Jolt: Company information
Jolt manufactures high quality swimwear and cycling clothing in its only factory, which employs 1,000 manufacturing staff and 200 support staff. Its products are used by both amateur and professional sports players in its home country. Jolt is known for its high ethical standards towards its workers, suppliers and the environment, and has voluntarily published a corporate sustainability report for many years.
Jolt is organised into traditional functional departments such as procurement, finance and sales, most of which have their own unreliable spreadsheet-based systems for planning and reporting. As a result, Jolt often fails to produce accurate, timely and consistent data to monitor its own performance, which contributes to failures in achieving the performance targets set by its retail customers.
Developments in Jolt’s market
Jolt’s market is seasonal and competitive. Retailers, who are Jolt’s customers, for both swimwear and cycling clothing have two key demands: they want lower prices to pass on to consumers and they also require suppliers to meet performance targets relating to lead times and quality.
To help them comply with the retailers’ demands, Jolt’s competitors have closed down all of their own manufacturing facilities and outsourced all production to overseas suppliers, who have much larger factories and lower costs. To mitigate the cost of shipping goods over long distances, Jolt’s competitors have invested in sophisticated software to consolidate orders so that each shipping container is completely full before despatch from their suppliers. Purchase invoice processing is also automated by the integration of information systems into the suppliers’ bespoke systems.
Business process re-engineering proposal
In order to reduce costs, it has been proposed to outsource the manufacture of swimwear, which is 50% of Jolt’s total output, to a supplier 17,000 km away. A comparison of the cost of manufacturing and the cost of outsourcing swimwear is given in Appendix 1.
This will mean that staff from Jolt’s functional departments will reorganise into multi-disciplinary teams, each serving major customer accounts. Each team will perform all aspects of account management from taking sales orders and procurement through to arranging shipping and after sales service. Team members dealing with customers will work in Jolt’s home country, while those managing quality and supplier audits will work close to the manufacturing site. Teams will be given greater autonomy to set selling prices to reflect market conditions. Many support staff will work in unfamiliar roles, or be offered new jobs overseas after the reorganisation.
A consultant has advised Jolt that the outsourcing and reorganisation proposal has characteristics of re-engineered processes, and could be described as business process re-engineering (BPR). She advised that, as well as evaluating how BPR will improve its business performance in meeting its customers’ demands and requirements, Jolt should take into account any development in information systems which may be required, as well as the ethical aspects of the proposed changes.
Required:
Appendix 1
Comparison of the average cost of manufacturing and outsourcing swimwear production
Evaluate how the BPR proposal could improve Jolt’s performance in relation to its retail customers’ two key demands.
BPR
BPR is the fundamental and radical redesign of business processes to achieve dramatic improvements in performance. For Jolt, the BPR proposal aims to meet the retailers’ demands for lower prices and the requirement to meet performance targets relating to lead times and quality.
Lower prices
To be able to sell swimwear at lower prices, Jolt proposes reducing costs by outsourcing production to an overseas supplier. The current average production cost of manufacturing is $5·00 per unit. The cost of purchasing from an external supplier is $4·00, which is $3·50 purchase cost, plus $0·50 ($5,000/10,000) shipping costs. This 20% ($1·00/$5·00) saving is a significant improvement in financial performance, but not a dramatic one, and may not fit the definition of BPR. Exchange rate movements could reduce the cost saving significantly. In the near future, expected changes to international trade tariffs will increase the unit cost to $4·35 ($4·00 + 10% of $3·50), and reduce the cost saving to just 13% ($0·65/$5·00).
Unless Jolt decides to outsource the remaining 50% of production and close its factory completely, factory overheads of $0·95 per unit may still be incurred and just be re-allocated to Jolt’s other sportswear products, possibly totally eliminating the cost saving.
Combining several jobs into one is a characteristic of a re-engineered process. As such, reorganising staff into multidisciplinary teams may create overhead savings, such as by reducing the number of staff employed by the automation of purchase invoice processing. These savings will be offset by additional costs, such as investment in new information systems, retraining staff to work in unfamiliar roles, or incentivising them to work overseas.
Re-engineered processes often allow workers more autonomy to make decisions. Giving teams more autonomy to set prices may allow Jolt to set prices reflecting the customers they serve and to prevailing market conditions.
Meeting performance targets
Lead times
Current lead times for customer orders are unknown. As the proposed supplier is 17,000 km away, goods will take several weeks to be transported by sea. This may increase lead times significantly, though may be offset by faster production times in larger factories. As Jolt’s sales are seasonal, retailers may pre-order in advance, reducing the importance of long lead times. To minimise shipping costs, shipping containers must be full, which may mean deliveries will be in larger quantities and which may increase the lead times.
Quality
Jolt is already known for producing high quality products. The quality of the new supplier’s products needs to be ensured. Any deterioration in the quality of Jolt products would undermine its reputation and reduce long-term business performance as fewer consumers would buy them. Monitoring of quality standards is more difficult when using external suppliers, especially at long distances, than when manufacturing in Jolt’s own factory. In re-engineered processes, work is performed where it makes most sense to do so. In this respect, having staff responsible for quality and supplier audits working close to the manufacturing site will help Jolt maintain performance in supplier relationship management.
Advise Jolt on the development of its information systems which would be required for the BPR proposal to deliver performance improvements.
Development of information systems
Functional departments currently have their own spreadsheet-based systems for planning and reporting. The data from these is unreliable and inconsistent. They are inadequate to provide the timely and accurate performance data, which Jolt needs to meet retailers’ performance targets.
Jolt must establish a shared database accessible by all parts of the multidisciplinary teams. This should be updated in real time, so workers in different time zones are using current data. The database should include financial data, such as cost information, and non-financial data relating to lead times and quality. Information systems must be able to provide teams with reports of performance data, and budgets, specifically for the accounts which they manage.
Fast and reliable internet services will be required, for example, so that team members can participate in online meetings, as they will be unable to meet in person.
Jolt may need to invest in specialised systems, such as the sophisticated software used by its competitors to minimise shipping costs by ensuring shipping containers are shipped fully loaded. Systems development may be required to integrate with suppliers’ bespoke systems so as to automate purchase invoice processing. Jolt must evaluate whether the benefits arising from all of these changes to its information systems are worth the cost and disruption of implementing them.
Assess the potential impact of Jolt’s high ethical standards on the BPR proposal and consequently on business performance.
Impact on workers
Jolt is known for its high ethical standards towards workers. Following the BPR, at least 500 (50% of 1,000) manufacturing workers are likely to be left without jobs. As Jolt’s competitors have already closed their factories, these workers may be unable to find new jobs doing similar work, though jobs may be created in the new supplier’s factory.
Staff who remain in work may become demotivated if they think that BPR will be extended to all of Jolt’s products. This may reduce financial performance by reduced productivity, increased staff turnover or difficulties recruiting new staff.
Staff may also be demotivated if they are placed in unfamiliar roles, or may be unwilling to learn new skills. Other staff may welcome, and be motivated by, the opportunity to perform new types of work, learn new skills or work overseas. This will probably increase their individual performance.
Suppliers
Any association with unethical practices, for example, if the new supplier were found to be using unacceptable working practices, could seriously harm Jolt’s reputation for high ethical standards. This could reduce financial performance, as consumers may not buy Jolt’s products, or potential investors could be discouraged from providing capital. Part of the team located close to the manufacturing site is responsible for supplier audits, which may help to reduce this risk.
Environment
Jolt should consider the environmental impact of shipping goods long distances. The environmental credentials of the new supplier are unknown. As Jolt voluntarily publishes a corporate sustainability report, any deterioration in its performance on environmental issues will become widely known. This could lead to reduced financial performance if consumers switch to competing products.