TheBTeam India BITS Goa

Report on Issues Facing

JOT

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2013 CASE STUDY

THE B TEAM (BITS-‐Pilani K.K.Birla Goa Campus)

Prabhat Mehta Apurv Chaturvedi Raunak Dharani Nishant Sarawagi

2 Global Business Challenge (The B Team)

To: The Board of JOT From: Consultant to JOT Date: 1st November 2012

CONTENTS

1. Introduction

2. Prioritization of the issues

3. Approach to resolving the main issues a. Faults in new flying Space Ship b. Late Delivery of Christmas product c. Near-Shoring proposal in Voldania d. Launch of new range of toys for 9 – 11 age group

4. Ethical Issues

5. Recommendations

6. Conclusion

Appendices

1. SWOT and PEST analysis 2. Ansoff’s growth vector matrix 3. Calculation for near-shoring problem


Introduction Husband wife pair Jon and Tani Grun founded one of the reputed toy manufacturers in the world, Jot. This company has progressed by leaps and bounds since its inception in 1998. Jot started out by making a very limited range of products in that were manufactured in the native country itself. A continued increase in demand made Jot to outsource its production from manufacturers in China to reduce the cost of production. Currently, Jot has a range of 34 products for primarily two age groups: 3-5 years and 5-8 years. Most of these products utilize simple electronic devices in making toys, which move or make sounds. A team based in the United Kingdom, who develop new products and improve the old ones, does the design of all the toys. The toys are tested in a facility based in Europe, which put the prototypes and old improved toys through the paces. After the testing is done, the order for mass production is placed and the product is ready to hit the market. The toy industry is highly competitive since there are many substitutes available in the market with minor changes in the design. There are more than 5000 toy manufacturers in Europe making it the biggest market in the world. With intense completion from local Chinese and Asian manufacturers who copy designs in no time it is really important for all companies that they have a good brand value in the market and reputation among dealers. Intense publicity and efficient customer care is key to achieve higher market share. And also the industry is capital intensive as the time between developments of the product and when they are sold is more than 9 months. So the interest rates play a very important role in business decisions.


Prioritization of the Issues Faults in new flying Space Ship For a company like Jot who is young, it is really important that their reputation in the market is intact and that dealers and vendors have faith in the brand. So it should be first in the priority list of Jot directors to resolve the issue of faulty products to prevent people from not buying Jot Products. Late Delivery of Christmas product Jot’s sales are seasonal so it is really important that all the products are in stores well on time. Delays in delivery of products can affect Jot’s sales adversely. Near-Shoring proposal in Voldania Outsourcing products to Voldania and not China should be next in the list since Jot is on an expansion spree. Planning on their future production is really important. Launch of new range of toys for 9 – 11 age group Toy industry runs on just one principle, Innovation. Jot should thereby focus on innovating new products that are loved by all. Therefore new range for products, even more sophisticated is really important.


Approach to resolving the main issues Faults in new flying Space Ship Reputation of the company is at its stake and also more than a million Euros. The problem with insulation has caused a lot of trouble to the company. This clearly shows that the product was not tested well. But the problem is that the product is in the market and all the orders are made. For Jot it’s a difficult situation as its reputation are at stake. At the same time they cannot neglect the losses they will face due to the faulty product, and also the hefty loans they have picked from the market. There are two options as suggested by Jot’s director: Option 1 As suggested by Michael Werner, Jot can recall its supply and add a value of 10 Euros and again supply the toys. This option will help Jot save 144,000 Euros of losses, which it will suffer in case it calls off the product. Rather Jot can set up a replacement channel, through which it sets up a method for consumers to return the faulty product to Jot directly and then Jot repairs the product (by adding 10 Euros value to it) or replaces it. This way Jot would loose 10 Euros per product but would still make a profit of 4 Euros per product sold. Jot must make sure everything is done smoothly, and that the fault in product is not highlighted. Or else it might affect sales of other Jot products. They should recall all the space shuttles that are stocked with the retailers (1400) and fix them. Also fix the 3200 products in the inventory. For the sold products (1200), replacement channel c should be set-up. This way Jot can make a profit of 36,000 Euros. Jot should also contact it outsourced HR division to take extra care of complaints regarding the product and place replacement of the product on top priority. Customer care staff must be aware of exact procedure of how the toy should be replaced, and they must make sure that red-tapism is minimal. They should follow a similar model used by NOKIA when they discovered that 46 million batteries they supplied were faulty. Providing a well-informed channel for


replacement will help them maintain the reputation of the brand among the consumers. They can also take help from the model followed by LEGO, leading toy manufacturer. LEGO has few products that involve more than 1000 small components, of which each and every small is really essential. Due to error in packaging line, few components are not included in the final packet, which leads to a huge discontent among the consumers. To resolve such problems LEGO has a predefined channel, procedure of which is explained well on their manuals, and their websites. Jot can also use their website and blogs to provide all the information regarding replacement of products. Option 2 As suggested by Boris Hepp, jot could write off the product. This way their reputation would remain intact and also the Jot’s customers would have more faith in their products, as they were not hesitant in recalling all the faulty products. But the only problem by doing so is that Jot would face losses worth 144,000 Euros at a time when it already has a debt of 150,000 Euros. Following this option there wont be any risk of loss of sales of other products, and also Jot’s customers who had been bitterly complaining would be satisfied. Late Delivery of Christmas product The toy industry is highly seasonal. Any delays in delivery of products will lead to loss of sale, as there are many substitutes s. available in the market. Jot faces delays from the manufacturer’s side, who can provide only 75% (1800) units on time. Now Jot has to decide the distribution among its clients. Jot has around 350 customers out of which 7 major customers account for 68% sales. The figures suggest that Jot’s sales are highly dependent on the 7 major customers. If Jot supplies its main customers with all the 1800 units then the small independent toyshops might loose faith in Jot. But at the same time Jot cannot afford to loose its major customers who account for almost 68% sale


Jot should demand compensation from the manufacturers, as they are losing on their credibility in the market due to delays. Such delays from manufacturer’s end leads to delay in payments as well, due to delays in delivery. This in turn leads to shortage of funds that are really important for development of new products and repayment of loans (leads to loss of interests). Jot should now start looking for alternative supplier of the product they outsourced to Gull. They should reduce orders from future, and make sure that they are not too much dependent on any supplier. Also they should maintain a buffer time period while placing orders to Gull, so even if there were small delays, Jot would be able to supply the orders on/before time. Near-Shoring proposal in Voldania Voldania servers Jot perfectly. Since all three warehouses of Jot are in Europe and USA, Voldania has geographical advantage over China. Also since Voldania is a part of European Union, the loss due to FOREX conversion would be minimized (also commissions that bank charge for carrying out international currency change/transfers would be reduced). It would be easier for Jot to get licenses for selling its product as it is made in Europe itself, i.e. EU certified. Also many people have a physiological misconception that ‘made in China’ products do not match the quality of products made in other part of the world. So outsourcing manufacturing to Voldania would overcome the problem. Also if we keep aside these factors, calculations show that outsourcing manufacturing to Voldania would reduce cost of production. One major problem with Chinese market is low IPR protection. So product outsourced to Chinese manufacturers have a threat of being copied and manufactured by someone else. This leads to huge loses. In such a competitive industry, such things can ruin a company, since millions of dollars are spent on R&D. Also artificially inflated currency value of China has lead


Launch of new range of toys for 9 – 11 age group Suitability The market demands more sophisticated toys rather than old fashioned ones. Also since the market of smartphones is increasing at a tremendous rate, gaming applications act as substitutes to toys for children of 9-11 years. With cheap tablets flooding the market, parents prefer to buy a tablet that can run multiple applications with no future cost. Also there is a great potential in this field. Once an application is a hit, consequent demand for its goodies increase in the market, for example after Angry Bird got hit in the app market, toys and clothes with Angry Bird design were demanded in the market. Also the beta versions of such games (with advertisements, and free of cost) earn a lot of revenue. Acceptability Financially, this is a venture that Jot can afford to take risks since the money involved is a fraction of their total revenue, However, it might take some time for it to become profitable. Jot has to clear loans worth 50,000 Euros in the near future. So if the company has a buffer of around 30,000 Euros only then should they go for investing in a totally new field. But accepting to this would mean going against John Grun, who has 30% shares in Jot. Feasibility Application and mobile game development is a new business as well as a totally new market for Jot. However the technology and the skills required for the same are not available with Jot. They will have to hire new people or outsource the game development, which again adds to cost of development and also the risk that the product won’t do well in the market.


Ethical Issues The business however profitable or non profitable it is, it has to ethical to have a clear conscience. The moral dilemma in front of the management need not be solved as it is not under any tight legislation but a good business is the one that works ethically as much as it can. Solution to Ethical issues

• The faulty spaceships sold to the customer were a mistake. And being honest, the company should go for replacing the faulty pieces as it is the duty of the company to care for the customers.

• The personal donation to the Voldanian government official will have to be given though it is not ethical as it is a part of the business which every company does.


Recommendations Faults in new flying Space Ship Jot should go with option 1 as recalling the faulty product will lead to an increase of goodwill and trust among the customers. Choosing this option will also be economical, as 140,000 Euros will be saved by not cancelling the product. By ensuring the replacement for the spaceship toy, Jot can earn revenue of 36,000 euros. In a market that is perfectly competitive because of the presence of a large number of buyers and sellers, goodwill and trust go a long way in ascertaining repeat customers. [Refer to appendix for analysis] Late Delivery of Christmas product Jot should make the supplies to the 7 major customers as they make up for 68% of the sales. On one hand, Jot risks losing the faith of the small customers but that is a trade off the company has to make because of the delay in supply of the goods because of the fault of the manufactures. However, by ensuring the supply to the big customers, Jot can at least hope for repeat business with those customers as their order was completed on time. It is easier to compensate a small player than a major client. [Refer to appendix for analysis] Near-Shoring proposal in Voldania Jot should certainly near shore manufacturing in Voldania owing to strategic and economic benefits. One primary upside to near shoring manufacturing in Voldania is the proximity to all the three warehouses of Jot. This would lead to low transportation cost to distributors and also ensure timely delivery of product. Manufacturing in Voldania will also minimize the FOREX losses and also curtail the possible breaches of IPR if the product was to be produced in China. Jot should keep outsourcing manufacturing to serve the expansion plan of Jot to serve Asian markets. This would help reduce the transportation and distribution cost. [Refer to Appendix 3] Launch of new range of toys for 9 – 11 age group


Production of a new application for smart phones and tablets targeted at the age group of 9-11 years is a great idea, but with significant risks. The downside of producing this application might be that the game does not take off as well as we hope it would. So the investments on the game will not payback. However, if the game takes off well, the visibility in app world would be immense and the revenue generated would be immense. So, we suggest that we outsource the manufacturing of the game/application to a well-known developer. This app would be made in close collaboration with the Jot designers to ensure a game worthy of Jot standards. The outsourced company would be paid a sum to develop the app and would be paid a royalty if the game gets more number of hits than expected. A presence in the Playstore of Android and Appstore of iOS will prove to be a very useful tool to increase visibility. [Refer to analysis done in appendix]


CONCLUSION The purpose of this report is to find the best way to deal with the issues facing the toy making enterprise Jot and to get maximum output from the limited resources with the company. According to the study, there are four primary issues facing the board, and we have given a recommendation for each of those problems. First and foremost, the scenario of the spaceship toy has been given the highest priority. So in order to maintain that trust in the customers, we recommend Jot to replace the spaceship toy with an improved one. This would prove to be advantageous on both economic and ethical front. The late delivery of the Christmas product has been prioritized as the second most important issue. So to the incomplete order will be shipped to the major customers. In future, we recommend Jot to reduce the percentage of the manufacturing outsourced to Gull. The third issue-facing Jot is the near shoring of production in Voldania. This would prove to be a very beneficial option on the economic front. The transportation cost incurred in getting the goods to the warehouse would be reduced substantially and delivery to the customers would be made much faster. Finally, the fourth issue facing the board is the development of an application targeted at the age group of 9-11 years. This novel way potentially has a massive outreach and this can be harnessed in going forward with the development of this application.


[Appendix 1] SWOT and PEST analysis

Strengths

• Experienced and visionary

board of directors and a positive working atmosphere.

• Priority given to the safety in handling of toys.

• The age group for which Jot makes toys doesn’t require much sophistication so no need to change the designs frequently.

• The toys of Jot meet the current trends of toys in the market.

Weaknesses

• High dependency on the

manufacturers and no back up plans if there is any delay.

• The market is seasonal as the sales are concentrated majorly in the fourth quarter so the company loses on liquidity for further development.

Opportunities

• Manufacturing in-house

can reduce the dependency on outsourcing.

• Market venture for toys and education based applications for age group of 9 and above.

• More licensed toys as it is already into this market and has a good reputation so can expand their business in this market.

Threats

• Flaws in design can hurt

the company’s reputation. • Breach of IPR is possible

by the Chinese manufacturers.

• The outstanding bank loans can prove to be a burden if the sales are not up to expectation.

• Artificial inflated value of Chinese currency leads to losses.

• There are substitutes available in the market (perfect competition) so any slight mistake can take a big toll.


P

• Threat of unfavorable changes in IPR laws. • Different standards of quality check. • Least amount of red-tapism and government

intervention. • Favorable tax system due to the business signed

between two countries.

E

• Interest rates since the debt taken is very high

(1,500,000 euros in case of jot). • Delayed payments by the affect the liquidity and the

cash flow. • Stable FOREX rates for international trading.

S

• Quality control becomes important as even a minor

fault in the products can hurt the reputation. • The company must take into consideration the ethics

and values in other countries as well to sustain the trade.

• Fair treatment to outsourced labor.

T

• Optimal use of social media for publicity and surveys. • Should use better tracking system for timely delivery. • Updated and lively websites for better customer care. • Recruitment of new designers/engineers who can

incorporate latest technologies to make even more innovative toy designs.


[Appendix 2] Ansoff’s growth vector matrix

Existing Market New Market

Existing Business

• Recruit innovative designers and give the new product a chance.

• Target high-end buyers with well-finished and more sophisticated toys with a higher margin.

• Continuous optimization of production.

• Increasing production to sell toys in Asia and USA.

• Hiring more people to do marketing of new products.

• To make education based applications or games for 9-13 age group.

New Business

• Buying rights to make a new toy of a famous cartoon or movie character.

• Recruit new employees in R & D department.

• Opening a new marketing head in a strategic location in Asia such as Dubai or India.

• Using technicians of IT department to make high tech toys.

• Set up a website to look upon the pre-existing toys and increase its popularity.


[Appendix 3] Calculations for near-shoring problem

C = [(L*W) + M + D] * Q

C Cost of Product to Jot L Labor rate W Average labor time M Machining cost charges D Distribution cost Q Quantity produced China:

Labour Rate

Distribution Cost C/Q Q C

1.75 3 5.45 60,000 327000 1.96 3.18 5.756 100,000 575600

2.198 3.371 6.089 140,000 852532 2.458 3.573 6.448 180,000 1160604 2.753 3.787 6.838 220,000 1504536

Total C (China) = 4420271.68 Euro Voldania:

Labour Rate

Distribution Cost C/Q Q C

5 1.2 5.41 60,000 324600 5.1 1.272 5.527 100,000 552700

5.202 1.348 5.649 140,000 790846 5.306 1.429 5.777 180,000 1039806 5.412 1.514 5.909 220,000 1300078

Other expenses in Voldania (long run) = 25,000 Euro [personal donation] Total C (Voldania) = 4033030 Euro


Year 1

Year 2

Year 3

0 200000

Labour

Transportation

Machining Cost

Others

China

Voldania

0 400000

Labour

Transportation

Machining Cost

Others

China

Voldania

1 2 3 4 5 China 327000 575600 852531.68 1160604 1504536 Voldania 349600 552700 790846 1039806 1300077.9

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

Cost in Pounds

COGS

0 400000 800000

Labour

Transportation

Machining Cost

Others

China

Voldania


Year 4

Year 5

0 500000 1000000

Labour

Transportation

Machining Cost

Others

China

Voldania

0 1000000

Labour

Transportation

Machining Cost

Others

China

Voldania

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