Practise evaluating the impact of lean production methods and total quality management on business performance for IB Business Management HL.
Option 2: Outsource the production to QS, a company known for its reliability and high capacity to produce excellent quality air conditioners using cradle to cradle manufacturing principles.
KA
KA is a public limited company that designs, manufactures and sells air conditioners. KA's unionized employees are motivated and efficient despite not being involved in any decision making. However, they are resistant to change.
The market and competition for air conditioners are growing rapidly. KA operates at full capacity but stock turnover has slowed.
Primary market research revealed that:
- consumers do not differentiate KA air conditioners from those of its competitors. All products are perceived as medium price and medium quality
- KA's customer service is rated as poor
- customers demand energy-efficient products using ecologically sustainable production methods.
To exploit opportunities and overcome weaknesses and threats, KA's management has decided to redesign its products so that they are energy efficient. KA is considering two options:
- Option 1: Implement lean production methods, which includes investing in ecologically sustainable machines that will increase capacity by 10 %. Total quality management (TQM) will also be implemented. However, the financial manager is worried about KA's ability to meet high initial costs. The forecasted payback period is three years and average rate of return (ARR) is 4 %.
- Option 2: Outsource the production to QS, a company known for its reliability and high capacity to produce excellent quality air conditioners using cradle to cradle manufacturing principles. However, QS refuses to sign an exclusive long-term contract with KA, insisting instead on renegotiating the contract every two years. KA will have to close its production facility and will use the cost savings to improve customer service and to reposition and differentiate its air conditioners.
Employees have heard rumours of both options and fear for their jobs. Strike action is being considered.
Evaluate the two options that K A is considering.
Given the fact that K A redesigned their product, both options will have the same starting point of being more energy efficient.
Some of the possible arguments for option 1:
- Option 1 will not result in redundancy and possible negative impact on the motivation of the remaining employees. Moreover, with appropriate training in order to implement the TQM and lean production practices, employees might enjoy the new challenge and motivation might even increase further, resulting in more efficiency and cost saving.
- The implementation of TQM/lean production should result in K A becoming considerably more environmentally friendly and by adapting to the market pressure/customers demand. KA might be able to capture part of the increase in demand. Moreover, KA should further be able to benefit from a growing demand in the market due to increase capacity of 10 %.
- However, the capacity will only increase by 10 %. One may argue that this is a relatively small percentage for a growing market and perhaps suits K A well in the short run but it will face a major strategic decision again in the medium term. Still, with increasing competition perhaps a 10 % increase is sufficient.
- The financial return, albeit forecasted, seems reasonable (do not penalise if candidates argue the opposite) although we do not have information on the current interest rate for comparison. Three years of payback also seem reasonable but technology is changing very rapidly and K A might have to replace the machine quite soon afterwards.
- The current lack of finance perhaps should be judged as of less significance, as K A is a PLC and shares can be issued, especially to ethical and ecologically sustainable minded investors, who may also be encouraged to purchase given the stated market growth.
Some of the possible arguments for option 2:
- With outsourcing, KA should be able to capture the growing markets and satisfy the growing demand with excellent quality sustainable air conditions and production process. One may judge this argument as highly significant for this option.
- The excellent quality should enable K A to differentiate itself in a current undifferentiated market and create a strong USP. The customer service which is possibly one of the reasons for a fall in demand in a growing market - should also improve significantly. Making the marketing of K A its core activity with the money saved should enable K A to be successful. K A now has the finance to do so.
- However, the shareholders might disagree with such a risky strategic move as K A will move away from its current core activity of manufacturing air
conditioners This move might be perceived as too risky. There might be other ways of improving customer service especially if TQM is to be implemented, as customers are constantly listened to.
- Moreover, closing down the production facility is a significantly risky decision. It will be very difficult to rebuild one. Perhaps K A should not rely on Q S especially given the fact that every 2 years the contract has to be negotiated. Terms and conditions could be changed in favour of QS when KA lost its bargaining power. K A 's management needs to pay attention to a potential loss of control.
Overall, both options can potentially enable K A to become a more environmentally and ecologically sustainable organization. The second option will enable K A to achieve this in the short term, however the possibility of strike action is real and this will require some significant conflict resolution strategies by K A 's management. Some of the good will enjoyed by K A will be undermined by this move.
Accept any other relevant argument for each option.
Accept any other substantiated judgment.
It is expected that candidates provide a conclusion with a substantiated judgment.
Marks should be allocated according to the markbands on page 3.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
If a candidate evaluates / addresses only one option, award a maximum of [5].
A balanced response is one that provides at least one argument for and one argument against each option.
Candidates may contrast one option with another for a balance as long as at least two arguments are given for each option.
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7-8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.