ 1 36.1 402,253.90 356,389.81 59,667.63 500,000.00* 318,311.3 4 2 38.3 491,941.65 406,442.19 25,366.23 364,444.44 559,305.6 3 3 38.3 491,941.65 335,504.21 41,664.34 364,444.44 504,665.7 6 4 44.4 787,288.71 124,069.11 9810.66 189,090.91 732,077.5 7 5 44.4 807,018.36 131,847.15 2737.23 189,090.91 752,511.8 3 6 51.7 857,219.08 53,410.14 1383.87 0.00 912,013.0 9 7 51.7 895,238.31 21,437.35 119.30 0.00 916,794.9 6 8 62.0 858,146.66 10,341.21 114.89 0.00 868,602.7 6 9 62.0 867,792.67 1216.61 0.00 0.00 869,009.2 8 *Includes administrative costs

3.1.7 Uplifting Approach

The following table displays the projected gross profits for the options generated using the Uplifting Approach.

Table 3.11: Uplifting Approach

Optio

ns Fibre %

Glass

Gross Profit

(Grade 1) / $ (Grade 2) / $Gross Profit (Grade 3) / $Gross Profit Total Gross Profit / $

1 36.1 402,253.90 113,157.32 59,667.63 575,078.85

2 38.3 491,941.65 126,555.44 25,366.23 643,863.32

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4 44.4 787,288.71 35,448.47 9,810.66 832,547.84 5 44.4 807,018.36 37,670.78 2,737.23 847,426.37 6 51.7 857,219.08 13,910.27 1,383.87 872,513.22 7 51.7 895,238.31 5,344.60 119.30 900,702,21 8 62.0 858,146.66 2,278.63 114.89 860,540.18 9 62.0 867,792.67 268,07 0.00 868,060.74

Figure 3.8: Graphs showing variations in Gross Profits for Compensation Practice & Uplifting Approach From the graph shown above it can be seen that the Uplifting Approach is more profitable below a fibre glass content of 51.7 %. At this point the machine variability is 8. Beyond a fibre glass content of 51.7 %, the Compensation Practice becomes more profitable.

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3.2 Assumptions and Constraints

This section outlines the assumptions and constraints that were taken into account when performing the phase 2 investigation of the BSAP Company Ltd.

3.2.1 Assumptions

• BSAP is a medium-sized company – Based on the market share calculations presented in Section 2.4.1, it was seen that BSAP Ltd. owned an average of 23% of the market.

• Accurate information – It is assumed that the information contained in the memos is accurate.

• Inefficient policies and procedures – According to Memorandum 1, the Sales Director states that he is currently working with the Sales Manager to develop new procedures and methods to create more aggressive selling.

• Absence of quality assurance and control programme – According to Memorandum 4, the Sales Director indicated that he have been unable to discover why the quality specifications are not met and he suggests the setting up of a working party to improve quality of products. Also, according to Memorandum 11, the Sales Manager expressed dissatisfaction in the Production Department not being able to introduce procedures to meet quality specifications.

• Unaware of job descriptions – According to Memorandum 1, the Sales Director stated that representatives of the Operations Department lacked a clear directive of what is expected of them.

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• Sales Data for CALBILD product- The sales data for CALBILD (Memorandum 8) represents “First” and “First-Second” batches. It was also assumed that the sales data can be projected. Projection was done for Q3 and Q4 of 2010. The same rate of change for Q3 and Q4 of 2009 was applied to 2010 during the same period.

• Estimated fixed costs – It was assumed that fixed costs were constant for all fixed cost items. This assumption allowed for simplicity in calculations.

• Variable costs – It was assumed that some variable cost items and others such as labour and production costs remained unchanged as the raw materials varied. The total raw material costs were used for its corresponding option calculation.

• Estimated Compensation Costs (including Administrative Costs) – It was assumed that 100% of compensation costs were incurred due to the sales of the “First-Second” products since they all fell below the B.S. specification of 86 kgm.

3.2.2 Constraints

• Machine data - Lack of data relating to the maintenance cost of No. 2 Machine

• Compensation costs – Lack of data relating to the compensation costs for % fibre glass over 47.8%

• Limited data – Data provided is limited to that provided in the Memos. More investigation is required in the third phase.

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4 .0 Focal Areas for Further Investigation in the Final Phase

The Expendables Value Consultants recommended the following areas to be considered for further investigation:

• Strategic Objectives - Top management should review the company’s strategic objectives in order to produce a clear company mission and vision for the employees (Memo 1).

• Job Description - The sales representatives may be unclear about their job description (Memo 1). This concern is raised by the Sales Director and can be addressed by reviewing the job specifications of the employees and developing a Performance Appraisal System.

• Compensation costs versus Fibre glass content - A study into the change in compensation costs with fibreglass content above 47.8% (Memo 11). This would enable a more precise calculation of profits for options with fibreglass content over this amount.

• Quality Assurance and Quality Control - There is no implication that the BSAP Company employs a Quality Assurance/Quality Control Programme (Memo 4 & 11). This programme would aid in determining the reasons why the quality specifications are not being met. A more accurate testing and measuring procedure or equipment should be considered as the current procedure is unable to give an accuracy of more than 1 kgm (Memo 7).

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• Alternate suppliers - The Company should investigate whether alternate suppliers for raw materials can be explored. The memos suggest that the company has a sole supplier.

• Machine Repair - The company should determine whether increased investments into Machine No.2 can be justified (Memo 10). This increase may exceed the normal Preventative Maintenance (PM) costs that may have been conducted on the machine.

• Value Management Principles –

 Management Style: the BSAP Company should review their current management style to determine if the concepts of value and function are being utilized effectively. Teamwork and communication principles should be investigated as the case indicates the presence of poor human dynamics in the company. The management team should encourage a work environment that harbours creativity, innovation, a functional approach and focus on customer requirements (British Standards Institute 2000).

 Human Dynamics: The BSAP case indicates the presence of poor teamwork as the different departments, Sales and Production, are not working together to determine the cause of the problem. Other areas in human dynamics that could be investigated are satisfaction; giving credit for individual and team contributions, communication; a common understanding and better group support and ownership; the group or individual responsible for implementing Value Management activities. (British Standards Institute 2000).

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 Environmental Considerations: The management team should identify conditions, constraints and opportunities that are internal and external to the organization that may influence Value Management practices. These may include specific organizational rules and policies, market conditions and competitors (British Standards Institute 2000).

 Methods and Tools: The management team should assess their current methods and tools used to determine the efficiency of their processes and procedures used to manufacture their products. Common Value Management methods and tools that can be used are Value Analysis, Function Analysis, Design to Cost and Design to Objectives (British Standards Institute 2000).

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5 .0 Recommendations on Design, Implementation &

Monitoring of a Improvement Programme

The Value Management approach would be adopted to develop an improvement programme for the BSAP Company Limited. The elements of this approach and the application of its elements to the BSAP case have been described in the following sections.

Value Management is a style of management, particularly dedicated to motivating people, developing skills and promoting synergies and innovation, with the aim of maximizing the overall performance of an organization (British Standards Institute 2000).

The key principles of Value Management which were mentioned as focal areas for further investigation in the final phase (see Section 4) can be brought together in a management framework comprising:

• A Policy;

• A Programme;

• Training, and

• Specific studies;

5.1 Establishment of a Value Management Framework

Assuming that there is an absence of a Value Management Framework in the BSAP Company Ltd., it is recommended that such a framework be developed in order to establish a

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Value Culture within the organization. This framework will be used as solution for improvement within the BSAP Company.

The following diagram illustrates the interrelationship between components of the Value Management Framework and the rest of an organization’s management structure.

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GENERAL MANAGEMENT GOALS

VM Policy

Consistent with and contributes to Other Policies

VM PROGRAMME

Owned by Champion (the Value Manager) Establishes procedures for training and Practice

VM TRAINING Establishes culture Provides awareness Builds competence VM STUDIES Formal application of methods for: Strategic studies Organizational studies Operational studies

VM METHODS AND TOOLS

Application of selected methods

RESULTS V A LU E C U LT U R E E na bl e in no va tiv e de ci si on s ba se d on V al ue F E E D B A C K F O R C O N TI N U O U S IM P R O V E M E N T A nd to c on vi nc e cu st om er s an d st ak eh ol de rs

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5.2 Value Management Policy

The BSAP Company’s top management team should develop a Value Management Policy that is based on the organization’s goals and objectives. This policy should have a holistic approach and would guide the activities and practices within the VM programme. It should seek to satisfy the needs of the customers and stakeholders. Adherence to the Value Management policy should be the responsibility of the middle management team or a Value Manager (British Standards Institute 2000).

5.3 Value Management Programme

A Value Management Programme is a planned and structured array of activities which enables the development, implementation and maintenance of a Value Management Policy in a suitable manner (British Standards Institute 2000). The Value Management Programme includes:

• integration of Value Management within the organization and development of procedures;

• quantified targets, performance indicators and other means for assessing results;

• Value Management Studies;

• appropriate resources, teams, timetables and budgets;

• a plan for appropriate deployment of resources;

• training and awareness for members of the organization;

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• a management plan of actions to be taken to implement the outcome of Value Management studies;

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5.3.1 Hiring a Value Manager

This is the first initiative that should be adopted by BSAP Company Ltd. since the design, development and implementation of a Value Management Programme should be made the responsibility of a single individual, the Value Manager. The duties of the Value Manager will include collection of suitable subjects for VM studies, form teams, organize training and supervise progress of studies. Since BSAP Company Ltd. is a medium sized organization, these duties can be assigned to one member of staff.

5.3.2 Value Management Study

The Value Management study involves the application of one or more methods to a specific subject identified within a Value Management Programme (British Standards Institute 2000). The VM study is led by a leader. Therefore, the BSAP Company Ltd. should assign a study leader who will define the objectives of the study in relation to the VM Policy and Programme. The members of the VM Study team should comprise a disparate group of people representing the various stakeholders from the departments within the BSAP Company Ltd. It is recommended that this team be cross-functional in nature. The following diagram reflects the benefits of the participation and knowledge/expertise overlap obtained through the formation of a cross-functional team within the BSAP Company.

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TECHNICAL MARKETING

PRODUCTION WORKS

CONSTRUCTIVE OVERLAP

Figure 5.10: Expertise/Knowledge Overlap of VM Study Team for BSAP Company

This cross-functional team will be responsible for identifying the methods and supporting processes needed to achieve the objectives in relation to the VM Policy and Programme. BSAP Company Ltd. will need to source the necessary training for the application of these methods. This VM Study team will need to set performance and resource targets and devise a method for their measurement. The monitoring and measurement of outcomes will be necessary in order to compare achievements with targets which can further assist in providing feedback for the benefits of future studies. It is also recommended that the VM study leader establish a timetable for the study and identify the resources to be used.

5.4 Value Management Training

In order for the BSAP Company to implement the VM programme effectively, proper training would be needed to develop the Value Culture and competence in Value Management practices within the entire organization. Firstly, the levels of competence in each of the subject areas in the VM programme should be determined then the appropriate level of training applied

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(British Standards Institute 2000). The training should be made available to employees at all levels in the company and should focus on support for Value Management activities, methods and tools to be used in the VM programme and developing an awareness of value among staff. One benefit of this training would be the future application of Value Management practices to more complex and strategic issues.

5.5 Value Management Tools and Methods

There are various methods and tools that can be employed by the BSAP Company to assess or re-engineer key processes and procedures used to bring value to customers. Some of which are:

• The Function Analysis method, which can be used to identify the key functions of a product, system or an organization (British Standards Institute 2000). The BSAP Company can use this tool to determine the product’s functions, its performance requirements and improve communication among the different departments involved.

• The Value Analysis method improves the competitiveness of a product by allowing the manufacturer and the customer to design, produce, maintain and use the product effectively. This tool can be used in conjunction with the Function Analysis method to increase the value of the product (British Standards Institute 2000).

• A subset of the Function Analysis process is the Function Cost analysis. This tool can be used by the BSAP Company to determine the total cost in providing a specific function in a product (British Standards Institute 2000).

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6 .0 Conclusion

Based on the sensitivity analysis that was performed it is recommended that the BSAP Company Limited adopt the Uplifting Approach due to the fact that this approach yields more profits up to a fibre glass content of 51.7 %. Although the Compensation Practice yields more profits beyond this fibre glass content, these projected profits were calculated with the absence of information regarding compensation costs over a fibre glass content of 51.7 %. Although, this lack of information creates a limitation, it can be projected that the actual returns from the Compensation Practice will definitely be lower than the amounts currently reflected in Figure 3.8. The provision of these compensation costs would have given a true reflection of the projected returns from the Compensation Practice.

In conjunction with the Uplifting Approach it is recommended that BSAP Company Limited adopt option 7 since this option yields the most profits. This option involves a reduction in the machine’s variability to 6 kgm. The information regarding the investment required to achieve this lower variability was not provided. Therefore, it is advised that BSAP Company Limited only accept option 7 provided that the required investment does not exceed $28, 188.99 (i.e. difference in profits between option 7 and 6). Otherwise we recommend that management consider option 6 which is the second most profitable option under the Uplifting Approach with a machine variability of 8 kgm (i.e. the machine’s condition is unchanged/investments not required). With the adoption of either of these options, the B.S. specification of 86 kgm mean strength will be achieved.

Although these options were generated based on the information provided in the memos, analysis of the other feasible solutions presented in Figure 3.7 is a venture that can be carried out

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to determine which one is the most cost effective based on some sort of decision analysis. The analyses presented in this report focused on the implications of increasing fibre glass content and reducing the variability of the machine. However, numerous other solutions exists and its worth exploring their implications.

Considering the focal areas for further investigation, The Expendables Value Consultants Limited advise that the BSAP Company Limited establish a Value Management Framework as an improvement programme. This framework will serve as a tool for maximizing the overall performance of your company and may involve external expertise for its implementation. The staff at the Expendables Value Consultant Limited will be glad to assist your company in this endeavour.

The Expendables Value Consultants commend your company in recognizing that a problem exists and we are eager to provide any further consultation if you desire,

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7 .0

References

British Standards Institute. Value Management. Standard, London: British Standards Institute , 2000.

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8 .0

Appendix A. Normal Distributions for Options Generated

Figure A. 1: Normal Distribution Curve for Option 1

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