OPERATIONAL AND PROJECT MANAGEMENT

Contents
Executive Summary...................................................................................................................3
Introduction................................................................................................................................ 5
Scenario 1 (Process Analysis)..................................................................................................5
Scenario 2 (Quality Issues).......................................................................................................7
Scenario 3 (Capacity Planning)................................................................................................8
Scenario 4 (Inventory Management)......................................................................................10
Scenario 5 (Logistics Management and Relocation)............................................................12
Conclusion:.............................................................................................................................. 14
References............................................................................................................................... 15
Executive Summary
Swindon Security Systems (SSS), a medium sized Company, is operating two divisions, Large
Systems and Off the Shelf Systems. Company has intention to negotiate a new consultancy
contract, so some areas having potential opportunities for improvements are needed to probe.

I was assigned to analyse the information and make my recommendations as to how each
department could improve their operations performance, and in doing so generate increased
profitability for the Company.

Following five areas were scrutinised and brief summary of the findings are as follows:

Process analysis for the large system divisions

● Maximum production capacity of the Company is 7 units per week of large systems
division. Due to the bottleneck of the site survey team, Company currently has an idle
capacity of completing 3 systems by the sales visit and manufacturing team while the
installation team has an idle capacity of completing 9 systems.

● Annual gross profit being generated by the business is £12 million while annual net profit
is being generated £7.5 million.

● Company has greater demand than actual production which would increase further in the
next 12 months. To meet the new anticipated demand and eliminate the process
bottleneck, Company has to recruit one additional site surveyor from a local employment
agency. This would increase annual profit by £3.9 million; however, the installation team
shall still have weekly idle capacity of completing 6 further systems.

Quality issues in off-the-shelf manufacturing

● The Off the Shelf division is facing quality issues due to the faulty systems (8%).
Company is incurring currently £0.8 million as an annual cost due to faulty systems.

● To minimise the quality issues and reduce the cost of shipments, the option of recruiting a
new quality control team is available (with 100% detection of faulty units at factory). But
this option would result in an incremental cost of £0.13 million annually.

● On the other hand, the philosophy of total quality management (TQM) may be used to
minimise the cost and to satisfy the customers. Using TQM would result in reducing cost
of £0.475 million for the first year and £0.54 million for each year afterwards. Faulty
systems error rate would be reduced from 8% to 2.5% by using TQM philosophy.
Capacity planning in the call centre
● Current plan of recruiting three permanent employees for handling the calls of the
customers would result in an annual cost of £134,400 as expected calls in different
months is more than the capacity of permanent employees.

Each permanent staff costs £3,300 while each contract staff would cost £694 for each
month. Hence, the decision to recruit three permanent employees needs revision.

● On the other hand, a reputable software company approached for an online call handling
system. This would increase the capacity of permanent and contract staff to handle 10
additional calls by each person on each day. By using this, there would be a reduction in
annual cost of £26,400.

Inventory management for cam units

● Current annual cost of procuring cams with no consistent policy of ordering amounting to
£90,000. Occasionally, orders are late and production held up.

● By using Economic Order Quantity (EOQ), not only the issue of late orders may be
resolved but the total annual cost of procuring cams would decrease to £77,367.50.

On the other hand, there is an option of bulk purchases which offers discounts as well.
Bulk purchase option would reduce the total annual cost of procuring cams to £83,280.

Logistics planning for a new location

● The lease for Swindon base (Off the Shelf Division) is near to expire in a few months.
Company has shipments in all over the UK which is far farlang from Swindon base. Due
to increase in fuel and shipments cost, optimal location needs to be considered before
renewal of lease agreement.

Nottingham is near to the optimal location from where transportation cost shall be
reduced. The most optimal location for this is Kettering but road infrastructure is not of
high quality there. By considering various other factors mentioned in the relevant section,
location may be changed.
Introduction
This report is prepared on the basis of the data provided. No assumptions are used from outside.
This is to facilitate the Board of Directors to better understand the operational matters with the
help of factual basis. Each section of the scenario is independently considered while analysing
the matters.

Scenario 1 (Process Analysis)

Maximum Production Capacity (Weekly) of the Company:
Below table has shown that Company has maximum production capacity (weekly) of completing
7 systems. As the site survey team is capable of completing only 7 surveys and each system is
individually designed so extra capacity available with other teams’ remains idle.

Table – 1

Site
Sales Manufacturin Installatio
Description Legends Survey
Team g Team n Team
Team

No. of staff A 2 3 5 12

No. of working days B 5 5 5 5

No. of hours for each

C 8 8 8 8
day

D=
Total available hours 80 120 200 480
A*B*C

No. of hours required

to complete 1 E 8 16 20 30
system’s working

Maximum Capacity
F = D/E 10 7.5 10 16
(equivalent systems)

Annual Capacity G = F * 50 500 375 500 800

Process Bottleneck:
“A bottleneck is one process in a chain of processes, such that its limited capacity reduces the
capacity of the whole chain” [1]. Capacity of the site survey team to make surveys is limited so it
is a process bottleneck. As Companies have demand of 8-9 systems weekly, so the site survey
team’s capacity of surveying 7.5 sites not only limits the other team’s idle capacity but makes it
impossible to meet the demand from clients.

Calculation of Annual Gross Profit being generated:

Amount
Description Legends Working
British Pounds (£)
Units manufactured and A 7.5 units * 50 weeks = 375
sold
Sales Revenue B 375 * 160,000 60,000,000
Cost of units C 375 * 128,000 48,000,000
Gross Profit – Annual D=B–C 12,000,000
Fixed Overheads E 90,000 * 50 4,500,000
Net Profit - Annual F=D–E 7,500,000

Services of Employment Agency Used

Currently, the Company is able to manufacture and install 375 units with the available limited
resources. Considering that in the next year demand from clients would be around 10-11 systems
per week (i.e. 500 units annually, assume demand of 10 systems weekly). Companies have a
process bottleneck for the site survey team (i.e. 375 systems site surveying capacity). Table – 1
showed that all other teams have sufficient resources to meet the demand of 500 units annually.
So, to meet the demand of 500 units, Company has to recruit new staff from an employment
agency on a temporary basis. Company has to engage one new surveyor for 250 days (additional
125 units need 2000 more hours i.e. 2,000/8 = 250 days) at the cost of £ 400 / day. Additional
one surveyor shall meet weekly requirements as well by adding 40 hours in a week.

Calculation of extra annual profit

Additional sales revenue (125 * 160,000) £ 20,000,000

Additional Units manufacturing cost (125 * 128,000) £ 16,000,000

Additional surveyor salary cost (250 * 400) £ 100,000

So by recruiting one additional surveyor, extra annual profit would be £ 3,900,000.

Scenario 2 (Quality Issues)
Company is facing quality problems due to the faulty units. On one side, Company has to bear
replacement cost of the faulty unit and on other hand, dissatisfaction of the customer may
damage the goodwill of the Company. Following is the calculation of the annual cost of quality
problems.

Current Annual Cost of the Quality Issues:

Description Working
Units manufactured – annually (Nos.) 40 * 5 * 50 10,000
Faulty units (Nos.) 10,000 * 8% 800
Replacement cost (£) 800 * 800 640,000
Additional cost incurred (£) 200 * 800 160,000
Total annual cost of quality problems 640,000 + 160,000 800,000
(£)

Financial Impact of Proposal A:

By recruiting a quality control team, the Company may save £160,000 (shown in above table)
being paid for replacing a new unit to customer. However, Company has to incur £290,000 as
salaries. Cost for replacement shall remain unchanged. In nutshell, Company has to incur an
additional amount of £130,000 for each year.

Proposal A may have following advantages and disadvantages.

Advantages:
1. There shall be 0% faulty units and would result in the increased confidence of the
customers in the product and no dissatisfied customer.

2. It would result in the increased goodwill of the Company.

3. Time required to ship a new unit in replacement of faulty units shall be saved.

Disadvantages:
1. It would result in an additional cost of £130,000 as a salary cost for each year.

2. New recruitment would result in additional recruitment and opportunity cost of the
human resource team.
Value of Proposal B:
Total quality management philosophy refers, “quality is not an accident” [2], Company may
obtain following financial benefit.

Decrease in cost of replacing faulty unit (A) (800-250) * 800 =£ 440,000

Decrease in cost of shipping (B) 550 * 200 = £110,000

Lump sum cost to be incurred (C) £75,000

Net benefit for first year (£) D = A + B - C £475,000

Net benefit for each year afterwards (£) – E = A + B – 10,000

£540,000

Hence, by using TQM philosophy, there would be a total annual cost of £325,000 of quality
issues for the first year and £260,000 for each year afterwards, respectively.

In nutshell, the best way for the company is to opt out proposal B as there would be reduction in
cost of £475,000 and £540,000 for the year 1 and each year afterwards, respectively.

Proposal A incurred an additional cost of £130,000 as a salary cost to counter quality issues,
however, satisfaction of the clients shall be unparalleled. Current method is incurring £800,000
as a cost to quality issues along-with customer’s dissatisfaction.
Scenario 3 (Capacity Planning)
Company has plan to operate the call centre with 3 permanent staff and for any extra calls,
Company shall negotiate a contract with the agency. Here is the analysis of the staff requirement
and annual cost of all staff based on anticipated calls data.

Requirement of Agency Staff and Total Annual Cost of All Staff:

Permanent
Remaining Calls Cost of
Calls Staff New Staff
Month for New Recruit Agency Staff
Expected Monthly from Agency
(daily) (£)
Capacity
B = 3 * 40 * D = C / 30 E = D * 110 *
A C = (A – B)/30
30 (round off) 30
January 6,700 3,600 103.33 4 13,200
February 6,300 3,600 90.00 3 9,900
March 5,100 3,600 50.00 2 6,600
April 4,200 3,600 20.00 1 3,300
May 3,200 3,600 - 0 0
June 3,000 3,600 - 0 0
July 2,800 3,600 - 0 0
August 3,600 3,600 - 0 0
September 4,100 3,600 16.67 1 3,300
October 4,900 3,600 43.33 2 6,600
November 5,200 3,600 53.33 2 6,600
December 6,100 3,600 83.33 3 9,900
Total cost of agency staff 59,400
Permanent staff cost (25,000 * 3) 75,000
Total Annual Cost of All Staff 134,400

Refer to the new staff required in column D and total annual cost amounted to £134,400.

Assuming Call Handling System Availed:

Calls Permanent Remaining Calls Cost of

New Staff
Month Expecte Staff Monthly for New Recruit Agency Staff
from Agency
d Capacity (daily) (£)
D = C / 30 E = D * 110 *
A B = 3 * 50 * 30 C = (A – B)/30
(round off) 30
January 6,700 4,500 73.33 3 9,900
 February 6,300 4,500 60.00 2 6,600
March 5,100 4,500 20.00 1 3,300
April 4,200 4,500 - 0 0
May 3,200 4,500 - 0 0
June 3,000 4,500 - 0 0
July 2,800 4,500 - 0 0
August 3,600 4,500 - 0 0
Septembe
4,100 4,500 - 0 0
r
October 4,900 4,500 13.33 1 3,300
Novembe
5,200 4,500 23.33 1 3,300
r
December 6,100 4,500 53.33 2 6,600
Total cost of agency staff 33,000
Permanent staff cost (25,000 * 3) 75,000
Total Annual Cost of All Staff 108,000
Annual benefit of call handling system (134,400 – 108,000) 26,400

Differences between permanent staff and agency staff:

1. Cost of payroll:
Company has to pay salaries to its permanent staff whether expected calls targets are
achieved or not. However, payment to agency staff shall only be paid if services are used.
For the hiring process of permanent staff, Company has to incur its time and resources.
Whenever any permanent staff resigns, Company has to bear training costs.

2. Efficiency of performing work:

Permanent staff is able to attend 10 extra calls each day with lower cost (per month average
salary of one permanent staff is £694.44) as compared to contract staff of the agency (having
average monthly salary of £3,300 for each staff). So, permanent staff is more work efficient
and cost efficient as well.

3. Customer satisfaction:

Agency contract staff may forgo customer’s satisfaction as compared to the permanent staff.
Company shall have direct control over its permanent staff unlike agency staff. Resultantly,
Company may suffer lower quality services from the agency staff.

4. Dependability on agency contract may result in loss of business

 Agency tends to leave a contract for more money on another contract assignment.  Agencies
may work on multiple jobs at one time unlike permanent staff. Poor services or termination
of contract by the agency may create many problems for the Company. Any unattended call
may allow intruders to misuse the large systems. It would result in legal implications,
damage to goodwill of the business [3] and loss of business as well.

Scenario 4 (Inventory Management)

Company is facing the problems of mismanagement of cost of procuring cams. No policy exists
for procuring and storage of cams. Resultantly, Company has to incur extra cost. Here, we’ll see
that which option is more preferable and financially feasible for the Company.

Total Annual Cost – Currently:

Current cost of procuring cams is £90,000 per annum.

Option of Economic Order Quantity (EOQ):

First, we shall calculate EOQ [4].

Formula = √ ((2 * Annual demand * ordering cost) / holding

cost)

= √ ((2 * 5,200 * 40) / 9)

EOQ = 215 units

No. of Orders = 5,200 / 215 = approximately 25 orders

Ordering Cost = 25 * 40

= £1,000

Holding Cost = Average Inventory * cost of holding one item per annum

= 215/2 * 9

= £967.50

Purchase Cost = 5,200 * 14.50

= £75,400

Total cost of procuring cams = 75,400 + 967.50 + 1,000

 = £77,367.50

Option of Bulk Purchasing for Availing Discounts:

No. of Orders = 5,200 / 2,600 = approximately 2 orders

Ordering Cost = 2 * 40

= £80

Holding Cost = Average Inventory * cost of holding one item per annum

= 2,600/2 * 9

= £11,700

Purchase Cost = 5,200 * 13.75

= £71,500

Total cost of procuring cams = 71,500 + 11,700 + 80

= £83,280

Conclusion: From the above workings, it is clear that both the options under consideration
would reduce the total annual cost of procuring cams, however, the most feasible option to
procure cams is the option of using EOQ method. EOQ method will cost a total annual
£77,367.50 as compared to the current and bulk purchase option having cost £90,000 and
£83,280 respectively.

Key Benefits of JIT Approach to Inventory Management:

Companies like to use JIT because it has been a more cost saving method of stock holding. Its
objective is to reduce the amount of goods you hold at any a time, and this has various benefits
as follows:

1. Need less space: Higher storage space or warehouse is not needed to store goods with
fast stock turnaround. And hence funds are saved for achieving other business objectives.
And through rental income earned by renting the warehouse space.

Waste reduction: Fast stock turnaround prevents the goods to become obsolete and
also reduces loss due to damaged or obsolete goods. This also saves money which could
be used in the entity's other objectives. As unnecessary stock need not be prevented.
 2. Smaller investments: For small scale companies this JIT Inventory management
system works best as the entity does not have enough funds to bear warehouse expenses
or losses due to obsolescence of stock.

3. First Time Right: Quality is prior focus in JIT and hence companies work to get First
time right for all goods to prevent wastage.

4. Shorter Lead time: JIT approach may be beneficial for the Company as lead time of
the inventory reduces.

5. Reducing transportation cost: JIT approach may be beneficial for the Company as
transportation cost of the inventory reduces by considering the fact that adoption of this
approach is feasible when supplier is located in a position which can meet Company’s
time requirement.

6. Reliable vendors: JIT approach may be beneficial for the Company as limited
number of vendors reduces the amount spent on vendors’ relations and ensured that
Company is receiving high quality goods and services.

All of these advantages will save the company money which could be used for other purposes.
Scenario 5 (Logistics Management and Relocation)
Finding Optimal Location by Using Centre of Gravity Method in Distribution
Location Centre:
The Center of Gravity Method [5] is an approach that seeks to compute geographic coordinates
for a potential single new facility that will minimise costs.

This method is beneficial because it’s (a) Simple to compute, (b) Considers existing facilities,
(c) Minimises costs

X-coordinates and Y-coordinates are given so by multiplying grid coordinates with the shipment
for each location and dividing it over total annual shipments, we received Cx and Cy.

Location Shipments per X-Coordinate Y- Cx Cy

year Coordinate
A B C D=A*B E=A*C
Bristol 170 2.2 0.4 374 68
London 360 9.9 0.6 3,564 216
Birmingha 290 4.5 5.7 1,305 1,653
m
Liverpool 600 1 10.5 600 6,300
Mancheste 360 3.3 11 1,188 3,960
r
Sheffield 420 5.7 10.3 2,394 4,326
Nottingha 390 6.7 8 2,613 3,120
m
Cambridge 240 10.8 4.2 2,592 1,008
Total 2,830 14,630 20,651
Optimal Location (D/A & E/A) 5.17 7.30
Coordinates

We can see from the above table that the most optimal location to reduce transportation cost is
falling at 5.17 at X-coordinate and 7.30 at Y-coordinate. If we have to select any location among
the locations mentioned in the above table, then the most feasible location which may reduce
transportation cost would be Nottingham having coordinates (6.7, 8). Swindon is a location
which is located near to Bristol and London but locations of Liverpool, Manchester, Sheffield
and Nottingham are very far farlang. These cities have demand of 1770 shipments. So by
choosing Nottingham as a location to centre, there would be a lot of reduction in transportation
cost.
Considering Other Options for Optimal Location:
By looking at the map, we can conclude that the optimal location found by the Centre of Gravity
method may be “Kettering” which is falling near to the optimal location. However, this method
can identify the location with the only perspective of fuel cost and remaining factors need to be
considered yet.

Following factors shall be considered for finalising the location:

1. Expected inventory profile

2. Geographic distribution strategy?
3. Proximity to the Logistics Carrier for entity
4. The pool of local talent present in the area.
5. Inbound and Outbound transportation expenses.
6. Access to interstate highway systems or inbound sea import locations.
7. Crime rate, Housing, Educational and infrastructure facilities
8. State taxes and incentives
9. Construction and land costs
10. Visibility and traffic problems
11. Competitors locations
12. Weather conditions

Conclusion
I would like to draw my conclusions here as follows:

Process analysis for the large system divisions

● I would suggest that, Company should recruit one more site surveyor to meet the
anticipated demand of the next 12 months.
● Company should consider lay-off of some staff of the installation team to reduce weekly
idle capacity. In case minor change is faced in anticipated demand, the Company has the
option to recruit temporary staff from the agency.

Quality issues in off-the-shelf manufacturing

● I would like to recommend opting for TQM philosophy for reducing cost. Error rate of
2.5% is quite bearable.

Capacity planning in the call centre

 ● I conclude to use an online call handling system. This would increase the capacity of
permanent and contract staff and the Company should consider engaging one more
permanent staff.

Inventory management for cam units

● Economic Order Quantity (EOQ) method should be used to manage the inventory.

Logistics planning for a new location

● I would suggest Nottingham as a new location assuming all other factors remained
constant.
References

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Kanji, G. K. (1990). Total quality management: the second industrial revolution. Total quality
management, 1(1), 3.

Saccani, N. (2013). Forecasting for capacity management in call centres: combining methods,
organization, people and technology. IMA Journal of Management Mathematics, 24(2), 189-207

Jung, H., & Klein, C. M. (2005). Optimal inventory policies for an economic order quantity
model with decreasing cost functions. European Journal of Operational Research, 165(1), 108-
126

Quah, D. (2011). The global economy’s shifting centre of gravity. Global Policy, 2(1), 3-9.