A second effect could be a detrimental effect on the firm’s cash flow position. Holding stock is costly (for a number of reasons) and polar Ices would be paying for the production (and storage) of much of its stock many months before it would be receiving revenue from its sale. This could place the firm in cash flow difficulties and could even lead to its failure. (Even if the firm’s cash flow position remained viable, however, there would still be an opportunity cost involved in having so much money capital tied up in stock)
A third effect could be the possible wastage of stock that is often associated with holding high levels of finish stock. This is because finished stock is at risk of ‘going off’ (if not stored properly) and is also at risk of ‘fire’, ‘flood’ and even of ‘theft’ (much theft being attributed to employees, who sometimes seem to view such stock as a ‘perk of the job’).
A. 2. [b] (i) This is a production system where the raw materials and component parts arrive at the plant just at the time when they are actually needed to be worked on. Under this system suppliers deliver the required materials as and when they are needed and so there is no need for the firm receiving these supplies to keep buffer stocks. Goods are only produced to order – i.e. to meet the current demand – and so there is no need to keep finished stock. The whole process can be very effective in eliminating the high costs of keeping stocks, but it does rely very much on excellent relations with suppliers, and with these suppliers (and the firm itself) delivering and producing ‘zero defect’ products (which is often associated with cell production techniques, teamwork, empowerment of employees, increased employee motivation, and total quality management). Just in time techniques are often employed when firms are engaging in ‘lean production’.
A. 2. [b] (ii) If Polar Ices did switch to Just in Time production then they would undoubtedly improve their cash flow position as they would no longer need to keep money capital tied up in stocks. They would be able to put this money capital to other uses within the business and should make higher net profits (due to their reduction in their overheads).
The elimination of buffer stock also eliminates the risk of some or all of this being stolen, damaged or left unsold (if demand falls). This would increase the firm’s profitability. It also means that it should be easier for the firm to adapt to changing patterns of demand (as consumer tastes change) and thus provide them with flexibility which could prove to be a competitive differential advantage for them in the market place.
The switch in production method, however, would necessitate a change in working practices within the firm – and the efficient implementation of change is notoriously difficult to accomplish. What would Polar Ices do with their current staff during the winter months? How would their current staff respond to the change in their employment status? Are there sufficient staff with the requisite skills available for temporary employment during the summer months? Are Polar Ices sure that their suppliers are completely reliable all the time?
If Polar Ices are certain that they can make the switch efficiently then they would gain greatly in cost savings and in flexibility by making the switch and should do so. However, if they have any doubts about being able to implement all the necessary changes efficiently then they would be better advised not to.
A. 2. [c] The batch production of chocolate in the winter months might or might not be a viable proposition depending on the circumstances.
Polar Ices do not currently produce chocolate at all and it is likely therefore that new machinery would be needed (unlikely that the ice cream machinery will be suitable) and the staff will need re-training (the skills are unlikely to be the same). All this will cost money and will take up space in the plant. If the firm has the money for the re-tooling and the re-training and has the space for the additional machinery, then it could consider moving into this new market. Before doing so, however, Polar Ices would need to carry out market research in order to establish whether there is sufficient demand for a new firm in the market place. Assuming there was, then ‘batch’ production would probably be a useful production method to use, as the firm would be operating in a new market with the possibility of producing a number of different chocolate products and it would not immediately know which would be the most profitable to produce – it is also likely that by producing a number of different, but related, chocolate products will maximise the sales revenue from the sale of the chocolate products. The use of batch production methods could also provide sufficiently large production runs for Polar Ices to benefit from some of the economies of scale that are likely to be available.
To summarise, it is possible that the move into this new area would be of benefit to the firm, but only if it is sure that it has, or can get, the necessary resources and that it will be able to gain a sufficient market share to make the whole thing worthwhile. Polar Ices would also need to be sure that they would not be damaging their Ice-Cream business by diversifying into the chocolate market.
