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QBUS6310 2022 S2 Group Assignment

Tash Toys

Your answer to this assignment must be less than 10 pages in 12-point type. This includes all appendices and other material. Do not include a cover page.

 Introduction

It is 12 March 2022 and Natasha Sommer, managing director of Tash Toys, has spent the morning worrying about a problem that has been causing her concerns for many months. Tash Toys was founded in 1992 and consists of 5 profitable shops and an online order business. Though the online order business makes money, Natasha is certain that it has not fully capitalized on the quality of the product and the loyalty of its customers.

The online order operation was established in 2003 and is run from an old railway building in Sydney. The building was acquired in 2009 having been converted for warehouse use 15 years earlier. In many ways it is an awkward building, but the state of the property market in Sydney makes relocation unrealistic: not only is it very hard to find the sort of space required, but it would be very expensive.

The building has been converted into three floors of space. Each floor has 1200 square metres of space divided into two 600 square metre areas. At present one of the ground floor areas is used to store stock for the company's shops, but it has been decided to reallocate this space to the online order operation from the beginning of September 2022. The other ground floor area is used as the packing room for the online order operation. On the first floor all the space is used for online order stock, while on the second floor one 600 square metre area is used for offices while the other is used for online order stock. Ceiling heights in all the rooms are relatively low and stock is stacked to use all the available height.

Sales

Tash Toys brings out three online order catalogues each year, each of which contains approximately 280 different toys aimed primarily at children under the age of 8. The toys are sourced from manufacturers in Indonesia, New Zealand, and Australia. The company deals with 12 different suppliers. The major catalogue is the Christmas one, which is sent out in the first week of October. This is sent to all customers on Tash Toys’ mailing list, which has built up over the years to 160,000 names throughout Australia and New Zealand. In 2021 there were a total of 22,600 orders placed from the Christmas catalogue. The average value of these orders was $84. The Autumn and Spring Catalogues were each sent to a shorter list of 45,000 customers who are regular purchasers of Tash Toys. In 2021 there were a combined total of 6900 orders from these two catalogues and the average order size was

$46.

The stock for the Christmas catalogue is ordered by the end of July and is delivered in two phases. About 75% of the order arrives in the first week of October, and in 2021 this was enough to fill the stock areas to capacity. The remaining part of the order is updated on the basis of early sales. Thus, the order is placed when the first 2,500 orders have been received and the results analysed. This second phase is delivered during the fourth week of November.

Listing on Amazon

In 2020 Tash Toys set up a virtual storefront on amazon.com.au. In 2021, 10% of online orders were received via this secondary channel. Natasha was surprised that so many orders were being generated this way. At the moment only 40 of the best-selling lines are listed on Amazon. Though many customers do order directly from Amazon, some customers start at Amazon and then switch to Tash Toys’ own website and place the order from there. While the order integration is actually simpler when a customer orders from the Amazon site, the Tash Toys site gives a much richer user experience and results in a greater number of cross sales. Amazon also helps Tash Toys track sales leads from customers who view products but do not end up placing an order. Last year 4500 new leads were identified and added to the 2021 catalogue distribution list. Amazon is not making this available for 2022. Natasha is still to decide if she will move the full range of products to Amazon.

 Operations

An order arriving at Tash Toys passes through three stages: first the order is checked, then it is assembled and packed, and finally it is dispatched.

 Checking

All orders are checked and moved to the fulfilment system by data entry clerks on the day on which they arrive - so that the earliest possible notice is given of stock shortages. The office can currently seat 7 such staff. These people are hired through a local agency. They each work 7 hours a day and are paid by the hour. On average a data entry clerk processes 22 orders an hour for orders originating on the Tash Toys’ site. Orders received  from Amazon are processed in about 90 seconds. Once the order is in the fulfilment system and marked as active, a packing note and address label are printed out two floors below in the parcel room, where the assembly/packing and dispatch operations take place.

Assembly and Packing

The assembly operation is divided into two stages. For every batch of 20 orders the fulfilment system produces an aggregate picking list. This picking list is then taken by one of three stock pickers who go around the stock rooms and select the stock required for the 20 orders. This takes an average of 45 minutes. The stock is then given to two packers who work together to divide the stock up amongst the individual orders, check that each order is correct and then pack the order in a suitably sized box. The competed orders are then passed on, with a packing note attached to the dispatch stage of the operation. Each packer can complete an average of 4.3 parcels per hour, which enables a single stock picker to provide enough work for 6 packers.

The total space allocated to the packing operation is 330 square metres, which is sufficient for a maximum of 16 packers at any one time. Both the packing and dispatch departments are staffed entirely by part timers. The part timers work either a four-hour morning shift or a five-hour afternoon shift. The warehouse is operated from 9am to 6pm Monday to Friday.

 Dispatch

The workers in the dispatch department are, like their colleagues in assembly and packing, employed only as required. They take each box, put it into a special bag and attach to it an address label (that had already been printed by the fulfilment system). They then scan the QR code on the label to confirm that the order has been filled. The parcels are stored in a secure area on the loading bay and are collected by an overnight courier service at two different times during the afternoon. Each person in the dispatch team can complete 9.5 orders per hour. In order to operate effectively, the dispatch operation needs at least 28 square metres of space for each dispatcher.

 Future Plans

Natasha is determined to expand catalogue sales considerably and to start this process in 2022. She intends to use two methods to boost catalogue sales. First, she will increase advertising spend for the Christmas catalogue by $35000. As a rough rule of thumb, she believes that $1000 spent on advertising will lead to 90 extra orders. Second, she will add names to the mailing list for the Christmas catalogue by exchanging names with a children's clothing catalogue. This can be done where the customer has given permission. In this way she will expand the list by about 24,000 names and she guesses that she will receive about one order from every 12 catalogues sent out to these new potential customers.

Exhibit 1

Christmas catalogue cost breakdown 2021 (average costs)

Notes:

a. Total fixed costs $356,000 p.a., absorbed over 22,600 orders.

b. Catalogue annual service cost of $147,200 over 22,600 orders.

c. Stock collectors, packers and dispatchers cost the company $13.20 per hour. Data entry clerks cost $15.00 per hour.

Question 1 (40 marks)

a) What are the main capacity constraints within the online order operation? Justify your answer.

b) Can the planned volume of orders for the 2022 Christmas catalogue be met within the current arrangements (allowing for the planned expansion of space later this year)? Provide detailed calculations supporting your answer.

You can assume that there is no change in the average size of the toys chosen for the catalogue. Identify any additional assumptions that you make.

 Question 2 (15 marks)

What other ways might Natasha consider addressing the capacity limitations that will come with increasing the size of the online order business?

Question 3 (45 marks)

Natasha has a long-term plan for expansion and as part of that she wishes to investigate again the option of receiving a larger number of more frequent smaller orders  from suppliers as a means to enable substantial increases in order volumes without relocating. She would like to maintain the current policy of dispatching all orders within 3 days of receiving them and kept sufficient stock in the warehouse to cover anticipated demand over the next 10 working days (to deal with late delivery or unexpectedly high demand).

According to Natasha's long-term plan, by 2027 a total of 52,000 orders from the Christmas catalogue will be reached.

a) Will the company be able to meet this level of total demand? Justify your answer.

b) Estimate the effect on profits if this target is achieved. Provide detailed calculations supporting your answer.

For simplicity, assume a zero rate of inflation from 2020 until 2027. Further assume there is a 7.5% increase in the total cost of stock as a result of the smaller, more frequent deliveries.

Identify any additional assumptions that you make.