Case Analysis: Garland Chocolates

Answer

Case Analysis: Garland Chocolates

            Edgeworth Toffee brand is experiencing a decline in sales margin due to the high operating costs and low efficiency of the packing lines for the two formats of manufacturing. The marketing team is proposing a new marketing strategy that entails changes in product packaging to improve consumer interest in the brand. Therefore, the two options are to either invest in new equipment or outsource packaging and manufacturing of the product. This paper presents the analysis of the situation with Edgeworth Toffee and recommendations to address the declining margins for the brand.

Replacement Option

The Packing Lines

            The packing lines for the two formats are operating at a 48% efficiency rate, which is almost half the standard rates and with a scrap rate of about 9.6%. This implies that the efficiency level of the lines is currently cut in half and the percentage of materials that cannot be used or repaired is almost ten times higher than the required rate.

            The annual maintenance cost for the packing lines currently stand at approximately $18,000. This value is expected to increase by at least 25% in the next 12 months. This means that in 12 months’ time, the maintenance cost will be:

125% x $18,000 = $ 22,500

The cost of replacing the packing lines including installation cost is about $140,000.   

The Manufacturing Line

The efficiency of the manufacturing line has dropped to 76% below the set target of 80% and 90% five years ago. Again, the difficulty of finding the replacement parts has increased from the required target of 1.2% to 1.5%.

The cost of replacing the manufacturing line is approximately $600,000, including the installation expenses.

Outsourcing Option

            Based on the quotation given by the supplier, Martin Contract Manufacturing, the new Operating Standard Costs for Edgeworth Toffee will be as follows:

Manufacturing and packing cost = $ 68

Overhead cost = $ 15.23 (reduced by 30% from the current overhead and depreciation cost)

Total Cost = $ 83.23

            This means that the operating cost will reduce from $95.70 to 83.23 while the margin increase from $49.30 to $61.77. However, Garland will have to pay $ 35,000 in tooling cost. Given the current demand, the gross profits after cost reduction through outsourcing would be:

Format 1= 2500 x (61.77)

    = $154,425

Format 2= (3000 x 61.77)

    =$ 185,310

Recommendations

            Based on the above analysis, Garland should outsource the manufacturing and packing of the Edgeworth Toffee brand from Martin. This will increase the sales margin even if the demand remains the same. Since it is unclear whether the proposed strategy will increase consumer demand, it is risky and expensive to acquire new equipment.

            The contract with the supplier should include assurance of performance delivery and product quality. Suppose the new marketing strategy increases the demand for Edgeworth Toffee brand, the supplier must provide high-quality products to maintain Garland’s reputation with the customers.

            The contract with Martin should be based on a short-term basis and subjected to renewal (Halvey & Melby, 2007). Outsourcing raises some risks for the company. Therefore, the deal should be undertaken in the short-term to estimate whether the new strategy can achieve the 20% increase in sales after which the contract can be extended, or a new equipment is acquired to mitigate the risks.

Question 1

            The sales are likely to increase in the future if the new packing materials are adopted. Customers develop emotional attachments and perceived value of products based on packaging. Thus, most buying decisions are influenced by packaging. By utilizing the new packing material, there is a higher chance that the sales will increase. Increase in sales would changes my analysis in that Garland should invest in the latest equipment and continue controlling its production to eliminate risks associated with outsourcing.

Question 2

            I cannot justify investing in the new equipment because it is not certain that the proposed strategy will increase sales given that the product has been in the market for long (Dabhilkar, 2011). Inventing in equipment would cost approximately $740,000, while outsourcing will cost $35,000 both with reduced operating costs but an unclear increase in demand.

Question 3

The 10% minimum rate of return on investment required by the finance department is reasonable given the risk associated with investing in the new equipment.

Question 4

Some of the risks of outsourcing include:

1. Quality risks (Leavy, 2014): With the supplier having control over the production of products, it leaves Garland vulnerable in case the supplier does not meet the quality standards. This can be minimized through independent quality control.
2. Supplier risk: Before signing a contract with Martin, Garland must conduct a risk assessment on Martin’s business practices to avoid any operational problems.

• Protection of intellectual property: In case Garland has any intellectual property, this information may be leaked in the process of sharing the information with Martin.

Question 5

Customers may not react to the new marketing strategies as expected by the marketing team. Without an increase in demand, achievement of the required rate of return from the investment may be affected.

Question 6

            The analysis will change if the outsourcing service level declines. A decline in the service level would affect the product offering thus Garland reputation would be at risk, therefore, the company would be forced to invest in the new equipment.

Question 7           

            Increase in sales would change my analysis. If sales increase, Garland should invest in the new equipment and continue controlling its production to eliminate risks associated with outsourcing. Reduction in operating costs and an increase in sales makes acquiring the new machine a profitable investment. However, if the sales decrease, Garland should continue outsourcing until the $35,000 tooling cost is recovered and then plan on developing a new brand to replace Edgeworth Toffee.