You are on page 1of 7

A REPORT ON THE POSTION OF CASTLE NURSING HOME PLC

Executive Summary: This report is commissioned to examine the current position of Castle
Nursing Home PLC, since it is evident that the top-line and bottom-line have been adversely affected. The report draws attention to the existing status of Castle Nursing Home. The strategy to grow and re-organize has resulted in the need to streamline its operations, so as to retain its focus, quality of services and reputation among the public. Further investigation into the organizations financial statements, proves the company is going through a rough patch but has chances of improvement. This report also provides clear insights as to what strategies the organization can use, to help improve the existing conditions.

Key Words: Operations, Quality Improvement Techniques, Competitive Advantage, Systems


Approach, Capital Investment, Investment Appraisal Techniques.

Introduction: Castle Nursing Home PLC is a chain of residences for old age pensioners in
Northern England. Due to its growth, it has become exceedingly tough to maintain consistency in its operations. Various publications highlight that the organization is being engulfed by its disjoint, mismanaged procedures and goes further to state that the organization is losing focus of its reason for existence. Castle Nursing Home now has to undo all the effort taken till date, despite having no clear focus and strategic plans at hand for the future. From the available financial statements, we can observe that the overall turnover as well as the net profit of the organization has reduced. This report frames the present position of the business as well as the strategies the organization can use to help boost the businesss operations as well as its status, for all its residents, staff and shareholders.

Applying Strategies into Castle Nursing Home:


As mentioned earlier, Castle Nursing Home is planning to undo the effort put in till date and restart from scratch. For this, Castle Nursing Home can adopt certain strategies such as: Understanding the role and importance of operations to the organization. The importance of performance management and undertaking performance appraisal. Importance of using quality improvement techniques to increase its quality of services to gain a competitive advantage. Understanding the importance of information and the various types of information systems that could assist the management. The significance of viewing the organization in terms of systems approach. The use of quantitative techniques to help decision-making. The pros and cons to cash-flow forecasting. Importance of a break-even analysis and marginal costing in decision-making. Use of capital investment decisions and Investment appraisal techniques.

Now that we have identified opportunities for Castle Nursing Home, let us see how it can implement these. Joseph G .Monks defines operations management as the process by which resources flow into an organization, get pooled and transformed to add value in accordance with the various rules as defined by the management. As seen, the weakness of Castle Nursing Home lies mainly in its operations. To streamline this, Castle Nursing Home can adopt operations management. Operations concentrates on five main areas: Capacity

(ability to meet demands), Quality (accordance to customer expectations), Process (activities that convert input to output), Inventory (stock possessed by the business) and Workforce (those who maintain and manage operations). These crucial areas are the foundation for any organization. Hence despite being costly, operations management is vital for the survival of Castle Nursing Home to enhance productivity, efficiency and competitive advantage. Competitive Advantage is the superiority gained by an organization over its competitors in the same market. It is said to be achieved when the organization is applying values or strategies that are not being used by its opponents (Barney 1991 cited by Clulow et al.2003, p. 221). Competitive advantage can be gained through implementing various quality improvement techniques such as, Total Quality Management (TQM) and Quality Accreditations. TQM is an approach for developing, sustaining and refining quality on all levels in the organization, in an economic way, to allow for customer satisfaction. If Castle Nursing Home implements these, it would help: Cover all functions and include all people within the organization. Examine all costs incurred. Develop policies and procedures that support quality. Meet needs and expectations of customers and Develop a climate of continuous improvement within the organization.

Castle Nursing Home can also adopt quality accreditations like ISO 9001 Quality Management System: Requirements, ISO 9004 Quality Management Systems: Guidance for Performance Management, ISO 14001 (Environment Management Standards), OHSAS 18001 Occupational Health and Safety Standards, European Quality Awards and EFQM Business Excellence Model. These accreditations would help Castle Nursing Home to get recognized for its quality and would also force it to adopt measures of continuous improvement and self-assessment. Quality Improvement Techniques can transform Castle Nursing Home and help it achieve competitive advantage. Some suggestions are: Higher annual returns. Lesser rework and waste. By providing value for money. Providing services such as spas. High technology-based medical services. Retaining of administrative and clinical staff. Hygiene with regards to both, operations and environment. In order for these to work, the basic requirement is information. "Information is any input into the system that initiates a change of state" (Vickery B & Vickery A, 1987) and is that which modifies knowledge structure" (Cole C, 1997a). So basically, information is processed data. Information systems convert data into information which in turn get converted into knowledge. This knowledge leads to action which ends in results. This cycle is repetitive in nature and hence determines what information systems need to facilitate (Ward and Peppard, 2002). Castle Nursing Home could approve of information systems which are aligned with its strategy. Johnson and Scholes define strategy as a long-term plan of action or course taken, which alters resources within the challenging environment, resulting in value addition and hence organizational benefits, to help meet needs and expectations of the stakeholders of the organization. For this, it could adopt a financial model (which would help build a representation of, and predict a financial situation) and it can also carry out a sensitivity analysis (which tests the effects of each changing key variable on a plan). This would provide as a back-up for its future plans including help predict and balance its financial status. Information systems also help by measuring performance targets. Performance Targets are those targets set by the organization to achieve. These are mainly of five types: Quality: This refers to the constant conformance to customers expectations. Dependability: This means the reliability on delivery times. Speed: This refers to how fast the customer is served. Flexibility: Refers to adaptability of the organization to changes.

Cost: Is about providing value for money.

In Castle Nursing Home, quality can be set as the main target. This would include aspects such as care given, technology used, services, and nutrition, medicinal facilities, hygiene of surrounding, smoothness of operations, and so on. Other targets can be based on cost (such as incentives based on training programs undergone by the employees, maintenance costs and so on), speed (how fast the customer receives medical attention in an emergency), dependability (reliability on the information collected and provided to residents or those concerned) and flexibility (ability to adapt to disturbances such as failure in machines used). After setting performance targets, there is a need for performance appraisal. Performance appraisal has been defined as the process of recognizing, assessing and evolving the work performance of personnel in the organization, so that the organizational aims and objectives are achieved, while at the same time profiting employees in terms of acknowledgment, receiving response, catering for work needs and offering career guidance (Lansbury, 1988). These can be achieved using various methods. Balanced Scorecard: The Balanced Scorecard has been viewed as one of the most strategic tools applicable. The organizations operational success can be measured through cause-and-effect linkages into the daily operations of an organization (Huselid, Becker, & Beatty, 2005). This can help Castle Nursing Home produce a balanced valuation of the performance by measuring both financial and non-financial performances. The four aspects of a balanced scorecard are: Financial perspective - It defines whether the companys financial strategy is yielding profitability and decreased costs. Some examples are: Cash-Flows, Return on Investment, Financial Results and so on. Internal business processes It impacts the quality of product and service and identifies which internal business processes must run in excellence to satisfy customers. Some examples are: Process Alignment, Number of activities per function, Employ technology, and so on. Customers Addresses how the organization must appear to customers to fulfill the organizations mission. For Castle Nursing Home, this aspect to maximize constituents satisfaction. Some examples in this category are: Customer Retention Rate, Customer Satisfaction Rate, Customer Percentage of market and so on. Learning and Growth: This perspective enables the other three perspectives and defines what the staff must do to achieve the mission, support internal processes and customer satisfaction. Some examples are: Job Satisfaction, Employee Turnover, Learning Opportunities and so on.

To obtain a healthy contribution from this approach, the mission and vision must be clearly stated. After this, the key performance areas must be clearly defined and action should be implemented accordingly to achieve the necessary results. Feedback measures should also be measured for effectiveness. Benchmarking Benchmarking can help Castle Nursing Home by setting benchmarks for the organization against which it could measure itself. These could be both external as well as internal in nature and can be based on price, quality, services, reliability, accessibility, behavior of personnel and so on. Critical Success Factors CSF are those areas in an organization, which if accepted as satisfactory, ensure competitive a competitive advantage to the organization (Rockart 1979, p. 85).It is a means to prioritize requirements and highlights the important parts in the functions of an organization that needs attention. For Castle Nursing Home, some of the critical success factors could be: Structure. Innovation. Infrastructure.

Financial Base. Change Management. Policies and Procedures. Decision-Making Models. Senior Management Support. Business Process Re-engineering.

CSFs are achieved with the help of various Key Performance Indicators (KPIs). For Castle Nursing Home, a few KPIs could be: Patients Confidence. Consistent delivery. Consistent delivery. Respect. Involvement of patients. Information Systems can also be implemented in Castle Nursing Home in order to help with decisionmaking. Choosing an appropriate information system would assist strategic decision-making and hence allow the organization to obtain a competitive edge. Enhanced decisions can be made is Castle Nursing Home could adopt into its operations, the use of various quantitative techniques. Castle Nursing can utilize the following quantitative techniques: Economic Order Quantity (EOQ). EOQ is basically the stock level at which holding cost and ordering costs are at minimum. It may not be used for every inventory situation, but can be thought of every time Castle Nursing Home wishes to purchase inventory (food, clothing, pharmaceuticals, etc.). This would help Castle Nursing Home to reduce its overall costs. In order to apply this into the workflow of the organization without disturbing the daily operations, Castle Nursing Home must realize the importance of systems approach. Systems thinking is a way of understanding the relationships among a system's parts, rather than the parts themselves. Castle Nursing Home needs to implement the systems approach in order to understand various interrelations within the organization. On applying systems approach, Castle Nursing Home would be able to locate where the problems are situated and then solve these problems based on a holistic approach to the problem. This is due to the fact that, the organization will then be able to view the problem from a causeeffect perspective, a multiple perspective, an opposing perspective and even view the organization as a whole. These are the contributions of the systems approach to Castle Nursing Home. As we all know, sustainability of any organization comes from focusing on key factors such as their stakeholders and their financial base. In order for Castle Nursing Home to regain its financial stability, it must be able to predict a companys future financial liquidity. This is known as cash flow forecasting. It also helps to prepare for surpluses and well as deficits. There are various pros and cons to cash flow forecasting. Pros: Cons: -

Helps anticipate downturns. Avoids dangers of overtrading but enhance steady growth. Inspires lenders and bankers that we might have to approach them. Inconsistencies in performance can be identified, predicted and remedied. Helps decide whether business is ready to make another financial commitment.

Inaccurate. Time-Consuming. Based on assumptions. Unforeseen Factors (Unmet sales figures, Sales Forecast, Credit Terms, Governemtn Costs, Inflation, and so on).

Decision-making with relation to finance and consequently all areas of the organization can be enhanced by integrating the concepts of marginal costing and break-even analysis into the financial streams of the organization. CIMA defines marginal costing as the system in which variable costs are noted to cost units and fixed costs are charged in full to aggregate contribution. It provides presentation of cost data in such a way that true cost-volume-profit relationship is revealed. This is where break-even analysis steps in. Break-Even Analysis helps by allowing Castle Nursing Home to guide short term decision-making and the effect it has on cost, volume and profit.

In order for Castle Nursing Home to make the most efficient decisions, they must consider where to invest capital. Capital Investment Decisions can be defined as the firms decision to invest its current funds most efficiently, in the long term assets, in anticipation of an expected flow of benefits over a series of years. We can see from available data that the sales of the company have reduced, it needs to intelligently invest its current funds, in order to obtain future benefits and returns. For this, there are various techniques to conduct investment appraisal. Payback Period: Payback Period is defined as the time period taken to get back the initial investment. This method would be useful to Castle Nursing Home as its two main advantages are: Easiest to calculate Considers the risk factor. But it can also prove to be fatal because: It does not measure profitability. Ignores time value of money Ignores long-term returns and future cash flows after payback period. Accounting Rate of Return (ARR): ARR compares the profit earned from the project to the initial investment required for the project. But does not take into account the time value of money and is unreliable if net income varies and is hence not so common in practice. Internal Rate of Return (IRR): IRR is the rate of return that sets the NPV at zero. Even though IRR takes into account cash flows and time value of money, it is expressed only in relative terms, has multiple values in cases of unconventional cash flows and does not give regard to scale of investment with mutually exclusive projects. Net Present Value (NPV): NPV has been defined as the difference between the present value of cash inflow and outflow of an investment. Castle Nursing Home could use this method to decide on its investments in expansion and dissolving of nursing homes. This is because this method has advantages over all others as: It considers all the cash flows. It considers time value of money. It is a true measure of profitability. Measures profitability of an investment. It is possible to adjust the discount rate for different periods. When choosing a project with higher NPV, value of the firm increases. NPVs of individual projects can just simply be added to calculate value of the firm. Takes into account opportunity costs, cost of capital and interest rates, which hence allows for calculation of risk of investment.

Analysis of the Financial Statements Provided:


From the financial statements (Trading profit and loss and Balance Sheet) of Castle Nursing Home it is possible to seek findings and assume the future trend of the company. This can be accomplished with the help of analyzing financial ratios. The following are the trends can be examined: The Reduction in Sales despite the Increase in Cost of Sales. The sales have taken a dive despite the increase in cost of sales, which shows that the company might be active in promoting itself but is not receiving the response accordingly. This has resulted in a reduced gross profit.

Current Ratio: The current ratio is a measure of the companys liquidity. It is the companys ability to meet the short term obligations. It can be measured by calculating current assets to current liabilities, where the ideal is said to be 2:1. In 2011, Castle Nursing Home, possessed a current ratio of 2.2, but by 2011 it went down to 1.1. This could be due to lack of checking in its operating cash flow, problems with inventory management and even excessive cash burn rate. Acid-Test Ratio:

The acid-test ratio is a measure of the companys liquidity. It is a more refined version of current ratio and excludes inventory. It can be assessed by calculating the current assets less inventories to current liabilities. The ideal ratio is termed to be 1:1. In 2010, Castle Nursing Home possessed a quick ratio of 1.2, but by 2011, it went down to 0.65. This could be due to the fact that the company is struggling to maintain sales or collect receivables. On comparing the difference of current ratio and quick ratio, we can see that the current ratio is comparatively higher; this implies that the company relies on inventory. Gross Profit Margin: Gross Profit Margin is defined as the percentage of companys revenue available to cover expenses to give a profit. In 2010, Castle Nursing Home had a gross profit margin of 26.67%, which has reduced to 21.05% in 2011. This shows that the company is either unable to control production costs and inventory or that prices are set too low.

Conclusion:
From the above report, we have seen the current position of Castle Nursing Home and can easily notice that it is on a downward spiral. Due to this it needs to refine and streamline its operations. This report also provides solutions to the various problems faced. The company could implement various operations management techniques; evaluate the importance of performance targets and its evaluation, understand the use of information systems and various quantitative techniques for decision-making, evaluate the need for implementing quality improvement techniques, the need to adopt systems approach and the need for cash flows and investment evaluation decisions. The report is concluded with an analysis of the financial statements of the company in order to evaluate the possibilities of problem areas within the company.