Operation Decisions (Case Study Sample)

OPERATIONS DECISIONS
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1. Briefly describe the details of the fictitious business that you created for this assignment.
CBN Offshore is an American company engaged in the offshore energy industry. It is a provider of floating production and mooring systems, in production operations and in terminals and services. The company’s main activity is the design, supply, installation and operation of Floating Production, Storage and Offloading (FPSO) vessels. These are either owned and operated by the Company and leased to clients, in which case the project is financed by the company and any joint venture partners. Alternatively the company also undertakes FPSO projects for clients on a turnkey sale basis, where these vessels may either be operated by the client, or operated by the company under a separate service contract. In this case financing is provided by the client.
2. Assess the current environmental scan factors that are relevant to the decision making process. Determine the factors that will have the greatest impact on plant operations and management’s decision to continue or discontinue operations. Provide a rationale for your determination.
All firms face uncertainty regarding the demands of their environment. However, at the same time they rely on various factors in their environment for survival. Kazmi (2008) define environmental scanning as a process of gathering, analyzing, and dispensing information on the business environment in which a company is operating in for tactical or strategic purposes. When selecting a certain operational strategy that is deemed suitable to a particular organization, a firm may employ various models. Porter’s (1985) five forces model sheds more light on the five integral forces that shapes competition within an organisation. It also examines the degree of rivalry among firms, the bargaining strength of suppliers, the proximity of the alternatives to the firm’s product as well as the bargaining strength of customers or buyers (Kotler, Berger & Bickhoff, 2010). This model stipulates that the higher the degree of strength of each of the five forces, the less the capacity of the identified firms to hike prices and reap maximum returns. In this model, a strong competitive force can be perceived as a threat. This is attributed to the fact that stronger competitive forces suppress returns. On the other hand, weak competitive forces can be perceived as opportunity. This is because weak forces enable a firm to make bigger profits (Patnaik, 2012).
Figure 1. Porter’s Five Forces Model
Source: Hill and Jones (2007).
* Threat of New Entrants: An industry that is perceived to be profitable tends to attract new entrants. These competitors are interested in investing in the industry so as to share the growth opportunities. This means that existing firms will have to share their markets which mean lower sales and revenue.
* Rivalry among Competitors: firms within the same industry are mutually dependant. The actions of rival firms may necessitate other players to make counter moves in order to protect themselves from the risks posed by the initial move. When rivalry is weak, the competition is low but if rivalry is high, the level of competition is higher (Azhar, 2009).
* Bargaining Power of Buyers: This refers to how buyer may influence a reduction in prices of products. A high buyer bargaining power lets a firm pass on the production costs to buyers.
* Bargaining Power of Suppliers: This refers to how suppliers may influence the increasing cost of a product or service. High supplier bargaining power allows a firm to pass on cost increase to its consumers.
* Substitute Products: Azhar (2009) defines substitute products as those products that may be different to a company’s product but satisfy the same consumer needs.
3. Evaluate the financial performance of the company using the information provided in the scenario. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term and how each factor influences managerial decisions. Be sure to show the calculations that helped you reach your conclusions.
For a business to be successful, it is important to ensure it is operating as effectively and efficiently as possible. To do this requires understanding the financial position of your firm. In order for a business to remain operating in the long run, it requires to make at the minimum average profits. However, this is not a requirement in order to continue operations in the short term. The profitability of a business underlies its performance and is the essential driver of the future of any business.
Total Revenue = Price of the output × Quantity
= 32× 6000/20
= $9600
The cost of operating the facility is the variable cost, which includes the labour costs and the costs of other variable inputs.
Operating Costs= ($70×100) + $2000
= $7000+ $2000
=$9000
The total revenue exceeds variable costs, thus it is sensible for the company to continue operating in the short run, even if it is losing money.
With regard to perfect competition, a firm’s decision concerning how much to produce does not affect the market price of its output. Thus, price of output equals the marginal revenue. Marginal cost and marginal revenue determine whether a firm should continue producing at its level of output or not. For profit maximization, if marginal revenue (MR) exceeds the marginal cost (MC), then a firm should increase its output. In this case MR ($32) exceeds MC ($30). Therefore to operate in the long term, the company should produce additional units in order to reduce losses.
4. Recommend how the company can improve its profitability to deliver more value to its stakeholders. Then, develop a brief plan to implement the recommendations.
As shown above...