Report on the Production Process and Procedures

In this report section, three main areas are covered. Firstly, aims and application of BPR are discussed in detail. Secondly, aims and application of lean management in the manufacturing sector are analyzed. While in the third heading, performance management measures are stated for the small companies to improve their performance outcomes.

a)      Aims and Applications of BPR

The BPR stands for Business Process Re-engineering. Organizations support BPR and implement in organizations for several advantages including monetary and non-monetary benefits. Aims of Business Process Re-engineering are stated below:

i)                   To cut down processes in such a way that reduces enterprise costs.

ii)                 To reduce redundancies associated with the manufacturing process in an organization.

iii)               To control unproductive layers in the production sector

iv)               To eliminate errors caused by processes or systems by re-engineering that process.

v)                  To remodel processes for improved output from each process in the organization.

Application of Business Process Re-engineering (BPR) is presented below:

Manufacturing Sector: In the manufacturing process, organizations use modern technologies and advanced processes to ensure maximum output from the invested input resources. However, sometimes errors in process or failure of a single process can cause issues and deficiency in process output. In such a situation, organizations can apply BPR tools (e.g. Robotic Process Automation and Workflow Automation) to overcome this issue.

Assembling Process: In the assembling process, poor technologies and inefficient systems can cause time delays and defects in assembling. Organizations monitor the assembling process to identify gaps and errors for process improvement. For such issues, organizations implement BPR approach that integrates information processing work and prioritize processes in redesign urgency orders. Moreover, sometimes it suggests a complete change of technology and re-modelling of processes. Thus, using BPR in assembling process time delay and system failure related issues can be handled.

b)     Aims and Application of Lean Management

The aims and application of lean manufacturing are Improvements in Quality, Increased Productivity, Waste Control, and keeping things in order. The most focused purpose of lean management is to make betterment in quality without increasing its cost. the quality can be increase by removing all kind of errors. Increase in productivity is the result of lean management. in other words, a strategy in which productivity is increased but the resources or cost remains the same is the output of lean management.

               Waste Control in the production sector, there can be a lot of waste of resources such as wastage of land resources, labour resources, plant resources, and capital resources. if this wastage of resources can be removed from the production sector the company will be able to produce more and more goods and also the profit will be increased. Keep every factor in a sequence lean management provides all kind of aid to keep everything on the place so it could be used to whenever it is required.

Application of Lean Management:

Application of lean management is in production or manufacturing sector, services sector: in-service sector, and supply chain. Lean management applications are common in the manufacturing sector to control waste and improve quality. While lean management can be applied for improved customer interaction and better service quality. For instance, in the healthcare sector, the lean management application can increase patient safety measures and reduce error rates. Furthermore, to control extra motion and improve transportation process companies apply lean management in their supply chain system.

c)      Performance Management Measures

In small scale productions, the appropriate performance management measures are rating scales, the benchmark of employee performance, monitoring system, productivity records, and performance appraisal systems. Small scale organizations can use these measures to get information about performance and requirement for improvement in future. After identifying, companies can apply lean management and incentive systems for improvement.

 

1. Concerns on Limited Resources

a)      Factors affecting limited resources in production management

In the production management, managers of an organization are required to maintain and utilize the organizational resources in the best possible way to maximize the revenue stream. Organizational resources include human resources and material resources. In Muscat Traders, the production management is required to manage the material resources such as linen fabric and raw materials for personalized mugs manufacturing. Managers are responsible to make production plans according to the available resources. For instance, if a company have not sufficient material to produce a required number of inventory units then managers will place an advance order to purchase new materials for the production process. However, if a company lacks financial resources then the company will produce products with the available limited raw material only. In such a situation, the company would focus on production capacity rather than market demand. Some common factors affecting limited resources in production management are discussed here in this section which includes time limitations for big orders, insufficient funds or budget, labour strikes, delays in the supply chain, poor managerial decisions, and dynamic demands. (Needles & Powers, 2010; Paramasivan, 2009).

Sometimes limited time available in the order delivery also influences production management plans. For instance, Muscat Traders produce three types of bedsheets (twin, queen, and king). In case of an urgent order of 300 twin size bedsheets will change the regular production plan for queen and king bedsheets as the company would need to purchase more fabric and arrange additional labour forces for the manufacturing of other products (queen and king bedsheets). Furthermore, sometimes the production management system gets influence from the unavailability of required funds or budgets. For instance, because of the limited budget company cannot purchase the whole required fabric from the suppliers to produce the desired level of bedsheets inventory. Apart, insufficient labour reduces the capability of an organization to meet its production needs. For instance, labour went on strike to create a challenging situation for the production management system. Similarly, delays in the required materials and supplies influence production system. However, sometimes improper decisions regarding resources utilization not only increase cost but also creates issues when the need arises. Although, unstable and dynamic demand for a particular product also make it difficult for the production managers to plan for production. As they cannot clearly understand the actual number of units required to be produced.

b)      Production budget: Using the data given in the case study the following production budget is developed. According to the case study, the company is required to produce at least 200 units of twin size bed sheets and 2000 units of personalized mugs. Considering the shared information, the following production plan is developed for the Muscat Traders without making any changes in the shared information. As case did not provide information about ending and beginning inventory therefore these are kept “0” for all products.

Following information shared in the above table, the following budget is developed for direct material usage. The direct material usage budget covers all essential details shared in the case study regarding the required production units, fabric metre per unit, and sizes of each bedsheet type named as a twin, queen, and king size bed sheets.

The following table represents the revenue budget of Muscat traders. The following budget is developed by using the selling prices and total number units specified by the case.

Considering the above, tables of direct material usage and revenue budgets it is clear that personalized mugs will have relatively greater contribution generation of total sales revenue. However, the total cost of personalized mugs is also greater than all other products because of the greater number of units produced.

c)      Reasons for Unequal Production

Following the production budget, Muscat Traders have planned for unequal production. There are several reasons for this unequal production. Three of these are unequal market demand for products, limitation of material, and different cost of production. According to the case scenario, total demand for each product varies in the market. The queen bedsheet had relatively greater demand than twin and king bed sheets. Therefore, the production level will also vary for these products. Moreover, the company have only supplies of 1000 metre fabric linen. Therefore the company adjusts all required sizes in this 1000 metre fabric and produce the maximum possible number of units for each bedsheet while considering the demand level. While the third reasons are the different cost of production. King bedsheet is relatively expensive than other products. Equal production will change the cost of production. Thus, the cost of production also limits the number of units produced by for these products.

d)     Measures to maximize profit

Muscat Traders is having limited resources, therefore, the profitability of the organization is at stake. Muscat Traders need to maximize profit by paying attention to some important measures such as increasing inventory turnover ratio. Increase in sales will enable the company to reduce fixed cost per unit and generate operating leverage. The company need to control resources wastage by encouraging lean management in the production sector. Management needs to add efficiency in resources utilization plans by identifying the areas of excessive wastage.

2. Concerns on production costing

In this report section, production costing strategies and methods are discussed in detail.

a)      Variable Costing and Absorption Costing

              In manufacturing industries, two common methods of costing are variable costing and absorption costing. In the absorption costing method, manufacturing industries calculate all costs which include the fixed cost of a production process as well as variable cost directly incurred in the manufacturing process. However, in the variable costing method, organizations only use variable costs to calculate manufacturing cost (Weygandt, et al., 2015). While they count the fixed cost operating expenses after the gross profit margin in the income statement. In other words, manufacturing companies using variable costing method keep their fixed cost sperate from the variable cost of production. Fixed cost differentiating between absorption cost and variable cost can be a fixed indirect expense incurred in the business operations. For instance, salaries paid to the management and building leases are fixed but overhead cost of production. These costs are not linked with the production volume to some extent. For instance, building lease will remain the same for a certain period, no matter how many units of products are produced in the building (Wallstreetmojo.com, 2020).

           Absorption costing method is also known as full costing method which entails the allocating fixed overhead costs. Companies use this absorption costing method to get an accurate accounting of net profitability in a certain period. However, it concerns all expenditure allocated to production process even when some produced units are not sold by the company. Excluding this, the variable costing method provides benefit to the manufacturing companies to determine the ideal pricing for a product offered by the company by calculating major manufacturing costs (mostly variable cost only). Variable costing method is mainly used by the companies to reveal the break-even point for the selected products (Chandra, 2007).

b)     Income Statement using the Variable and Absorption Costing

              Using the information shared in the case study, the following income statements are developed. The first income statement is based on absorption costing method. While on the other hand, the second income statement is developed while considering the concept of variable costing. However, the rest of all assumptions regarding revenue and per-unit cost are the same for both income statements.

According to the above-presented income statement, the company will have a loss of OMR 3777 as cost of goods sold is greater than the revenue generated by the company.

See the following table projecting income statement based on the variable costing method.

In this costing method, gross contribution margin was 3986 which indicate that the company is capable to meet its manufacturing cost. However, the company failed to cover its fixed cost with contribution margin therefore net income is turned to a net loss of OMR 2114. Thus, using variable costing method we can understand the actual reason behind net loss of the fiscal year. Muscat Traders need to increase production to cover fixed cost.

c)      Reduce the Selling Price

Reduction in selling price from OMR 5 to OMR 3 will change the overall income statement. The following income statement is based on the variable cost of production.

According to the following table, net loss for Muscat Traders is 6913 while using the absorption costing method. See the following table.

d)     Favourable or Unfavorable Decision

According to the above-presented tables, the company would have a decrease in sales revenue if the prices are decreased to OMR 3 from OMR 5. Because of higher fixed cost company was unable to produce a profit at the end of the business operations even when selling price was OMR 5. Therefore, reducing the selling price would not be a favourable decision for the company. However, the decision can be made favourable if the company exceeds its supply of bedsheets and personalized mugs while reducing the selling price to OMR 3. Bedsheets and personalized mugs are not need-based products. Therefore, the demand for these products highly depends upon the selected selling prices. By decreasing, selling Price Company can attract more customers, as well as quantity sold to each customer, will also increase if a company decreases its selling price per unit for bedsheets and personalized mugs.

 Conclusively, it can be said that reduced selling price will be favourable for the Muscat Trader Company only if demand or sales increases. Excluding this, if sales volume remains consistent and unchanged then the decision of reducing the selling price will be unfavourable for the Muscat Trader Company as it happened in this case study.

3. Recommendation

The recommendation section contains some suggestions and overall summary report regarding the case study of Muscat Traders.

a)      Summary Report

Ahmed Ali made several decisions regarding the selling price of products, production levels for each product, and utilization of organizational resources for the generation of revenue stream. In this section, a summary report is developed for these decisions as well as my opinion about these decisions.

 First of all, Ahmed Ali decided against implementing lean management instead of BPR. In my opinion, his decision was right because the company was not having very complex processes with the error rates which could be improved by the BPR approach. The company was requiring cost control and waste control system to reduce manufacturing cost in the production process. Thus, applying lean management instead of BPR was the right decision of Ahmed Ali.

Second decision made by Ahmed Ali was about unequal production of various sizes of bedsheets. His decision was right about unequal production as the company had a fixed size of linen fabric sheet from which they could not produce the equal number of bedsheets for all sizes (including twin, queen, and king). However, his decision about budgeted production was inappropriate. He should manufacture and sell more twin size and king size bed sheets for profit maximization as the cost of production for these bedsheets were less than Queen size bedsheet.

The third decision of Ahmed Ali was about reducing the selling price for personalized mugs. This decision can be considered as the right decision because the reduced selling price of mugs increased its sales. Increased inventory turnover ratio indicates higher profitability.

b)     Implications of the CEO’s Actions

The CEO of the organization is against the decisions made by Ahmed Ali (as stated in the case scenario). Somehow, if proper justifications and clearance are provided CEO will surely accept the decisions of Ahmed Ali about the production sector, selling price, and lean management. The CEO actions for Ahmed Ali decisions should be as following.

Firstly, system re-engineering can also reduce errors and issues in the production sector which increases capacity and efficiency in the production plants. However, in this case, the company does not require remodelling of process or changes in technological use. Instead, the organization need to have improved manufacturing systems by efficient utilization of available resources. For this purpose, the CEO should support the application of lean management. Secondly, the reduced selling price will enhance the affordability of these products for all customers. Thus, a positive impact is expected for the demand factor. Considering this CEO should support the decision of Ahmed Ali.