Operation Mgmt- Case Study

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Marks : 80Case No. 1 AKRON ZOOLOGICAL PARK During the late 1970s, the decline in Akron's tire industry, inflation, and changes in governmental priorities almost resulted in the permanent closing of the Akron Children's Zoo. Lagging attendance and a low level of memberships did not help matters. Faced with uncertain prospects of continuing, the city of Akron opted out of the zoo business. In response, the Akron Zoological park was organized as a corporation to contract with the city to operate the zoo. The Akron Zoological Park is an independent organization that manages the Akron Children's Zoo for the city. To be successful, the zoo must maintain its image as a high-quality place for its visitors to spend their time. Its animal exhibits are clean and neat. The animals, birds, and reptiles look well cared for. As resources become available for construction and continuing operations, the zoo keeps adding new exhibits and activities. Efforts seem to be working, because attendance increased from 53,353 in 1986 to an all-time record of 133,762 in 1991. Due to its northern climate, the zoo conducts its open season from mid-April until midOctober. It reopens for one week at Halloween and for the month of December. Zoo attendance depends largely on the weather. For example, attendance was down during the month of December 1992, which established many local records for the coldest temperature and the most snow. Variations in weather also affect crop yields and prices of fresh animal foods, thereby influencing the costs of animal maintenance. In normal circumstances, the zoo may be able to achieve its target goal and attract an annual attendance equal to 40% of its community. Akron has not grown appreciably during the past decade. But the zoo became known as an innovative community resource, and as indicated in the table below, annual paid attendance doubled. Approximately 35% of all visitors are adults. Children accounted for one-half of the paid attendance. Group admissions remain a constant 15 percent of zoo attendance.

The zoo does not have an advertising budget. To gain exposure in its market, then, the zoo depends on public service announcements, the zoo's public television series, and local press coverage of its activities and social happenings. Many of these activities are but a few years old. They are a strong reason that annual zoo attendance has increased. Although the zoo is a nonprofit organization, it must ensure that its sources of income equal or exceed operating and physical plant costs. Its continued existence remains totally dependent on its ability to generate revenues and to reduce its expenses. ADMISSION FEE ($) YEAR ATTENDANCE ADULT CHILD GROUP 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 117,874 125,363 126,853 108,363 133,762 95,504 63,034 63,853 61,417 53,353 4.00 3.00 3.00 2.50 2.50 2.00 1.50 1.50 1.50 1.50 2.50 2.00 2.00 1.50 1.50 1.00 .75 .75 .75 .75 1.50 1.00 1.50 1.00 1.00 .50 .50 .50 .50 .50

DISCUSSION QUESTIONS 1. The President of the Akron Zoo asked you to calculate the expected gate admittance figures and revenues for both 1996 and 1997. Would simple linear-regression analysis be the appropriate forecasting technique?

2. Besides the admission price, what other factors that influence annual attendance should be considered in the forecast? Case No. 2 KWIK LUBE

Dick Johnson, a successful textbook author and English professor at the University of Washington, retired from teaching in 1978 at age 40. His net worth was approximately a half-million dollars. In 1985, during a trip to Los Angeles, he came across a very interesting type of new business. It was a very small gas station that specialized only in oil changes and lubrication jobs. The old gas station had been remodeled, the gas pumps had been removed, and the large sign above the small building read "OIL AND LUBE-- $10 and 10 MINUTES." For two hours, Dick observed the converted gas station from a restaurant across the street. During the next month, Dick made three trips to Los Angeles to talk to the owner, George, about how he got into the business and how the business worked. Dick paid George $1,000 for his advice and information and promised never to compete directly with George or ever to open or operate a similar type of business in the Los Angeles area. After talking to his lawyer and accountant, Dick started to organize a new business--Kwik Lube. In March 1986, Dick had built his first Kwik Lube, and by the end of 1986, he had completed two additional Kwik Lubes in the Seattle area. The total gross revenues in 1986 from all three stations were $260,000. Between 1986 and 1990, business picked up rapidly. Total gross sales in 1987 and 1988 were $680,000 and $750,000, respectively. In 1989, total gross sales for the three Kwik Lube stations were $750,000, and in 1990, total gross sales were $780,000. Dick was convinced that this sales increase was due to his not significantly increasing the price of his basic service, which was to change the oil, change the filter, and do a lube job. In 1986, the total price was $9.95. In 1989, the total price per job was $10.95, and by 1990, the total price was only $12.95. In addition to running his three Kwik Lube stations in Seattle, Dick desired to franchise his idea in other cities in Washington and in other states such as Oregon, Idaho, and Montana. During the last three years, Dick had acquired considerable knowledge about this type of business. He was able to obtain the best possible prices for oil, lubricants, and filters. If he franchised Kwik Lube, he would even be able to make a profit from selling oil, filters, and lubricants. Dick invested over $20,000 in lawyers' fees and another $2,000 in talking to other companies in the franchise business. He decided to set his franchise fee at $18,000, plus 6% of the gross sales of the stations. In addition, each new Kwik Lube station had to conform to exacting standards for the building and all of the equipment. Depending on the location, Dick could build and equip a Kwik Lube Station for under $200,000. Like his own Kwik Lube stations, these new stations would have two car or vehicle bays. In 1991, Dick sold his first franchise to T. A. Williams and another franchise to an investor in Eugene, Oregon. By 1994, Dick had sold a total of eleven franchises in Spokane, Washington; Eugene, Oregon; Portland, Oregon; Butte, Montana; and Boise, Idaho. In addition, Dick experienced a substantial growth rate for total gross sales for his three Kwik Lube stations in Seattle. In 1991, total gross sales were $990,000. In 1992, total gross sales were $1, 040,0000; in 1993, $1,200,000; and in 1994, $1,330,000.

Dick knew that it would only be a matter of time before someone else would start to compete directly with his Kwik Lube stations, but he never believed that the first competition would be in Seattle. Construction on the first two Speedy Lube Stations started in 1994, and both stations were in operation in early 1995. The two stores were almost identical to the Kwik Lube stations, but Speedy Lube was priced two dollars less than Kwik Lube's current price, which was now $19.95. Dick never dreamed that this new competition would cut so deeply into his total gross sales. Total gross sales for the three Kwik Lube stations in Seattle dropped to $1,110,000 for 1995, and the situation did not look any better for 1996. Indeed, when 1996 figures became available, sales were again only $1,110,000. Soon after the total gross sales figures came in for 1995, Dick got some startling information from one of his friends in Spokane. Over 50% of the stock in Speedy Lube, Inc., was owned by Richland, Inc., a holding company owned by T.A. Williams. Dick was outraged that one of the people who purchased a franchise from him was directly competing with his Kwik Lube stores and in direct violation of the franchise contract, which contained a noncompetition clause. Dick had only two goals for the coming year: (I) to shut down the two Speedy Lube stations, and (2) to regain his lost sales for the two years from T. A. Williams. Both objectives were to be accomplished with a lawsuit. Dick Johnson's lawyer strongly suggested that Dick employ a witness to testify on his behalf against Speedy Lube. While there seemed to be no question about who would win the case, Dick's lawyer believed that an expert witness could more accurately determine the damage. In addition, most juries place more importance on expert testimony. As a result, Dick decided to employ the services of Dr. Warren Gunn. Dr. Gunn was a professor of marketing at Eastern Washington University which was very close to Spokane. He had more than ten years' experience as an expert witness, and his specialty was determining damages for antitrust and franchise cases. His basic strategy was to find data about the same industry or a similar one in a location resembling the area in which the original problem occurred. In this case, Dr. Gunn needed data about the fast oil and lubrication business in a location similar to Seattle. Because Dick originally obtained his idea from a small station in Los Angeles and because Los Angeles had hundreds of these types of businesses by 1995, Dr. Gunn decided to collect data in the Los Angeles area. This would require the development and pilot testing of a questionnaire that could determine the total gross number of cars serviced for fast oil and lubrication businesses in the Los Angeles area between 1986 and 1996. Although the questionnaire study would cost $20,000 to perform, Dr. Gunn and Dick both believed that it was the best approach. The data were collected in two weeks, and are summarized in Table 1. Both Dr. Gunn and Dick knew that if the results of the questionnaire were not favorable, they would not use it during the case. TABLE 1 Analysis of Avera