Operational Efficiency Analysis of XYZ Company in Tea Segment

This paper analyzes the operational efficiency of the company in the tea segment and identifies key issues such as uncertainty in forecasting, capacity planning, quality management, inventory management, order fulfillment, and suppliers' relationship. Plausible solutions are suggested, and the application of these solutions is demonstrated.

Executive Summary
Operation management is study and application of the administration practice
which creates the highest level of efficiency possible in an organization. The
Operation management process is concerned in overseeing the operations of the
company and ensuring their effectiveness & efficiency.
This paper on operation management is intended to critically analyze the operations
and their efficiency of the company XYZ which is engaged in FMCG segment in
Egypt. This report is restricted to analysis of the operational efficiency of the
company in tea segment only.
As it can be observed from the minutes of board meeting that the company is facing
some operations related issues, such as uncertainty in forecasting, capacity
planning, quality management, inventory management & order fulfillment and
Suppliers’ relationship, the report is directed towards critically analyzing these
areas and identify the reasons for the issues and provide plausible solutions. While
doing so all the operational management techniques, methods, and models adopted
in analysis is clearly mentioned.
The entire report is divided into topics such as –
 Identification of key operational areas;
 Identification of key problems in those operations;
 Plausible solutions to address the issues;
 Application of the solutions recommended;
 Aggregate Plan for coming period; and
 Conclusion

Contents
Executive Summary.............................................................................................................................1
Introduction:...........................................................................................................................................5
About the Company:............................................................................................................................5
External Objectives..........................................................................................................................5
Internal Objectives...........................................................................................................................6
Main operations of the company:....................................................................................................7
1.1 Forecast....................................................................................................................................7
1.2 Capacity Planning...............................................................................................................11
1.3 Quality.....................................................................................................................................11
1.4 Production Process.............................................................................................................11
1.6 Inventory management...................................................................................................12
1.7........................................................................................................................................................13
Key issues identified:.........................................................................................................................14
2.1 Forecasting Concern..........................................................................................................14
2.2 Relationship with the suppliers......................................................................................16
2.3 Delay in timely availability of materials and cost reduction................................16
2.4 Quality Concerns.................................................................................................................16
2.5 Capacity Concern................................................................................................................16
2.6 Order fulfillment..................................................................................................................17
Plausible steps to address the issues:.........................................................................................20
3.1 Forecast Issue.......................................................................................................................20
3.2 Relation with Suppliers......................................................................................................21
3.3 Delay in availability of raw materials and cost reduction.....................................21
3.4 Quality Concern...................................................................................................................21
3.5 Capacity Concern................................................................................................................21
3.6 Order fulfillment..................................................................................................................21
Application of determined steps:..................................................................................................22
4.1 Forecast Issue:.....................................................................................................................22
4.3 Delay in timely availability of materials......................................................................25
4.4 Quality Concern:..................................................................................................................28
4.5 Capacity Concern................................................................................................................30

Aggregate Plan:...................................................................................................................................31
Forecast..............................................................................................................................................31
Relationship with Suppliers:........................................................................................................31
Enhancement of capacity:...........................................................................................................31
Conclusion:............................................................................................................................................31
Bibliography:........................................................................................................................................32

Introduction:
Tea is an aromatic beverage commonly prepared by pouring hot or boiling water
over cured leaves of the Camellia sinensis (a species of evergreen shrub or small
tree whose leaves and leaf buds are used to produce tea). After water, it is the most
widely consumed drink in the world.
Tea processing is the method in which the leaves from the tea plant Camellia
sinensis are transformed into the dried leaves for brewing tea. There are several
categories of tea that are distinguished by how they are processed. In a very
generic manner, tea processing involves different manners and degree of oxidation
of the leaves, stopping the oxidation, forming the tea and drying it
The innate flavor of the dried tea leaves is determined by the type of cultivar of the
tea bush, the quality of the plucked tea leaves, and the manner and quality of the
production processing they undergo. After processing, a tea may be blended with
other teas or mixed with different flavors to alter the flavor of the final tea.
About the Company:
XYZ Company is located in Egypt, and it is engaged in the manufacture of different
brands of tea. The proprietors began their business in the year 1998 in a place
known as Borg El Arab industrial region. The entire sales for the XYZ Company were
about 15 Million Egyptian pounds in the year 2016. The company is, however, facing
setoff issues that are related to the operational management in their different areas
of business that are within their operational processes. The issues include capacity
planning, quality, process layout, forecasting accuracy, and inventory and supplies
relation among other issues.
After analyzing the information given, the key objectives of the company are
identified as follows:
External Objectives: The external objectives of the company are –
o Maintain and grow the sales at existing level without increasing the price; and
o Improving customer satisfaction;

Internal Objectives: The internal objectives of the company in the context of
operational management are –
o Enhancing the accuracy of forecasting by reviewing the existing forecasting
mechanism;
o Re-evaluation of Supplier relationship and exploration of alternatives;
o Total Quality Improvement of the product;
o Optimization of inventory costs; and
o Review of order fulfillment mechanism.
This paper makes a genuine effort in finding the operational management
problems faced by the company. Further, while suggesting the plausible solutions,
the paper also demonstrate application of solutions on the issue.

Main operations of the company:
The following are the operational areas identified in the company –
1.1 Forecast:
Forecast can be explained as prediction of future value of a variable of
interest which can be anything such as demand, price, and cost, etc.
Forecasts play a major role in price determination in the context of a
company since under traditional cost accounting total cost is forecasted and
a profit margin is added to such total cost to determine the total revenue to
be generated which in turns is used to determine the price of the product.
(Stevenson, 2012) The importance of forecasting to operations management
cannot be overstated. The primary goal of operations management is to
match supply to demand. Having a forecast of demand is essential for
determining how much capacity or supply will be needed to meet demand.
Any Company should adhere to the elements that make up a good forecast
when planning or even bringing up one. The elements are essential as they
result in the best forecast. The forecast obtained is likely to be an effective
part in an organization as they in one way or the other resolve and even
prevent future issues from occurring in the society (Gilliland, 2010). . First, a
good forecast should be timely. The forecast should be allocated a
ce0072tain time in which it can to the information contained in the planning.
The timing cover allocated to the forecasting will enable the organization to
implement the changes within the planning made in case there is a need for
any. As a result, the forecast made should be accurate, and of degree, that is
started to be accurate. Secondly, good forecasting should consist of reliable
qualities. Reliability should outlay factors which will enable the planning to be
of use to the organization. Therefore, the planning should be designed in a
way that it acts as the backbone of the organization. In case a poor technique
after applied during the time at which forecasting is being planned, there will
a creating of fear that will be pulling the stakeholders whenever they are
advised to apply the foresting planning method.

The third element which should be contained in good forecasting is the presence
of the expression which ought to be presented in the units that are meaningful
to the users. For instance, the financial planners must account on the amount of
money required to establish the plan. The production planners on the hand are
obliged to know the number of units required to accomplish the plan being
worked on (Company, 2016). Also, the schedulers are also required to
understand the types of machines as well as the skills to be applied when
working with the obtained plan. It is, therefore, advice able to choose units from
the needs of the customers targeted by the organization in question. The fourth
element which should be put into close consideration is the means in which the
forecasting is presented. Qualified forecasting is supposed to be presented in
writing. Written forecasting is said to increase the likelihood of those in concern
applying the planning in their areas of work. As a result, there will be a room for
adjustments and changes as the ideas written as not fixed (Sasaki & Hutchins,
2014). The other key element which should be put into consideration is simplicity
when it comes to an understanding and ease of use. The forecasting made
using the techniques that are sophisticated are normally feared by the users.
This is because the information indicated in such forecasting is normally hard to
understand. The users, therefore, end up misusing the techniques or even
obtaining the wrong message from the technique. Finally, the forecasting being
applied should be cost-effective. Among all the other qualities of good
forecasting, the planners should ensure that the benefits expected to regenerate
from the forecasting greatly out ways the cost of setting and implementing the
forecasting.
Once the company adheres to the elements outlined above before planning to
forecast, there will be a good start in the organization. Also, the company will be
in a position in which it can avoid the errors which are likely to occur as a result
of poor planning. During the planning of the forecasting, there should be
focused on the three main measurements of errors in forecasting (Delacruz,
2010). The first one is measured in the form of the mean absolute deviation
abbreviated as MAD. The second one is the mean squared error abbreviated as
MSE. Finally, there is the mean absolute percentage error abbreviated as MAPE .
Mean Absolute Deviation The technique for assessing forecasting methods uses

the aggregation of simple mistakes. MAD measures the accuracy of the
estimation by averaging the alleged error using the absolute value of each error
(Sherbrooke, 2004). MAD can be calculated by below formula. Mean Absolute
Percentage Error is a close measure that is related to MAD by expressing the
magnitude of the error relative to the magnitude of the demand. MAPE can be
calculated by below formula. MAPE is simple and easy to know that’s the reason
why it is well known. But in order for it to be considered as the best form of
calculation, it has to contain quality —clarity of presentation, measurement
validity, ease of interpretation, support of statistical evaluation demand
reliability as MAPE meets most of above.Mean Squared Error is calculated by
averaging the deviations of forecast compared to the actual demand, the
deviations are squared, giving higher weight to errors which are farthest from
the actual demand. Their formulas are as shown below
When it comes to providing the analysis of the data provided in the table which
tried to compare and contrast the data obtained by the company in the years
2015, 2016 and 2017, the final analysis drawn was that in the year 2015, the
technique applied during forecasting consisted of the good elements. In the year
2016, the tracking signal applied during forecasting worked right. As a result,
there was a great outcome which came as a result of correct forecasting. The
results obtained in the year 2017 were poor (Mü ller, 2011). This meant that the
tracking technique which was applied in this year was not the right one.
Therefore, it was not accepted. Therefore, its outcome turned out to be the poor
results. Poor forecasting ended up cause a drop in the sales rate of the XYZ

Company. When it comes to the 2018 forecast, the XYZ is bound to use different
techniques while planning the forecasting to avoid the repetition of history.
The technique which is likely to be put into consideration when working on 2018
forecasting is the multiplicative technique also known as seasonal. This is
considered to be the best technique when it comes to the forecasting of
seasonal data. Therefore, the technique that is recommended for XYZ to apply in
future as it guarantees increases a forecast that will increase the sales of the
company (Narayan & Subramanian, 2008).
Approaches to forecasting
Mainly there are two approaches to forecasting; qualitative demand quantitative.
Qualitative techniques include soft information (e.g., human aspects, personal
opinions, ideas. On the other hand, Quantitative techniques comprise either the
historical data projection or the creation of an associative model that try to use
causal or explanatory variables in doing the forecast.
Types of forecasting techniques
Judgmental forecasts which depend on analyzing subjective inputs collected
from different sources like surveys.
Time-series forecasts which are merely it assume the future output using past
data as an input, using historical data assuming that the future will be like the
past.
Associative models usually use equations that comprise of one or more
explanatory variables can be used to predict demand. For example, demand for
carbon black might be related to variables such as oil prices. There are two main
issues to consider when deciding on the forecasting technique to be used first is
the time frame demand second is the demand behaviour. The time frame of
forecasting: There are three times frames is considered on business context;
short-term (less than two months), medium term (3 months to 2 years), “they
are primarily used to determine production demand delivery schedules demand
to establish inventory levels” (Maramba, J. (2012 pg.98). long-term (more than
two years) “is normally used for strategic planning--to establish long-term goals,
plan new products for changing markets, enter new markets, develop new
facilities, develop technology, design the supply chain, demand implement
strategic programs such as TQM”.

To sum up, it is noted with much concern that XYZ Company is not new to the
matters dealing with forecasting. This is because it applied the technique in the
years 2015 and 2016 and the turnout was impressing. But as a result of the
change of technique, it ended up messing its sales up in the year 2017 ( Narayan
& Subramanian, 2008). Therefore, it should just adhere to the technique which
has been proposed to produce good results.
1.2 Capacity Planning:
Capacity refers to the ability to produce (in the context of operations
management). (Managementstudyguide.com, n.d.) Capacity planning refers to the
process of determining the anticipated production capacity which is required by
the management for timely matching of supply with the demand.
1.3 Quality:
Quality Management is an operation in which the activities and tasks are
overseen as to whether the company can maintain desired level (Investopedia,
n.d.).
1.4 Production Process:
The production process is nothing but a group of activities which are directed
towards transforming a given set of inputs into pre-determined output (LLP, n.d.).
The production process of XYZ is given as under:
o The warehouse dispatches raw material to the certified tea tasters in the
production department as and when requisition is raised by the Production
department.
o The certified tea tasters start to propose the needed blend of tea and this is
the commencing point for blend preparation.
o The mixing procedure start which was backed by equipment such as magnet,
mesh, and mixing drum which ensures the homogeneity of the blend.
o The blend is then dispatched to the sample tanks where inspection team
collects the samples of the blend for quality checks.
o After quality checks, the blend will proceed to move into the main tanks
depending upon the nature of blend.
o There are 7 production lines of which line no.5 produces tea bags, line no.6
produces the dust and finally, line 7 Is used to produce the CTC. Line 1, 2 and

3 are exclusively deployed for production of tea bags and line 4 could
produce all different types of tea.
1.6 Inventory management: Inventory management is an operation which is
concerned with process of ordering, storing, dispatch and protection of
company’s inventory.
The model of inventory and order which is currently within the
organization is not in any way applying economic calculation of the
quantity order of economy. The company ought to have understood that
inventory should be considered as a critical form in the business field.
This is because inventories are essential for operations (Gilliland,
Tashman & Sglavo, 2015). Also, inventory plays a great role in the
contribution of the provision of satisfaction to their customers.
In order to effectively manage inventory managers must keep records of
all in hand inventory and on order inventories, have a reliable forecasted
demand to be able to decide on raw materials purchases and other
expenses and cost, know lead times & its variability, have estimation of
carrying, ordering and shortage costs and finally a classification system
for inventory . Since inventories are used mainly to satisfy demand, then
the manager must have a reliable forecast of demand amount and
timing. Also, managers should know how lead time which is the time
between submitting and receiving orders and demand varies as the
greater the variability, the greater the need for more stocking (Keillor,
2007). Inventory has different types of cost related to it as mentioned
previously, purchasing cost. In inventory management, ordering policies
are very important issues deciding on how much & when to place an
order is a crucial issue.
When it came to the issue of the invention, the company should put up
with the acts of attempting to the amount that the company had set aside
for invention. This is because invention deals with the customers’
satisfaction and it are also vital when it comes to operations. XYZ

Company should get to understand that inventory should be considered to
be the aim which is of most important especially when it comes to
customer’s satisfactory levels (Bateman, 2012).
1.7 Order fulfillment:
` The existing mechanism of order fulfillment is as follows –
o The costumer sends order through mail or fax.
o The Marketing manager will process the orders and accidentally
cancels 1 out of 400 orders.
o All the orders processed by the marketing manager are placed into the
internal mail box and it takes 1 hour on an average to get delivered to
the pickup area.
o After delivery into the pickup area, there is a queue time of half an
hour.
o The clerk picks up and order from the pickup area and verifies whether
the requested goods are available in the stock.
o If the goods are available in the stock, the same is forwarded to an
officer in inspection department and the officer will check for the
correctness of the order. However, it is found out that one out of every
500 orders on an average is being send to transport with wrong
address.
o Once the inspection is over, the goods are sent to the transportation
department where the transportation department delivers the goods to
the customer within 2 – 3 days from the date of dispatch. While the
transport department is delivering the goods with cent percent
accuracy, it is observed that some of the deliveries are getting delayed
upto 7 days from the date of dispatch.

Key issues identified:
The company has scrutinized its performance in ‘tea manufacturing segment’ which
of course contributes 50 million Egyptian Pounds to the company which can be
considered as substantial and makes the performance in the segment strategically
important to the company. During the board meeting, the following issues were
identified that are to be addressed for a prosperous future of tea business of the
company.
2.1 Forecasting Concern:
The economic situation of country (Egypt) as a whole turned out to be
unstable owing to which the growth rate of the company came down to 4%
during the year 2016 when compared to a comfortable and promising 10%
during the year 2015. Further, it was highlighted that the net profit from the
segment came down to 5% during the same year. To add further the main
reason as identified by the General Manager was that the instability of
economy has caused the operating costs of the segment grow at a higher
rate than the selling prices. This could possibly mean that the economy of
Egypt is experiencing higher inflation. Let us analyse the historical
information of the sales given to understand the above statement.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
50000
100000
150000
200000
250000
300000
Historical Sales Analysis
2014 2015 2016
Figure 1.1
The trend of sales as a % of growth in a month when compared to corresponding
month in preceding year results as follows:

Analysis of trend in % of change in sales
Mont
h 2014 2015
% of
change 2015(2) 2016
% of
change (2)
Jan 190,000 230,000 21.05% 230,000 235,000 2.17%
Feb 198,000 227,000 14.65% 227,000 232,000 2.20%
Mar 200,000 225,000 12.50% 225,000 230,000 2.22%
Apr 203,000 223,000 9.85% 223,000 228,000 2.24%
May 205,000 205,000 0.00% 205,000 270,000 31.71%
Jun 190,000 260,000 36.84% 260,000 225,000 -13.46%
Jul 250,000 200,000 -20.00% 200,000 218,000 9.00%
Aug 180,000 195,000 8.33% 195,000 210,000 7.69%
Sep 175,000 200,000 14.29% 200,000 212,000 6.00%
Oct 190,000 205,000 7.89% 205,000 215,000 4.88%
Nov 200,000 220,000 10.00% 220,000 232,000 5.45%
Dec 220,000 235,000 6.82% 235,000 240,000 2.13%
Total 2,401,000 2,625,000 10.19% 2,625,000 2,747,000 5.19%
Aver
age 200,083 218,750 218,750 228,917
Figure 1.2
From both the figures (1.1 and 1.2) above, it can be observed that the economic
conditions of the country has effected the sales from the beginning month itself
where it can be clearly seen that the company has registered a growth in sale of
2.17% in 2016 when compared to sales in corresponding month of 2015 while the
same was 21.05% in 2015 when compared to sales in corresponding month of
2014. If we further look at the graph in figure 1.1, we can notice the gap in level of

sales between 2014 and 2015 (represented by blue and orange lines respectively)
is more than the gap between 2015 and 2016 (represented by grey line).
Another concern pointed out by the operations manager was the practical
hindrances which are posing challenge to reduction of operation costs even after
continuous efforts towards the same. The following are the hindrances as confessed
by the operations director.
 The relationship with suppliers
 Delay in timely availability of materials;
 Quality related problems, and
 Shortage of capacity to meet the demand
2.2 Relationship with the suppliers:
While the exact issues with the suppliers were unstated, owing to the
unstable economic conditions and the fact that the operational costs are
raising, it can be inferred that the local suppliers may be increasing the price
of material due to inflation and further, the inflation in turn is also effecting
the exchange rate of currency negatively thereby making the company pay
more than what the company would pay with a stable exchange rate.
2.3 Delay in timely availability of materials and cost reduction:
The company has adopted ‘Fixed order quantity’ model for procuring raw
materials. This is indicated by the fact that the company has an order
quantity of 350000 tons per order. Further the usage of point-of-use
replenishment suggests that the company has no separate department for
inventory management for majority of items and hence the company may not
have set up re-order level owing to which the company would have failed to
order the raw material in time resulting in delay of availability of raw
material.
2.4 Quality Concerns:
As identified by the Operations Director, while the company’s aim is
reduction of operating costs without affecting the existing quality of its
reputed tea brand, the company is concerned with the level of defects owing

to moisture. The problem persisted even after training the employees on the
quality concepts and usage of quality tools.
2.5 Capacity Concern:
Operation Director also expressed his doubts on the existing capacity of the
company band claimed that the company has barely managed to meet the
demand with its existing capacity during the years 2015 and 2016. Let us
analyze the required capacity with the existing capacity.
Existing Capacity vs Required Capacity
Particulars Existing
Capacity
Requirement
2014 2015 2016
Per Month
230,0
00
200,08
3
218,
750
22
8,917
Per Annum
2,760,0
00
2,
401,00
0
2,625,
000
2,74
7,000
Figure 2.1
As per figure 2.1, we can see that the existing capacity was greater than the
required capacity till latest year. However, the existing capacity mentioned in
the table was maximum capacity and not the normal capacity. Therefore the
company should have ideally maintained more capacity especially during
2016. Any abnormal halt of production during the year would have ended up
loss of sales as the margin was only 13,000 bags of tea as suggested by the
table. Further assuming that the company maintains the existing growth rate
of 4.65% the expected requirement during the year 2017 would be 2,874,736
units which clearly exceeds the existing capacity.
2.6 Order fulfillment:
The basic structure of Order fulfillment mechanism adopted by XYZ Company
if depicted in form of Business Mapping would look as follows:

Worker picks order
Inspector checks
the order and
allows transport
Transport firm
delivers the order
to customer
Customer receives
the order
3 Hours
30 Minutes
10 minutes
1 out of 500
deliveries are
misplaced
2-3 days
100%
correct
delivery
Yes

Issue identified are as follows:
o On an average, 1 out of every 400 orders placed by customer are
dismissed by the marketing representative accidentally;
o One out of every 500 orders is shipped to wrong address owing to the
mistake committed by the Inspector; and
o Substantial time for delay in delivery of some orders by the transportation
department

Plausible steps to address the issues:
3.1 Forecast Issue:
Since the company XYZ is operating under unfavorable economic conditions
and such conditions are expected to last till coming 2 years, the sales growth
is assumed to be similar to that of year 2016. Let us analyze the growth rate
of sales to determine whether the rate exhibits any trend or seasonality.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
% of Growth in Sales
2014-15 2015-16
Figure 3.1
Now as observed in the figure 3.1, while it is hard to establish whether the
growth rate displayed a seasonality it is obvious that the growth rate of sales
is displaying a trend (a non-linear trend) from year to year. In every year
there is a peak period of time lasting for 2 months where the sales growth
increased dramatically followed by a month where there was negative growth
followed by a steady increase and then an irregular variation. Even if the
trend is assumed to be a seasonal variation, Time Analysis Forecast method
adjusted to seasonal variation cannot be adopted owing to non-linear trend.
Further, predictive analysis using Regression technique cannot be applied
owing to lack of supportive date of predictor variable. Hence a simple ‘3-
period moving average’ technique can adopted to forecast the sales.
3.2 Relation with Suppliers:

The Operations director has suggested an alternative for existing tradition
auction method of procuring international supplies (of tea) which is to have a
strategic alliance with large farmers and meet the requirement directly from
their farms. Since the costs of each of the alternative is given, indifference
analysis should be conducted to find out the better option from the both.
3.3 Delay in availability of raw materials and cost reduction:
If the company should ever reach its objective of reducing operating costs,
the company should consider adopting economic order quantity model for
determining the quantity to be ordered each time. However, since discounts
are involved, we should also consider Quantity Discount Model of Economic
Order Quantity. Further if the company aims at eliminating delay in
availability of raw material, then it should adopt the Re-Order Level which will
be computed at a later part of the report.
3.4 Quality Concern:
The company is concerned with the quality of the finished goods and in order
to check whether the production process is in-control (or) out-of control, let
us analyze the Statistical Process Control by computing the Mean and Range
of the samples. Then let us construct X-Bar Chart and Range Chart through
which we can calculate the upper control limits and lower control limits. If all
the samples are within the control limits, the process is said to be randomly
variable and is in-control. If the samples are not within the control limits, then
the process is said to be non-randomly variable or out-of-control.
3.5 Capacity Concern:
In order to address the capacity concerns raised by the operations director,
he also proposed 2 alternatives to meet the increasing requirement. To
analyze the best suited method, indifference analysis can be utilized.
3.6 Order fulfillment:
As it is observed that the company is taking a minimum of 2 days 5 hours and
10 minutes for completion of a sale order while it is taking as long as 7 days 5
hours 10 minutes. Within this time, there is a waiting time of 1 and half hour
in queue and hence can be avoided. Further strict surveillance of
transportation may also considerably reduce the extended delivery time

which is 4 days in some of the cases. Further with proper internal controls in
place, and a robust ERP system, the company can also avoid mistakes such
as cancellation of sales order, and dispatching the goods to wrong address.
Application of determined steps:
4.1 Forecast Issue:
By adopting the 3 period moving averages method, the sales are forecasted as
follows:
Moving Averages
n
Values
for t
Forecasted
figures
t-3 215000
t2 232000
t-1 240000
T 229000 229000
t+1 233667 233667
t+2 234222 234222
t+3 232296 232296
t+4 233395 233395
t+5 233305 233305
t+6 232999 232999
t+7 233233 233233
t+8 233179 233179
t+9 233137 233137
t+10 233183 233183
t+11 233166 233166
Total 2794780
Figure 4.1
The graph comparing previous year sales and expected sales would look
something like this

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
200000
220000
240000
260000
280000
Forecast vs Historical Sales
2016 2017
Figure 4.2
By looking into the figure 4.2, it can be observed that the forecast has not
followed the trend of the historical data. This is because the historical data itself
is obtained from conditions which resulted in sales which is significantly
different from the trend that was experience in past 2 years preceding the year
2016. It is therefore pertinent to note that the quantitative forecast is only of
little use under the following circumstances:
o If managers wants to collect the information quickly;
o When new product is introduced with no historical information; and
o When historical information available for the purpose of forecast has
become obsolete especially with political and economic conditions are
changing.
Therefore the company may consider using qualitative methods of forecast
such as collecting –
o Sales force opinion;
o Customer opinion; and
o Executive opinion.

4.2 Relation with the Supplier:
The indifference point to determine the ideal alternative is computed as under –
Indifference Point Analysis
Particulars
Alternative
1
Alternative
2 Difference
Fixed Costs (a) 100000 0 100000
Variable Costs per ton (b) 800 2500 1700
Indifference Point = (a) / (b) 59
Expected Cost for annual
requirement = (c ) x 3,000,000
tons
2,400,100,0
00
7,500,000,00
0
5,099,900,0
00
Alternative 1 - Building alliance
Alternative 2 - Traditional
Auction
Figure 4.3
From the table in figure 4.3, we can conclude that the indifference point is 59
tons of tea which implies that if the annual demand of tea by XYZ Ltd is less
than 59 tons, the company should go with the alternative with lowest fixed cost
(i.e., Alternative – 2) and if the demand for tea by XYZ Ltd is more than 59 units,
the company should go with the alternative that results in lowest variable cost
p.u. (i.e., Alternative – 1). Since the annual demand is 3,000,000 tons the
company should go with alternative – 1 (i.e., Building alliance with local
farmers) if financial results alone are concerned. However XYZ Ltd should also
consider the following non-financial factors while choosing the alternative.
o Quality of the raw material supplied by farmers since it will directly impact
the brand power of the products;
o The company should also focus on various levels of stock for better
inventory management such as EOQ, Re-Order Level, Re-Order Quantity and
Safety Stock.

4.3 Delay in timely availability of materials:
The analysis is as follows:
Step 1: Computation of Basic Economic Quantity –
Basic Economic Order Quantity
Particulars Result
Total Quantity required per month (a) 250,000
Total Quantity required per annum (b) =
(a) x 12 3,000,000
Ordering Costs per Order (c ) 20,000
Carrying Cost per unit per month (d) 2
Carrying Cost per unit per annum (e) =
(d) x 12 24
Economic Order Quantity = [(2 x (b) x (c
)) / (e)]^1/2 70,711
Figure 4.4
Step 2: Analysis of the effect of discount on total cost of inventory
Total cost (TC) = Carrying Costs + Order Costs + Purchase Cost
Total Inventory Costs at various levels of ordering
Tons per Order EOQ
240000
tons
250000
units
350000
units
Carrying Costs
No. of Units (a) 70711 240000 250000 350000
Carrying Cost per unit per
order (b) 24 24 24 24
Total Carrying Costs (A) =>
((a) / 2) x (b) 848532 2880000 3000000 4200000
Ordering Costs
No. of units required (a) 3,000,000 3000000 3000000 3000000
No. of units per order (b) 70711 240000 250000 350000
No. of orders required (c ) 42 13 12 9
Ordering Cost per Order (d) 20,000 20,000 20,000 20,000
Total Ordering Cost (B) = (c
) * (d) 848,524 250,000 240,000 171,429
Purchase Costs
Total units to be purchased (a) 3,000,000 3,000,000 3,000,000 3,000,000
Price per unit (b) 2500 2400 2300 2300
Total Purchase Costs (C) =
(a) x (b)
7,500,000
,000
7,200,000
,000
6,900,000
,000
6,900,000
,000
Total Inventory Costs = (A) + 7,501,697, 7,203,130, 6,903,240, 6,904,371,

(B) + (C ) 056 000 000 429
Figure 4.5
EOQ 240000 tons 250000 units 350000 units
6,600,000,000
6,700,000,000
6,800,000,000
6,900,000,000
7,000,000,000
7,100,000,000
7,200,000,000
7,300,000,000
7,400,000,000
7,500,000,000
7,600,000,000
7,501,697,056
7,203,130,000
6,903,240,000 6,904,371,429
Total cost of inventory
Figure 4.6
From table in figure 4.5 although the EOQ computed initially was 70,711 units
per order, owing to the effect of discounts on big orders by the suppliers,
250,000 units per order is the optimum level of quantity to be ordered to
reduce the overall inventory costs. However, from the analysis we can
conclude that the current level of order of 350,000 units’ results in more cost
than the optimum level decided at 250,000 units. However while the concept
of EOQ (Quantity Discount Model in given case) assures that the overall cost
of inventory will be lower, it will not guarantee availability of sufficient
quantity of material throughout the year. Therefore if the company is
concerned about timely availability of raw material, it should also consider
analyzing Re-order quantity. The re-order quantity is computed as under:

Re-order Quantity
Particulars
Resu
lt
Reorder Quantity
Lead time (a)
30
days
Average consumption during month (b)
2500
00
Lead time consumption (c )= (a) x (b) / 30
2500
00
Safety days (assumed to be 25% of original days) (d) 7.5
Safety Stock (e) = (d) x (b) / 30
6250
0
Total Reorder Quantity (f) = (e) + (c )
3125
00
Figure 4.7
From the table in figure 4.7, it can be observed that the re-order quantity is 312,500
and is higher than the EOQ. While this results in slightly higher inventorial cost than
EOQ, it also reasonably ensures that the company maintains enough stock at any
point of time thereby matching the production with forecasted demand. Further, it
can also be observed that, while the Re-order Quantity certainly results in higher
costs than EOQ, the same however will not exceed the cost incurred with the
current level of order.
Re-order Level: Re-order Level (or Re-order point) is the level of inventory reaching
which the company should order the stock in order to maintain stock levels which
enable the company to continue its operations without any haul
(Accountingexplained.com, n.d.). The Re-order level is computed as follows:
ROP = d X LT
Where
D = Demand rate (units per month) = 250,000
LT = Lead time in months = 30 days (or) 1 month
Therefore, ROP => 250,000 x 1 month = 250,000 units

4.4 Quality Concern:
The following table consists of 20 samples each containing 5 observations from the
material of XYZ.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 7 6.7 6.9 6 6.5 6.7 7.9 6 6.5 7.7 6.9 6 6.5 6.7 7.9 6.9 6.
8
6.5 6.7 6.9
2 7.2 6.6 7 6.1 6.6 6.6 7 6.1 6.6 7.6 6.5 6.1 7.6 6.6 7 7.1 6.
7
6.6 6.6 7
3 7 6.7 6.7 6.2 6 6.7 7.4 6.2 6 6.7 6.4 6.2 7 6.7 7.4 7.2 7.
2
7 6.7 7.4
4 6.9 6.9 6.7 6.4 6.4 6.9 7.3 6.4 6.4 6.9 6.3 6.4 7.4 6.9 7.3 7.4 7.
4
7.4 6.9 6.7
5 6.9 7 6.5 6.3 6.7 6 6.9 6.3 6.7 6 6.4 6.3 6.7 6.9 7.4 7.3 7.
5
7.3 7 6.8
Figure 4.8
Let us apply Statistical Process Control to find out whether the control chart of the
finished product is random in control or conversely random out of control.
Step 1: Computation of Mean and Range of data:
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1 7.00 6.70 6.90 6.00 6.50 6.70 7.90 6.00 6.50 7.70 6.90 6.00 6.50 6.70 7.90 6.90 6.80 6.50 6.70 6.90
2 7.20 6.60 7.00 6.10 6.60 6.60 7.00 6.10 6.60 7.60 6.50 6.10 7.60 6.60 7.00 7.10 6.70 6.60 6.60 7.00
3 7.00 6.70 6.70 6.20 6.00 6.70 7.40 6.20 6.00 6.70 6.40 6.20 7.00 6.70 7.40 7.20 7.20 7.00 6.70 7.40
4 6.90 6.90 6.70 6.40 6.40 6.90 7.30 6.40 6.40 6.90 6.30 6.40 7.40 6.90 7.30 7.40 7.40 7.40 6.90 6.70
5 6.90 7.00 6.50 6.30 6.70 6.00 6.90 6.30 6.70 6.00 6.40 6.30 6.70 6.90 7.40 7.30 7.50 7.30 7.00 6.80
x 7.00 6.78 6.76 6.20 6.44 6.58 7.30 6.20 6.44 6.98 6.50 6.20 7.04 6.76 7.40 7.18 7.12 6.96 6.78 6.96
R 0.30 0.40 0.50 0.40 0.70 0.90 1.00 0.40 0.70 1.70 0.60 0.40 1.10 0.30 0.90 0.50 0.80 0.90 0.40 0.70
Figure 4.9
By substituting the values of X and R in X –bar charts of POM-QM, we
obtained
UCL (Upper control limit) 6.9014 1.071
CL (Center line) 6.779 .68
LCL (Lower Control Limit) 6.6566 .2815
Figure 4.10

The X-bar chart and range chart are also obtained as under:
Figure 4.11 – Range Chart
Figure 4.12 X-bar Chart
From the range chart above in figure 4.11, it can be observed that the
process of production is at times, out of control. An out-of-control situation
reflects involvement of non-random variation which is caused by definite and
specific causes called as assignable causes. These assignable causes make
the process out-of-control or become statistically unstable. Therefore the
company should investigate the matter further and find out the assignable
cause. Once such cause is identified, it should be eliminated and only random
variable due to common causes remains. Thus the entire process becomes
stable and return to an in-control situation (Winspc.com, n.d.). Since the data
(rather the process) is already proven to be non-random, runs test need not
be conduct the random variability of the data.

4.5 Capacity Concern: To choose the best among the alternatives for meeting
the increasing requirement for capacity, Indifference Point Analysis should be
performed.
Indifference Point Analysis
Particulars Alternative 1
Alternative
2 Difference
Fixed Costs (a) 100000 0 100000
Variable Costs per ton
(b) 150 900 750
Indifference Point = (a)
/ (b) 133
Alternative 1 - Buy a
new line
Alternative 2 - Toll
manufacture
Figure 4.13
As evident from figure 4.13, the indifference point between both the
alternatives (viz., Buying a new line and toll of manufacture of incremental
requirement) turned out to be 133 bags. Therefore if additional capacity
required is less than 133 bags, the company should adopt option with lesser
fixed costs (i.e., Alternative – 2) and if the additional capacity required by the
company is expected to be more than 133 bags, the company should go with
option with lower variable costs (i.e., Alternative – 1). Assuming that the
company maintains same rate of growth of sales as in the previous year
2016, (i.e., 4.65%), the total expected demand would be 2,874,736 bags
which exceeds the existing capacity of 2,760,000 bags by 114,736 bags
(which is greater than the indifference point of 133 bags). Since the expected
additional capacity required exceeds the indifference point, the company
should prefer acquiring additional line of production instead of tolling the
requirement to the third party.

Aggregate Plan:
Forecast
The company can either adopt moving averages method or qualitative method for
forecasting. If the company adopts qualitative method, the company can consider
that the growth rate would remain the same as was in the case of 2016 depending
upon the information available.
Relationship with Suppliers:
If financial aspects alone are considered, the company is suggested to go with the
alternative of forming an alliance with the large farmers for procurement of raw
material.
Enhancement of capacity:
The company should go with the alternative of acquiring new line of production
rather than outsourcing the additional expected demand.
Conclusion:
After critical analysis of the operations of the company, it can be concluded as
follows:
o XYZ was facing a problem of accuracy for forecast owing to unstable economic
conditions of the country. Since such a factor is external and not controllable by
the company, the company should try and reduce the operational costs in order
to maintain the revenue and net profits under declining sales growth scenario.
o XYZ has not deployed the best inventory management mechanism which is
resulting in delay in availability of raw materials to meet the demand and also
increase of operating costs.
o There is an assignable cause in the production process which made the process
out-of-control and hence in order to increase the quality of the company by
reducing the moisture content of tea, the company should identify the
assignable cause and eliminate.
o Further since the company did not have any lead time, and different levels of
stock, the company is immediately recommended to deploy such controls.

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