3/20/2013

SYNERGY
ISSUE ANALYSIS AND SOLUTIONS OF JOT

Members:
Sanjina Kowsar Mahmud
Kazi Muhtashim Uddin
Quazi Ayman Abedin
Faiza Zubaida Bashir
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TABLE OF CONTENT Page


Executive Summary


1. Introduction

2. Terms of Reference

3. Prioritization of Issues

4. Discussion of Issues & Recommendations

4.1 Faults in New Flying Spaceship Toy

4.2 Late Delivery of Christmas Product

4.3 Launch of New Range of Toys 9-11 Age Groups

4.4 Near-Shoring Proposal in Voldania

5. Ethical Issues

6. Appendix





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1.0 Introduction
Jot is a small European company, establishment in 1998, which designs and outsources
the manufacture of a range of childrens toys. Initially Jot used to design small range of
product that were manufacture in their home European country, which gain huge
popularity and that is the point where expansion plus diversion and innovation was
portrayed by the company.
Within 5 years of magnificent journey i.e. by 2003 it started to get orders from many large
toy retailers across Europe. In commencing of 2004, Jot begun outsourcing all of its
manufacturing to range of manufacturing companies in China to cull down its cost base
and to enable the company to price its product competitively. By the end of 2010 sales
revenue exceeded 8 million i.e. a rise of 16% and almost 18% at the end of 2011.It is also
estimated that if these strategically sound growths continue by the cease of 2016 it will
reach a gross profit margin of 33.6% which is brilliant to reach its zenith.

2.0 Terms of Reference
This report will show the results of our analyses, which will help to provide solutions to the
problems the company is facing and to give assessments on the proposals presented in the
scenario.










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3.0 Prioritization of the issues facing Jot

Fault in new flying spaceship toy
There has been a report that the newly launched flying spaceship has been found faulty,
which, after a brief investigation has been found to be true. If a quick, proper action is not
been taken immediately, then it is going to damage the reputation let alone loss very badly
and will affect the business in the long run. So this is going to be our First Priority.

Late delivery of Christmas product
It has been notified by Gull, one of Jots manufacturer in China that they will not be able to
deliver the 2400 units ordered for delivery on November 4 2012 in one go, that were to be
sold during Christmas, rather the will be able to provide 75% of the order on time and the
rest 25% on December 15. Now the principal problem, i.e. whether to send that 75% to
Jots main customers or to share them out more equally so that the independent toy shops
can at least get some of their orders to sell during Christmas, is going to be the topic of our
second issue.

Launch of new range of toys for 9-11 age group
Entering an entirely new market i.e. developing applications for children without much
prior information may go in any ways. It can be an instant hit or may fail to attract any
customers at all in the midst of so many application developers making millions of apps
daily. As a result, this issue has to be dealt carefully, and so it comes in number three.






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Near-Shoring proposal in Voldania
As wage rate in China is increasing, Jot is considering near shoring its manufacturing to
Voldania, an Eastern European country. But on the other hand, even though the wage rate
is going to increase, China is still the best option as a high quality, low cost manufacturing
base and given the fact that Jot right now is quite reluctant regarding this issue as they
would review the situation at some future point, it is not the problem to look into right at
this moment and so its priority is at the bottom.















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4.0 Discussion of Issues & Recommendations

4.1 Fault in new flying spaceship toy
Financial Impact
Since the new flying spaceship toy have strong sales, flaws in the product will decline its
sales volume remarkable. It is estimated that around 240000 of sales revenue will be at
stake and hence profit margin will wane.
Strategic Analysis
It is vital for Jot to focus on the product safety arena, in order to sustain in these
competitive market. If Jot fails to produce safe toys, consumers will not be willing to buy
the product and therefore retailers will not be convinced to buy its inventory. In order to
combat this hazard Jot need to hire skilled technicians i.e. in practice, the product safety
should starts with the design process and safety aspects are addressed from concept
designed onwards. It is essential for JOT to recruit proficient employees so that there is no
accusation about the products and hence customer satisfaction magnifies.
Reputational Impact
The lack of producing limpid toys will diminish JOT brand image and will hinder its
longevity. Customers may be disappointed when expectations of new launches are not
fulfilled. This may lead to a reducing in customer satisfaction and customers will be
attracted to other toy brands.
Assessment of Potential solutions
Corrective measure to repair the faults
One of the potential solutions to cull these faults is to test the toy after designing so that
flaws can be detected and repaired instantly. Therefore, toy designers will know its
mistake and avoid repetition to occur. To be more assured about the product, Jot can hire
testing organization which is used extensively to assure toy safety, not only through
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product testing but also for doing risk assessments, giving advice on quality management
procedures, undertaking factory audits and inspecting products before shipment.
How to combat the fault in new flying spaceship
A number of customers and consumers reported a fault regarding Jots newly launched
flying spaceship. In fact this is the outcome of launching goods in the market without
testing. An inventory of 6000 units was sold and no further order has yet been placed due
to flaws. The retailers are complaining bitterly because of customer dissatisfaction towards
the product made them loose great deal of profit and are not willing to buy this new flying
spaceship toy. To eliminate this shortcoming, another 10 per unit should be spend on
improved installation (i.e. initially the product cost to make and distribute was 24, if 10
more is added then the final initial cost will be 34) and hence the product will be safe to
ship out to customers. But here comes the momentous point if cost of production
increases and especially in repairing a fault, Jot cannot increase its product cost to retailers
and therefore its profit margin decreases. Since no new order are placed and all the major
retailers are grumbling bitterly it would be better for Jot to write off this product
completely in order to save the reputation. Therefore JOT should never launch any
products with testing because EU government is taking rigid actions towards companies
who are not taking initiatives about toy safety and hence there is a high possibility of
losing trading license also.
Recommendation
Short-term
To retain its reputation, Jot should promptly repair the faults and help to satisfy customers
by providing its excellent after sales service so that consumers crave for Jot product even
after receiving faulty goods.
For getting more in-depth views of customers and consumers, Jot should create a
customer service program where customers needs, complains are mitigated .What level of
innovation is expecting from Jot are discussed and what not. If this sort of customer
service programs is introduced, Jot will able to predict its pros and cons of the product,
which will help the company to withstand all odds and hence become the most renowned
trusted toy brand ever.
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Long-Term
Jot should design its product in such a way which is transparent, has longevity and
certainty and in order to do so Jot should recruit skilled labors and take rigid
measurements towards toy safety.
The key objective should be:
(1) Obtain a comprehensive overview of the toy supply chain;
(2) Identify established practices and activities undertaken by different economic
Operators to ensure toy safety throughout the supply chain;
(3) Identify gaps and weaknesses in the existing system for ensuring toy safety; and
(4) Recommend concrete actions to improve the current situation.
The project should consist of a preparation phase in which the methodology was
developed and an expert group was established consisting of representatives of the main
stakeholders including manufacturers, importers, retailers, test laboratories, consumers
and Member States. Subsequently, activities were undertaken to identify the situation 'on
the ground' in the toy sector, including desk research, interviews and fact-finding visits
both in Europe and in China (as because Jot outsource all its product from Chinese
manufacturing companies)

4.2 Launch of new range of toys for 9-11 range
group
Suitability Factor
Market Analysis
Since its entry in the market, the demand for smartphones has outpaced the rest of the
mobile phone market. Even the European mobile market, as measured by active
subscribers of the top 50 networks is 860 million. So the idea of entering a new market and
developing a mobile phone application seems legit. However, a very recent survey done in
the fourth quarter of 2012 by the research firm IDC (Appendix#) shows that smartphone
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sales growth declined by 19%. In the previous year, its growth was 55%, which decreased
down to 36%. Now, this 36% may still seem a big number, but if the growth continuous to
slow down, developing a mobile application may become risky. Besides, the app store
itself is huge and diverse with developers releasing new apps almost regularly. So in order
to differentiate itself, the app developed by Jot has to be the most original, creative app
with graphics better than the others and not to mention the availability of the app to
download for free, all in order to attract and satisfy the target consumers.
Customer Evaluation
Even though letting children use smartphones may have some advantages, from our
recent survey, we found out that majority of the parents who previously bought products
from Jot are quite reluctant to let their children use smartphones and tablets at this age.
According to them age 16 is about the right time for kids to have a smartphone. One
reason for their unwillingness is the cost factor. In order for the children to use the app,
they need a smartphone, which is very costly for the likes of children of the particular age
Jot is targeting. And it is less logical for parents to buy their children a smartphone costing
from $100-$200, when they can buy innovative and creative toys at a much cheaper price,
ranging from 20 Euros to 60 Euros. Besides, there are also the issues regarding their health
that may arise for playing overtime in smartphones resulting in inadequate physical
growth and poor brain development.
Competitors Position
Potential competitors have yet to set their foot in this new market, which will make Jot to
be the first company if they go through with the proposal, as a result there will be no
learning from others mistakes and if this project fails then it is going affect both the total
sales and market share of the company let alone reputation.
Acceptability
There might not be many toy companies which are developing smartphone applications
but there are a lot of application developers who are developing thousands of application
regularly. As a result, market penetration will be tough. And even if it is successful in
entering the market then it will have to the better application than the competitors in
order to attract customers and satisfy them, which is quite difficult in this diversified
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market. All these barriers are making the success of this project questionable and
therefore, it's putting the money of the shareholders at risk, should they consider investing
in the proposal. With fewer chances of earning revenue and negatively affecting the gross
profit of the company, this proposal should not be put into action.
Feasibility
According to an investigation done by Jot, it is considered that the costing of initial design
of an application is as little as $ 30,000. So we carried out our own research and it reveals
that this proposal is not quite feasible to green-lit. We cross checked the Initial
development costs predicted by Jot with that of Angry Birds and the amount it took Rovio
for the initial development is 100,000 Euros, minus all the additional costs. Now, according
to our research an estimated amount needed to built the app from scratch till its release in
the market and afterward will vary from $8000-$250,000. A brief overview of this
estimation is given below-
Firstly, before developing an app, it has to be decided whether it should be made for
single-platform app or a multi-platform one? Currently, there are five operating systems
that are running the smartphones, and the chart of their market share (appendix#) shows
their unpredictable volatility. A single-platform app is much easier to handle, but will work
only for that particular platform and will not be sufficient to reach all the target customers.
However, in case of a multi-platform, the app will definitely reach all the target customers
but at the same time the expenditure on the developing it will increase five times than the
initial budget.
Secondly, the functionality of the app should be chosen. As Jot wants to build an
application that has both gaming and educational aspects, targeted for children, It is going
to cost much higher than actually estimated, the price ranging from $8000-$250,000. The
reason, for the expense to go up is the elaborate design that will be used in the app. It has
to be impressive, creative and original enough to immediately attract users in the midst of
so many other applications developed by other companies. The design will include aspects
such as an app icon, splash screen, tab icons and so on.
Now even though Jot has their own in-house team of designers, they are involved in
designing physical toys, not developing applications. As a result, a third party agency for
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developing the app has to be hired, who bills by the hour of working. This will substantially
raise the total costs, whatever the amount is.
Additional costs besides all that will include promotions regarding the launching of the
app, ongoing maintenances, future upgrades and app-store fees. Besides even if Jot
decides to pursue the project and if the budget goes beyond of what has been estimated
during its development phase, it will be tough for Jot to manage that required amount of
money, as they already have a bank loan of 1,600,000 Euros at an interest rate of 10% per
year, which are yet to be paid. Moreover, it has been indicated by the bank that for now
they will be unable to grant any more long-term loan request.
Recommendations & Proposals
Based on the above factors, this proposal should be rejected. This is due to the highly risky
and unpredictable market of smartphone and smartphone applications; uncertainty in the
success of the app; customers unwillingness to buy, when they can be happy with a lot
less; high competition in the market and lastly, too much expensive as a product for Jot to
develop right at this moment with fewer chances of even meeting the budget invested
behind it, let alone earn a profit, if the proposal was to be accepted.
Instead of developing an application, Jot can invest that same amount of money in their
licensed toys department, as these products of Jot currently account for almost 10% of
Jots sales, in terms of the number of units sold. And with the amount of money that was
to be invested behind the app project, the sales of this department can increase upto even
20%, if proper dedication is given.

4.3 Late Delivery of 4th Quarter (Christmas)
Product.
Financial Impact:
One of Jot Toy Companys manufacturers, Gull is unable to produce their contractual order
of 2400 units by 4th November. The only feasible option for Gull is to send 75% of the
shipment now and 25% by 15th December. Due to this Jot will not be able to send all of
their shipments at once to their three warehouses. This will cause an increase in
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transportation costs and hamper the companys exponential growth trend.In addition as
Jot is a young company banks are hesitant to loan them long term. Therefore such a
mistake during their peak sales quarter will affect them in the long run.
Strategic and Tactical Impact:
Strategically this late delivery of product from Gull will affect Jot in the future. If the
situation is not handled correctly it will expose Jots weaknesses to its competitors.
Furthermore it might even give Jots other suppliers the idea that they can follow Gulls lead
and not produce shipments on time.
Reputation and Status Impact:
Jots inability to correctly pick the right manufacturers tenders may affect their reputation
in the toy industry. Gull not being able to send the required amount on time will make Jot
rethink their negotiations next year as repeat dealing is a major part of their business
strategy. Since most of Jots toys are designed for smaller children, if they are unable to
send their toys to all their retailers and distributors as promised Jot will loose valuable
customers and future business opportunities
Potential Solutions:
1. Look for New Suppliers or Increase Volume of Toys
Jot has numerous suppliers under contract which they use every year, however recently
during their peak season toys are not being shipped on time. Therefore they should
terminate their contract with Gull immediately and contract another one of their suppliers
to provide the deficit. Also, instead of terminating the contract they might increase their
desired number of toys. This is because Gull is focusing on higher margin orders. In both of
these cases Jot should be aware that doing so will slow down their overall sales process.
Since, delivery time may fluctuate. During this time it is for Jots priority and best interest
to supply only to their top 7 distributors and then later equally distribute it among their
smaller retailers.
2. Set up Jots Manufacturing Centre In House:
Since, Jot is a young company and comparatively smaller then their competitors such as
Mattel and Hasbro, it might be in their best interest to start thinking of building a small
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manufacturing centre for situations such as this. In doing so they are able to control the
timeline of production and shipping if one of their suppliers is unable to provide the
correct amount on time. However, building a manufacturing centre takes time and money.
Since, banks are unwilling to provide large loans; Jot in order to grow might look for
outside investors instead.
3. Reevaluate Operational Planning
Mistakes regarding supplier output have been made twice the current year. This can
happen to any small company. However if this area is bleeding the company too much it
might be in Jots best interest to reinforce the operations sector. This can be done by either
hiring a new individual to run the area or bring in more experienced individuals to help
make the sector stronger. Also regarding the tender options Jot should implement
contingency models when deciding on which manufacturer to go with.
Recommendations:
Short-Term:
The issue Jot is facing is the suppliers inability to provide them with their goods on time at
their hour of need. Therefore, I would recommend Jot to search for a new supplier
immediately. Michael Werner should start contacting their other suppliers for product so
that they are able to satisfy their retailers and distributors during the fourth quarter.
Long-Term:
If Jot wants to correctly address the issue so that in the future these sorts of situations are
minimized, I would say they might think about undergoing the project of creating Jots very
own manufacturing centre. Since, toy manufacturing parts are relatively cheap and easy to
find this will be a fruitful investment. In addition being able to provide all of their
customers will help keep their reputation.



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4.4 Near-Shoring Proposal in Voldania
Why Jot is likely to adapt near-shoring proposal?
In actuality, off shoring costs are on the rise. The reason behind the hike is the start-up
costs and the wages of workers in China, all of which undercuts the cost-savings rationale
behind off shoring. Furthermore, off shoring carries potential risks, such as possible
political instability in overseas locations, less reliable civil infrastructure, exchange rate
volatility, less developed legal and regulatory systems, and risks to intellectual property.
If Jot accommodate to near-shoring concept it can generate jobs in the same territory
which would be beneficial for the current euro recession period. At the same time cost of
goods manufactured and distribution cost will be substantially less without compromising
the quality of product. Near-shoring also offers some advantages like similar time zones,
cultural affinity, geographical proximity, ease of immigration and other legal issues.
Strategic Analysis
China is no longer the dominant production location it once was. Studies have
shown rising labor costs, increased congestion in getting product through the ports, much
higher transport costs, and growing concern over toxic toys where the paint used
contains carcinogens or lead. China also has a poor reputation for respecting the
intellectual property rights of outside firms. Near-shoring in Voldania would help Jot to
develop a more flexible, just-in-time, supply chain. Orders can be fulfilled and supplied in
4-6 weeks rather than 3 months with consequent benefits for adjusting supply to demand
and reducing inventory and transport costs
Financial Impact
According to simple accounting concepts if cost of production increases rapidly, its gross
profit margin will be less than expected and hence the net profit before tax will be low
therefore declaring a heavy loss in the business.
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Assessment of Potential solutions
1. Vivid Calculation for the next five years Near-shoring Proposal
Due to rapid increase of workers wages in China, Jot is intending to adapt near-shoring
concept i.e. Jot wants to outsource part of its manufacturing to Voldania, a country near
Eastern. The momentous reason to choose Voldania is because the labour charge per hour
in 1 year is 5 which will inflate at 2% per annum where as in China the labour rates
charged per hour in one year is 1.75, while there is a possibility to rise by 12% per annum.
Another factor comes under consideration is that; Voldania will use as many machines as
possible resulting 40% more machining cost in china. On the other hand around 25% of
labor hours will be less in Voldania compared to china. Since crude oil price have raised
unexpected heights at unexpected rates, distribution price per unit from china is relatively
way higher than Voldania. An extensive calculation is performed and the data is tabulated
in table 5.4(Appendix#) in order to decide whether near-shoring proposal is a feasible
concept to reduce manufacturing cost.
Near-shoring vs. China
The labor cost is rising, fast. Thanks to the Chinese governments one-child policy, there
are fewer young people entering the workforce, and they are less eager to perform back-
breaking menial work that their predecessors had to accept. As a result, companies are
forced to raise wages to attract workers. Therefore switching to near shoring concept will
benefit Jot in order to generate profit substantially. To decide whether the manufacturing
operation should be performed in Voldania, Jot should have sound cognizance about labor
wages, machining cost and distribution cost. A prolonged calculation is performed
regarding these basic variables to drive decision on off-shoring or near-shoring and the
data is tabulated in 5.4 and is shown in appendix
Survey Government Policy of Near-shoring areas
Jot should investigate fully before shifting its part of manufacturing operation in Voldania.
They should comprehend whether Voldanias government is willing to encourage overseas
companies to manufacture within the territory and also analyze the countrys economic
and financial stability. Jot should also keenly overview the political calamities of Voldania
so that in future dealing the political pressure dont hurdle delivery dates.
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Total Landed Cost Arbitrage
Calculation of Total landed Cost is vital for Jots decision making purpose about the
selection of near-shoring or off shoring concept. The total Landed Cost (TLC) arbitrage is
the process of assessing the cost differential between EU total landed cost for
manufacturing a product and the total landed cost for a product manufactured in a Low-
Cost Country (LCC) while taking exchange rates in to account. This Total Landed Cost
differential can be calculated as follows:
TLC(EU) [TLC (LCC)exchange rate]= TLC( differential )
Recommendation
Short-term:
To cull down the manufacturing cost promptly and mitigate drastically changing customers
demand Jot can have a mix of off-shoring and near-shoring concept. This mix of concept
will increase manufacturing capacity with brilliant quality control and therefore customers
will to have Jots product.
Long-Term
A manufacturing strategy that meets consumer product and price demand must be
supported with sound information for decision making. In order to do so Jot should have a
vivid analysis of factors affecting manufacturing cost in Low-Cost Countries. A broad
illustration is shown in fig 5.2 so that Jot keeps these variables in accounts to decide near-
shoring objectives.

Low -Cost-Country
Raw material Cost
Labour Cost
Quatily Cost
Overhead
Packaging
Risk of distribution
Exchange Rate
Transit
Insurance Cost
Port Charges
Handling Cost
Security Cost
Banking Cost
Transpotation Cost
Potential Demurrage
Duties
Hike in crude oil
Home Country
Local handling Cost
Local transpotational
cost
Taxes
Safety Stock
Product Implication
Enviormental Cost
Maintanance Cost
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5.0 Ethical Issues
Product Safety
The key ingredient to retain a business infinite longevity is to produce goods in such a
way which is transparent and safe for the consumer as well as for the environment. Since
Jot outsource most of its product from China due to its low production cost, the Chinese
manufacture drastically fail to maintain the quality of products and hence causes product
safety at stake. The most hazardous risk associated with Jot toys are smoke coming from
lead batteries and too high levels of banned chemical substances such as certain heavy
metals and phthalates. If these sorts of elements are used to design the products then
people will not be able to trust any brand, therefore Jots reputation will demolish.
Product safety not only relies on how to avert accidents but it also depends on how the
composite element is reactive to human body and environment. For instant, Jot uses toxic
materials to paint the outer surface of toys which is perilous for users as well as for
environment. Due to rapid increase in global warming its Jots civic duty to use
compounds which is eco-friendly at the same time safe humans. Jot and its outsourcing
companies should be rigid with customer product safety and illustrated code of conduct
should be performed both at managerial post and first liners. If corrective measures are
not taken there is a possibility to losing its trading license. One of the remedies for this
issue is there should be an external testing lab so that the product is tested immediately
after its design and any flaws detected can promptly be solved. They should also use less
toxic/ecofriendly substances and colours while painting the toys or else, as they are
bought for children, they may be put into harms way.
Intellectual Property Right (IPR)
One of the biggest risks of outsourcing is the protection of IPR. Outsourcing companies
only manufacture the product, whereas JOT creates the product which is protected by
IPR codes so that Jots innovation doesnt get copied before launching in the market.
These IPR codes are used because it involves lots of research, development studies,
designs, technological innovation in short ideas which are out of the box. Legal
protection of IPRs are increasing at a rapid scale because the outsourcing companies
breaching the IPR which stake companies reputation heavily .One of the corrective
measure that can be taken is the government of the outsourcing countries (esp. China)
should take rigid actions against these unlawful act and therefore the patent company
should also be careful in choosing the right manufacturer.


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Appendix 1

SWOT Analysis

Strength

Successful and fast growing
company.

Good product designs.
Profitable company.

High growth in sales revenue
(almost 18% last year).

Expanding geographical markets.

Experienced and committed
management team.

Good safety record on its
products.

Oppurtunity

To appoint one or more new
outsourced manufacturers to produce
products YY and ZZ.

To appoint new outsourced
manufacturers outside of China as

Manufacturers B and C are located in
another Asian country and in Eastern
Europe respectively.

Appoint a new outsourced
manufacturer, P, to manufacture the
licensed products.

Improved control over outsourced
manufacturers.


Weakness
Dependent on just seven customers for
68% of sales revenue.
Dependent on product designers and
key employees.
Reliant on only 20 outsourced
manufacturers.

Highly dependent on customers
changing preferences.

Seasonal business with peak sales in
quarter 4.

Jot has not yet published a CSR
statement.

Threat
Poor quality of production by
outsourced manufacturer Q.

Inaccurate marketing literature and
packaging for one product.

Possible large write-down of Jots
inventory.

Need to comply with EU safety
regulations.

Competitors actions and price
competition.


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Appendix 2













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Table 5.4
Year 1 Year 2 Year 3 Year 4 Year 5
Production
in units
60,000 100,000 140,000 180,000 220,000
Labour
Hours in
China for
production
units
36,000 60,000 84,000 108,000 132,000
Labors
Hours in
Voldania
for
production
units
27,000 45,000 63,000 81,000 99,000
Labor rate
charged per
hour in
China
1.75 1.96 2.1952 2.458624 2.7537
Labor rate
charged per
hour in
Voldania
5 5.1 5.202 5.30604 5.4121608
Labor wages
for
production
units China
63,000 117,600 184396.8 265531.39 363488.4
Labor wages
for
production
unit
Voldania
135,000 229,500 327,726 429,789.2 535803.92
Machinery
cost per unit
China
1.40 1.40 1.40 1.40 1.40
Machinery
cost per unit
Voldania
1.96 1.96 1.96 1.96 1.96
Machinery
Cost for
Production
Unit China
50400 84000 117600 151200 184800
Machinery
Cost For
Production
Unit
Voldania
52920 88200 123480 158760 194040
Distribution
Cost for per
unit from
China
3 3.18 3.37 3.57 3.78
Distribution
Cost for
Production
Unit from
China
180,000 318,000 471,800 642,600 831,600
Total Cost
(China)
293400 519600 773796.8 1059331.39 1379888.4
Total Cost
Voldania
187920 317700 451206 588549.2 729843.92
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0
500000
1000000
1500000
2000000
2500000
Year 1 Year 2 Year 3 Year 4 Year 5
Voldania
China