Ivory Delights is part of a privately owned multinational organisation, Pluto Pinnacle which manufactures a range of products including: frozen food, animal pharmaceuticals and confectionery.
Ivory Delights was established in 1977 and is Australia’s third largest confectionery company and solely focuses on manufacturing small candied confectionery. Head office and the manufacturing plant is located in the Albury/Wodonga region. The plant has the capacity to produce over 1,000,000 tonnes of confectionery items per year which are consumed domestically and exported overseas.
In 2014 Ivory Delights employed over 1100 staff, with major distribution centres located in Melbourne and Sydney. Major customers include supermarkets, supermarket branded stores and large department stores.
Quality is something that Ivory Delights is very particular about and in 2001 was accredited with ISO 9002. ISO 9002 was also accredited for administration processes of purchasing, training product control, product traceability and process improvement. The Hazard Analysis Critical Control Points (HACCP) food safety system was also adopted, further highlighting Ivory Delights commitment to quality control and safety.
Ivory Delights’ strategic goals are as follows:
• To be recognised as the leading confectionery brand in the Australian food industry;
• To provide customers with high quality products and excellent service; and
• To be the leading company in the industry, continuing to grow at rates higher than the industry average.
It plans to achieve these objectives by:
• Being an accredited supplier to the major supermarket chain and speciality outlets;
• Expanding by acquisition, where appropriate;
• Sustaining superior performance; understanding and satisfying customer needs; and
• Investing in state-of-the-art equipment to enable product innovation and efficiencies.
Ivory Delights is already recognised as having a differentiated offering compared with its major rivals—Sweet Nothing and Wiggles—due to its value product range, well established relationships with key retails outlets and the achievement of quality accreditation across a wide range of its operations. In planning to be the supplier of choice, Ivory Delights is focused on its direct customer (i.e. the retailers) and the end customer (i.e. the customer).. The company recognises that they need to sustain their growth rate and profitability to prevent takeovers from one of the two major companies, Wiggles and Sweet Nothing.
The acquisition of Smickers in 2001 was undertaken to achieve production and processing economies of scale and gain access to additional markets through Smickers’ accreditation and speciality store relationships, as well their export focus and AQIS (Australian Quarantine and Inspection Service) export approval status. Further acquisitions are possible; however they would need to be a good strategic fit from operational and cultural perspectives.
The company has strong family values, and the ongoing sustainability of the business is more important than short-term profitability. In 1999, Wiggles unsuccessfully approached Darrell Lea, the General Manager at Pluto Pinnacle about the prospect of buying Ivory Delights’ operation for $250 million. Lea was offered a seat on the board; however, under the terms of the deal he would lose control over the Ivory Delights operations. In addition, a large proportion of the purchase synergies would arise from the removal of duplicate functions across the combined business group. This would have resulted in the retrenchment of many of Ivory Delights loyal employee base, some of whom had been with the company since Darrell Lea’s grandfather established the business over 50 years ago.
Question 1 – Strategic Management (15 marks)
As part of your role you have been asked to prepare a discussion paper on the strategic position Ivory Delights should pursue. The company want to increase its market share in the confectionery area. Considering the following issues, prepare a response to be presented at the next board meeting.
Issues you might like to address include:
a) What type of organisation and industry does Ivory Delights want to compete in?
b) What business strategies will Ivory Delights need to follow and how will these be in line with Pluto Pinnacle’s overall strategy?
c) Who are Ivory Delights competitors? What are their strengths and weaknesses?
d) What are the key issues that will affect future industry growth including any impacts?
e) What are the key issues that will affect future industry profitability including any impacts?
f) Who are Ivory Delights’ key stakeholders?
Question 2 – Knowledge Management (KM) (15marks)
Ivory Delights for the past 10 years has been more conscious of capturing knowledge and incorporating KM into strategy and culture, particularly after losing several integral managers in an aeroplane accident. A key knowledge value that Ivory Delights encourages is ‘everyone has great ideas’. Ivory Delights want to implement a KM system where employees are rewarded and encouraged to share information both formally and informally. In addition, incentives are put into place which encourage progression in the company. The attitude Ivory Delights has is that high-potential employees must be retained somewhere within the organisation. Hoarding of people and information is strongly discouraged. The result is that knowledge follows people from position to position and the organisation as a whole benefits from this.
In a letter to the BOD the General Manager wrote that: ‘The organisations’ ability to continuously learn from any source and convert what is learnt into action is the greatest competitive edge’. Part of Ivory Delights strategic challenge is finding ways to make the company operate as one learning organisation where each group can benefit from experience and knowledge gained by each other.
1. Explain why it is important to capture knowledge. How can employees be motivated to contribute to and use a KM system?
- How could Ivory Delights improve the way that knowledge is captured, stored and rewarded?
Question 3 – Economic Order Quantity and Sustainability (20 marks)
Ivory Delights imports from Pooran an ingredient which is used to help the confectionery crystallise. Pooran is a country that has rich resources and very productive land but has been ruled by a dictator (Justine) and her family for over 25 years. Family members own and tightly control all the industries in Pooran. Justine’s brother, Richie operates and owns the fields where the ingredient stickit; which Ivory Delights needs is grown. He pays his workers very poorly and uses chemicals that the World Health Organisation (WHO) has not condoned due to its carcinogenic effects. Ivory Delights know of this corruption but is unable to source the ingredient from anywhere else.
In the past Ivory Delights has had no special inventory policy other than to order equal quantities of inventory 12 times a year. The newly appointed purchasing manager has queried how ‘relaxed’ this policy is and wants the inventory policy reviewed. So far the information obtained is that the stickit product comes in barrels which cost $95each. Ivory Delights uses 7,000 barrels per year. The purchasing manager estimates that to place and receive a typical order of stickit costs $175. The annual cost of storing stickit is $5 per barrel. The lead time to receive the order is one month.
1. Using the EOQ formula determine the optimal order quantity.
2. What is the total annual cost of ordering and storing stickit at the economic order quantity and how many orders will be placed per year?
3. Prepare a graphical analysis of the economic order quantity decision.
4. Assuming a stable usage each month, determine the reorder point.
5. What are some of the financial, environmental, social and broader issues Ivory Delights should consider when purchasing stickit from Pooran?
Question 4 – Linear Programming (15marks)
Ivory Delights manufactures 3 main products: Belly Beans, Darties and Nubes and supplies to supermarket chains and distributors. Although the company does make other confectionery treats these are seasonal and change yearly. The raw material ingredients that the three products use are all the same, it’s the process of mixing and cooking that determine how the product will turn out.
Belly Beans are small lollies which come in 5 flavours and every 110g pack contains 5 of each flavour. Ivory Delights packages 20 individual packets into boxes which are then shrink wrapped ready to be supplied to the customer. To produce these lollies 1.5kg of raw material is required, 2 hours of labour and overhead is applied at a rate of 150% of direct labour.
Darties are a similar sized lolly to Belly Beans and come in 7 different flavours and packaged in a small cardboard box weighing 130g per box. Darties boxes holds 15 packages of these boxes. To produce this lolly requires 2 kg of raw material, 2.5 hours of direct labour and overhead is applied at 150% of direct labour.
Nubes are sugar coated lollies which are soft and chewy to eat and is Ivory Delights’ biggest seller. Ivory Delights has kept to traditional flavours and will once a year bring in a limited edition flavour for a set period. Nubes require 3 kg of raw material, 3 hours of direct labour with overhead applied at 150%. A box contains 10 Nubes packages.
Each of these 3 products goes through the same manufacturing process which consists of mixing, cooking and packaging. Belly Beans are sold for $1.60 per pack, Darties for $1.70 and Nubes at $2.00 per pack.
|Belly Beans||$ 1.60||$ 0.30||$ 0.20||$ 0.30|
|Darties||$ 1.70||$ 0.50||$ 0.10||$ 0.15|
|Nubes||$ 2.00||$ 0.40||$ 0.27||$ 0.41|
1. Using Solver, derive the optimal solution for the number of boxes that should be prepared to maximise profit.
2. State the optimal confectionery treat mix and the resulting profit.
- Should the product mix suggested by solver be implemented?
Question 5 – Transfer Pricing and Performance Management (20 marks)
Pluto Pinnacle in 2014 purchased Ebony Boxes, which manufactures packaging supplies. This was part of the corporate strategy to vertically integrate along the value chain. Ivory Delights currently purchases its packing supplies from ‘Boxing UP’. The contract with this supplier is up for renegotiation at the end of 2015. The board of directors wants Ivory Delights to purchase the boxes from Ebony Boxes but each manager is free to decide whether goods will be transferred internally and can determine the prices at which the transfer will occur.
Ivory Delights would like to purchase the packaging boxes from Ebony Boxes, but can purchase the same product from Boxing Up for $0.045 per box. Ebony Boxes is currently operating at full capacity and sells to an outside supplier for $0.045. The manager at Ivory Delights is hoping to receive a price concession if the boxes are bought internally. The full cost to produce each box is $0.04 ($0.032 representing variable costs). If the box is sold internally, $0.03 (this should be $0.003) of variable costs can be avoided.
The managers of the two divisions met to discuss the possible transaction. After some discussion and negotiation, it was decided that Ivory Delights would purchase the boxes at the current price for the next 6 months. At the end of the 6 months, negotiations can be reopened by either party.
1. Based on current information, what is the highest price that Ivory Delights should be prepared to pay for each box? What is the lowest price that Ebony Boxes should be willing to accept?
2. Assume that the outside sales price of the box increases to $0.047. How would this affect the internal transfer price?
3. Assume that because of market conditions; demand for the box has decreased significantly, creating excess idle capacity within Ebony Boxes. How would this change affect the internal transfer price?
4. Why is it in the best interest of the company as a whole to allow the division managers to negotiate internal transfer pricing instead of using a fixed, nonnegotiable formula for establishing transfer pricing?
Question 6 – Sustainability (15 marks)
In Australia more companies are starting to report on their sustainability performance. Ivory Delights believes that incorporating into their end of year reports acknowledgement of how they have implemented more sustainable practices, will be of benefit to the company’s reputation.
- Why are an increasing number of companies reporting on their sustainability performance? What are the benefits for companies to report such activity?
2. What key measures could Ivory Delights include in its sustainability balanced scorecard?
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