Our task:
Kit scott has asked your company of management consultants to advise on the strategy that KC should follow. You have 1 hour 30 minutes to analyze the enclosed material and to prepare a presentation addressing the following questions;
1- Should KC begin production of the D-type switch? if so , how should such production be carried out
2- What other recommendation, if any, would you make concerning the business and organization of KC Switches limited?
Your presentation should contain supporting reason for your recommendations. The presentation will be delivered to one of the management.
You may feel that to carry out this task you have to make additional assumptions. This is permissible provided that an adequate explanation of the reasons for such assumptions is given.
The company:
KC switches limited specializes in the manufacture and supply of electronic switches for household electrical appliances and equipment, e.g. television, ovens, washing machines. The switches are supplied in packs to electrical goods manufacturers who then incorporate them along with other components within their respective products. Separate contracts are agreed for the switch on an annual basis.
KC switches currently manufacture three different type of switch. These have the code names;
1- A-42
2- B-33
3- C-66
Despite advances in technology the market for such micro electronics has tended to remain fairly stable. Furthermore KC has a comparatively loyal client base at the quality end of the market.
However recent developments in both market demand and electronic research have led to the requirement for more versatile and reliable switching component. Not surprisingly KC have christened the new switch a D-type although at the present time there is no agreement as to how KC should begin the production.
The Product;
A-42 last year KC produced 0.5 million A-42 switches. This was down by a third on the previous year's production when the plant was a full capacity. The reduction was due to a drop in orders from KC's traditional customers, because the design of many of their new products has meant that the A-42 switch is being replaced by the D-type switch.
The A-42 is sold in packs of 5 for 5 pound per pack current accounting information indicates that the cost to produce and sell the products is around 2 pound per pack.
The B-33 KC supplies more B-33 switches than all its competitors put together. Last year 0.4 million were sold in packs of 4 at a price of 8 pound per pack. The market for this type of switch remains buoyant. As it is included in a wide range of domestic electrical appliances.
Kit believes that KC's dominant has been achieved due to aggressive marketing and competitive pricing, and has justified their investment in the necessary machinery which continues to incur fixed costs of 300.000 pound per year. The variable costs associated with the product are estimated to be 4 pound per pack.
The C-66
0.6 Million C-66 switches were sold by KC last year. It is a type of switch that is contained in the majority of televisions and electronic games. Although it is a large market it is also a very competitive one. Consequently the switches are sold for 5 pound per pack of 4. Current accounting information indicates that the cost o produce and sell C-66 switches is around 2 pound per pack.
Expenses of a fixed nature are charged at 200.000 pound per year for the production of the A-42 and C-66 switches, and it is likely that fixed costs for the d-type switch would be a similar magnitude.
The D-type switch is presently being manufactured by a handful of KC's competitors. Market survey information suggests that the demand of the switch next year will be between 2 and 2.5 million. An increase in demand of around 50% is likely for the following year, which will then drop to 10% for the next 4 years before the market stabilizes. Based on previous experience it is estimated KC's competitors are well-placed to supply between 1.75 million and 2 million switches next year.
The companies who are already producing the D-type are selling the switches at 10 pound for a pack of 5 switches. It is likely that KC's production and sales costs will be about 4 pound per pack.
The future Product -Mix
Although the demand for the A-42 has decreased significantly amongst KC's traditional clients the overall market remains fairly stable. This is because a number of new manufactures are entering the field at the cheaper end of the electrical equipment market. They are using many of the less up-to-date components in order to produce equipment of reasonable quality at heavily discount prices. This approach is proving popular with consumers and a product life between 3 to 5 years is estimated for such equipment.
A recent market survey suggested that, should KC wish to supply to such customers, then it is likely that the resultant business would make up for the recent drop in orders. However, a price reduction of 105 would have to be made to A-42 switch in order to be competitive.
Kit scott is not convinced that there is a need to begin production of the D-type switch at this time. Kit's caution stems from concern about the level of investment that seems to be necessary.
Chris believes that KC should cease production of the A-42 and re-equip the plant for production of the new D-type switch. One reason for this is that sales and marketing employees believe that to continue to produce the A-42 would be damaging to the reputation of KC. A reputation that they believe is founded upon production up to the minute's technology.
Rahma, favors a different option- ne which involves expansion in terms of new plant. Thus rather that replacing the A-42 with the D-type, Rahma feels that KC should produce both types of switch. One reason for this is that the production employees who produce the A-42 are very content with the work which is team based production to produce both the A-42 and the D-type switch would be stressful.
It would not be possible to run the A-42 and the D-type switch side by side on the same plant, and it is estimated that the cost of re-equipping the exciting plant and retaining staff for the production of the D-type would be 500.000 pound. By comparison an expansion of production to produce the both the A-42 and the D-type switch would cost around 1000,000 pound.
In both instance a maximum production volume of 0.6 million switches of the D-type would be facilitated. Indeed it would not be financially viable to acquire new plant with significantly less production capacity than this.
Other business issues:
1- Kc's agreed business plan for the next 2 years begins with a commitment " to develop exciting and potential business sources whilst maintaining acceptable level of profitability and security "
Such a commitment has been translated into the strategic objectives of profitability (net income as a percentage of sales) exceeding 25% across all lines of business.
2- Currently interest rates are 6% however; an analysis of the economic climate suggests that they are likely to rise during the next 12-18 months to something in the order of 10-12 %.
3- A corporation tax rate of 50% is assumed for computational purposes.