Task description

This question allows you to choose from one of two options.

Option 1 – To complete your assessment based on the Conroy Manufacturing Case Study provided below, or

Option 2 – Choose a complex multi-stage decision case study from your own organisation.

The same two questions and criteria apply to both options. However, if you are conducting the case study for your own organisation, you will need to collect and supply the appropriate background data and information, to at least the same or greater level of detail provided for the Conroy Case Study. This data and background information should be included in Appendices and will not be included in the word count. If you believe that you do not have access to suitably detailed background information and data for this assessment, then it is recommended that you use the Conroy Manufacturing Case Study.

The Conroy Manufacturing Company

Case Study

(Written as at January 2018)

Read the case study which follows and answer the 2 questions at the conclusion.

The Conroy Manufacturing Company was founded in the 1960’s on a disused army base in near Frankston, south east of Melbourne. Originally, the company produced a range of small machines and tools for industry, but it expanded rapidly during the 70’s and early 80’s and acquired interests in industrial paint manufacture, pre-fabricated garages and building materials. New production units were opened in Dandenong, Ballarat and western Sydney and the Head Office was moved to Dandenong. However, the company fared badly during the late 1980’s. The paint manufacturing side of the business was scaled down and prefabricated garage production ceased.

In 1999 a new management team took over and it was decided that the company should diversify into the consumer goods market. A range of products was developed for the DIY enthusiast including an electric drill and a car engine tuner. These are sold through the major DIY chains and hardware stores. To date, the products have been fairly successful, though sales are still small when compared with more established firms in this market. They also form only a relatively small part of the company’s total turnover, as shown below:

Sales ($m)
	2013	2014	2015	2016	2017 (*)
Product Group
Industrial Machinery	32.4	24.8	36.8	33.6	34.4
Paint	14.4	13.2	12.4	11.6	10.4
Building Materials	25.2	26.0	26.8	28.8	30.0
Consumer Goods	0	1.2	2.4	3.6	4.4

(*=provisional)

The company is now (January 2018) considering the development of gardening tools and equipment and, as a first step, a detailed plan has been put forward to produce an electric lawnmower (code named the LM18). Market research has suggested that consumers make their decisions in this market on the basis of price, convenience, safety and the presence of features such as a grass collecting box and an edge trimmer. Taking this market research information into account, an outline design has been formulated. This includes a processor that will precisely control the height of the blades on uneven lawns and an electronic voice that announces when the grass collecting box is full. Now a decision has to be made on whether the project should be continued. The market research and development of the design has already cost $2.5 million.

If a decision to continue is made, it is hoped that a successful prototype can be developed by December 2018. The company’s chief engineer, Kevin Abbott, has estimated that there is a 75% chance that the December target could be achieved and that with the total research and development costs amounting to about $8 million (including the $2.5m already expended). If the target is not achieved, the company will review the situation in January 2019. It could decide to abandon the entire project or to allow further work on the prototype. Abbott estimates that modification of an unsuccessful prototype would cost around $6.4 million and the modifications would take an additional year to implement. He is, however, sure that all problems would be overcome by December 2019.

The company also has to consider possible locations for the production of the LM18. The list of possible sites has now been reduced to two: Campbellfield north of Melbourne beyond the ring road would be a new site for the company, while an existing, but unused, factory at Laverton aerodrome west of Melbourne could be converted for LM18 production.

The Campbellfield site is an old textile mill which has been closed for two years. The site can be purchased immediately for $6 million. It is thought, however, that there is a 20% chance that the site will still be available in one year’s time for the same price, though it is unlikely that the site will still be available in two years’ time. Equipping the mill, which would not commence until the prototype had been successfully developed, would cost an additional $4 million.

Because of the age of the buildings, and the need to carry out renovation work, it would take a year before the equipment could be installed. This means that, if a successful prototype was developed within a year, production could commence in January 2020. However, if the prototype development took two years, production could not commence at Campbellfield until January 2021. The site is relatively small and could only cope with production of an estimated 50,000 lawn mowers per year. However, there are warehousing and transportation GSB014 Business Decision Making and Analysis: Unit Guide 24 facilities and the availability of skilled labour force locally. The site is located 4 km north of the M80 ringroad, and about 30km from Port Melbourne.

Converting the existing site at Laverton would involve the construction of some new buildings. The conversion would take a year and would cost about $24 million, but a decision to go ahead with conversion would not be taken until a successful prototype had been developed. This again means that production would commence in January 2020 if the prototype was successfully developed within a year. However, if the prototype took two years to develop, production could not commence until January 2021. If the site is converted, it is anticipated that it would have a capacity to produce 166,000 lawn mowers per year. The site is 20 km from Port Melbourne.

Sales of the LM18 would be supported by a major advertising campaign in newspapers and local television, especially in the first few months after its launch. In order to estimate the sales that would result, extensive use has been made of market research, economic and industry-wide data. To simplify the problem, the management team has decided to estimate sales under two different market conditions: Good, and Poor. These conditions can be assumed to prevail through the entire life of the product. The probabilities of these conditions prevailing are thought to depend to some extent on how quickly the product can be launched since an early launch will give Conroy an edge over any potential competitors. The Marketing Department has estimated the following probabilities:

Market Conditions Prevailing	Good	Poor
Month production commences
January 2020	0.7	0.3
January 2021	0.4	0.6

It has been decided to use a 6-year planning horizon (i.e. up to December 2023) since technological developments would probably mean that a new model would be required for the market for later years. The tables below show the estimated net cash flows which will occur during the years of the product’s life. These tables exclude cash flows relating to purchase or value of buildings or installation of equipment. In arriving at these estimates, it has been assumed that, because the Campbellfield site can only cope with a relatively small volume of production, net cash flows generated by production at this site will be largely unaffected by market conditions.

If production is at Campbellfield

Net Cash flow in product’s	1st year	$16m
	2nd year	$16m
	3rd year	$16m
	4th year	$16m *

(* if applicable)

 

If production is at Laverton

		Market Conditions
		Good	Poor
Net Cash flow in product’s	1st year	$24m	$8m
	2nd year	$24m	$8m
	3rd year	$24m	$8m
	4th year	$24m*	$8m

(* if applicable)

 

At the end of 2023 it has been estimated that the Campbellfield site would have a value of $16m, while the Laverton factory would have a value of $32m. In the event of the Campbellfield site being disposed of without being equipped (because of the abandonment of the project after the failure of the prototype) it can be expected to be sold for its original price of $6m. The company’s cost of capital is estimated to be 10%. For simplicity, it can be assumed that all cash flows occur at the end of the year. Also, the effect of factors like taxation and development grants should be ignored.

Question 1

You have been engaged as a consultant to your organisation’s/Conroy executive to consider the information presented. You are asked to apply decision analysis techniques to the decision problem facing your organisation/Conroy Manufacturing and advise the company on their outcome options and recommended course/s of action. Clearly state any assumptions you have made. Your discussion should include:

• An executive summary • A brief overview of the key facts and your approach to the problem.

• A clear statement of assumptions about the information provided and your analysis.

• A decision tree of potential decision paths and events including:

o Probabilities

o Net present value calculations

o Expected values

• The application of at least one other decision making technique covered during the course, for example SMART, Analytical Hierarchy Process or Sensitivity Analysis.

• Recommended course of action.

• For own organisation option: Additional Appendices for background information and data.

Question 2

Discuss in detail the strengths and limitations of your analysis in the context of the problem faced by your organisation/Conroy Manufacturing. Your discussion of limitations should include consideration of potential biases and heuristics that may have been used by your organisation/Conroy and its staff. Make specific recommendations for other information or investigations that would be needed to improve your analysis?

Assessment Format:

A report addressing the 2 questions – text, illustrations, diagrams and calculations – supported by reference to the sources of information and theoretical frameworks of understanding. Refer to the Student Handbook for more information.