IB Business Management HL 5.3.2 Lean production methods Question Bank

Production of oil is suffering because oil is a fossil fuel and worldwide demand for petroleum and other oil products is declining as part of a major trend towards reducing carbon emissions. Oil fields have passed their peak production levels, meaning production costs are increasing. MM is reducing operations in Alberta in response to concerns about impacts on indigenous peoples and the environment. MM is trying to improve its image by developing energy-efficient production methods, supporting research into more efficient uses of energy, offsetting carbon emissions by funding reforestation and other environmental projects, researching diversification into alternative fuels such as hydrogen, and strengthening ethical values throughout the business, particularly in oil production. The demand for palladium has been falling over the last 20 years. Governments are discouraging the use of diesel and petrol cars for environmental reasons, and sales of electric cars, which do not use palladium, are increasing. Although palladium from MM’s South African mine is highly profitable, cash flow can be a problem. MM’s gold mine in Egypt has technical problems and some areas are unsafe, with a risk of flooding if heavy rains fall. Some lorry drivers have threatened strike action because of safety and pay issues. MM is exploring ways to reduce costs. The fastest growing section of the mining industry is lithium extraction. The current rapid growth in demand for lithium has been caused by increased use of lithium-ion batteries, which are essential for electric vehicles, smartphones and other electronic equipment. MM’s board sees opportunities for major growth in this sector, but members disagree about whether to seek a license for a new lithium mine, take over an existing lithium producer or enter a joint venture.

M M uses just-in-time (JIT) production in its Oil Production Division.

The long-term demand for oil is usually predictable, and production is reliable unless major problems occur. In 2020, however, there was an unexpected decrease in demand for oil. Uncertainties in the world economy and responses to climate change now make predictions more difficult.
M M has prepared a sales forecast for its oil production for 2022 and 2023 (Table 2).

§ calculated using a four-quarter moving average based on six years of historic data
† calculated by comparing actual sales with a four-quarter moving average

In 2020, M M had some major problems:
- A catastrophic fire occurred at one of its oilfields.
- The gold mine in Egypt collapsed, trapping 23 miners.
- It experienced a cyber-attack on its computer network.
- An earthquake in Chile damaged the country's transport system.

In response to these problems, M M had to rely on its contingency planning and its crisis management procedures.

JG Mining (JG) wants to buy MM's tar sands mining operation for $50 million, but the board of directors are divided. MM recently invested $15 million in their tar sands operation in addition to the original $\$ 30$ million set-up cost in 1986 . Production is at designed capacity, and, although the long-term average rate of return (ARR) for the tar sands operation is below those of most of MM's other investments, it provides a reliable source of income. However, M M has difficulty selling sulphur, a by-product of tar sands production.

Employees at the tar sands operation are against selling the operation to JG. However, the income from the sale would help M M finance other investments, such as lithium mining, and the sale could help improve MM's corporate image. MM's Finance Director, Ethan, estimates that the net present value (NPV) of the tar sands operation is $46 million.

Define the term just-in-time (JIT) production.