IB Business Management HL 3.6 Efficiency Ratio Analysis Questions

Encouraged by the success of AFA’s first pop-up stall, Sam decided to expand the range of fair trade products and open three additional pop-up stalls, each run by a new manager. To do this, he needed to find new suppliers of fair trade products, which were proving to be very popular with his customers. These fair trade products included coffee, clothing and stationery, many of which could be sourced locally. At first, some suppliers of these fair trade products were not willing to supply Sam, as his order and re-order quantities were very small. However, as AFA grew and the suppliers understood Sam’s purpose, they became more willing to supply AFA. Sam worked with two types of suppliers: wholesalers that imported products from many parts of the globe, and local producers that met fair trade standards. Faced with growing complexity, Sam decided that some form of restructuring of AFA was required. He invited a close friend, Finn, to become his second business partner. With Kim promoted to chief financial officer, Finn was recruited to become chief operations officer. Finn’s responsibilities included supervising the four managers of the new retail outlets and being in charge of the e-commerce website. Sam retained overall control of AFA. Signs soon began to appear indicating that business growth was outstripping Sam and Finn’s ability to manage. Despite lower transport costs and greater bulk buying, some diseconomies of scale were affecting AFA’s operations. Gross and net profit margins were being eroded, so Finn increased prices. Sam accepted this decision but reminded Finn that AFA’s vision was to create opportunities for both internal and external stakeholders. Finn responded by telling Sam that if costs were not kept under control then AFA would have to adopt some new pricing strategies. By following the fair trade movement, AFA was creating opportunities but Sam was concerned that new pricing strategies could undermine AFA’s position in the retail market. Thinking that Sam was still not listening to his concerns, Finn brought up his latest management idea to highlight the problems at AFA. Finn revealed that, unknown to Sam, he had hired a mystery (secret) shopper to visit two of the stores. She had visited stores at their busiest times. Finn was appalled at what she had reported, including poorly organized stores, unhelpful staff, and a failure to regularly mention the importance of fair trade at the checkout.

Sam and Finn are having difficulties resolving their disagreements. Finn was convinced that the problems at AFA should be resolved by a change in the organizational structure. Sam, however, was convinced that he should strengthen the organizational culture. Sam reluctantly accepted the need for greater delegation but insisted that there should be more training for all employees on the culture and ethics of AFA.

As part of greater delegation, Kim was given responsibility for the relationship between AFA and its suppliers. Kim is concerned that she spends a lot of time chasing orders that do not arrive and dealing with the poor quality of orders. Some products have to be thrown away because they have passed their sell-by dates*. Others have to be returned to suppliers because the outlet managers do not accept the poor quality and therefore cannot be sold.

AFA's stock of fair trade woollen hats has now reached 500 , with an annual sales average of around 1250 for the whole business. Kim wants to introduce lean production including total quality management (TQM) throughout AFA's operations and has created a Gantt chart to show the stages in implementation.
* sell-by dates: dates printed on the packaging of products that state the date after which the product can no longer be sold.