Report to the ceo of skagen business

Published:

Introduction

SKAGEN DESIGNS Ltd. was founded in 1987 by two natives of Copenhagen named Henrik and Charlotte Jorst, and since then it has emerged as one of the reputed international brand in watches, clocks, sunglasses and jewellery.

SKAGEN DESIGNS mission statement states that "It strives to create a global community of enthusiasts with our commitment to designing an impressive and unique yet attainable product while offering outstanding customer service to our customers and consumers." (http://apac.skagen.com/about/home.fx)

Skagen US Worldwide Headquarters is situated in Reno, Nevada and has its European headquarters situated in Denmark.

The Skagen Denmark product has proven to be a best-seller in many markets from Singapore, Malaysia and Australia, and plans to open up more stores in the coming years.

Skagen designs are disturbed across 30 countries all over the globe.

(http://apac.skagen.com/about/home.fx)

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In this report Skagen must decide whether to completely move the total manufacture of their product to a single company in a country where labour is reputed to be cheaper or not. The report includes the various advantages and disadvantages of going ahead and taking the decision. It also highlights on current operating systems and changes that it result in, in case the proposal is adopted. And finally the report presents various decision making tools to analyse decision making process.

Current Operating System

Fig. 1 above represents the overall view of the Skagen Designs. According to the figure it is clearly shown that the Skagen Denmark is responsible for the Assembly and design of the products. A third company, Tabernus, owns Skagen UK which imports watches into the UK. Ortak, a jewellery design company, also works as a retail shop in UK. Zeon limited are the repair agent for Skagen in UK.

As per the current operating system, most of the parts are currently sourced from other countries and there assembly takes place in Denmark. Skagen designs are influenced by various external factors like Economy, Competition within the market and various Government regulations and policies.

System Map: System map present a holistic view of the organisation, the subsystems within it and the lines of influence connecting them. Manufacturing Subsystem deals with the manufacturing of the basic products by Skagen like watches, handbags, sunglasses, etc. The top management subsystems like HR, marketing, sales are responsible for providing feedback on the latest quality trends, various improvements that needs to be brought to the designs, on the marketing research, etc. Company's distribution system interacts with the customers with the help of their independent retailers which in turn sell the products to the various individual retailers across the region.

Marketing subsystem is responsible for promoting the brand name of the company by various methods like advertising, media, etc. Also it carries out market research on the latest trends within market and to find new opportunities in new market.

2) Input- Output Diagram:

Another important technique to understand the current operating strategy of the company is to use the Input-Output diagram. Input -output diagram clearly depicts the inputs that are required to attain the required output.

As per Paton and McCalman 2008,"input-output diagram shows the inputs to a system and the resulting outputs "along with the feedback mechanism to provide aid for control and performance measurement".

Skagen's Current Aims and Objectives and evaluation of the proposal in light with the company's objectives and strategies

Mission Statement Skagen

The mission statement reveals the fundamental purpose of the organisation. The mission statement of Skagen aims at "Creating a global community by designing innovative products of high quality, which would be affordable by the end customer, along with excellent customer service to their consumers and customers". (http://apac.skagen.com/about/home.fx)

Vision Statement Skagen

Also the objective of the Skagen says that "Skagen Designs will be the ultimate choice among suppliers, customers, consumers, and employees as the most innovative and profitable design Goods Company within the strategic segments, products and markets by 2015." (http://apac.skagen.com/about/home.fx)

Evaluation of the proposal in light with the company's objectives and strategies

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Evaluation of proposal to move the manufacture of the parts to one single country instead of outsourcing them from different countries will fit to the strategy in a way that it would help the company to expand its areas of operation by moving manufacture to a new country, reduce the cost of manufacturing, provide better after sales to its end customers thereby increasing Brand image and hence helps it to achieve its mission of 'Generating Global Community'.

Objective tree determines the objectives that need to be fulfilled by an organisation and it helps to ensure that they are done within the estimated time lines.

As shown in figure 4 the objective tree here consists of two branches one that aims at generating High Revenue and second one aims at lowering down the production cost. For generating high revenue the major factors taken in account are the expansion of market and targeting a large number of customers. These two factors depend on various other factors like better after sales, better quality designs, more range of designs , brand image, etc.

The second branch of the objective tree that aims at lowering down manufacturing cost is further dependent on installing custom set ups and moving manufacturing plant to single country. Shifting manufacture unit lowers production cost due to availability of cheap labour, less tax rate and low transportation cost.

Advantages and Disadvantages of Adopting the Proposal

Pros:

Cheap labour: Outsourcing has been a major movement for many companies in the recent times and the main reason for shifting the manufacture to India is mixture of both cheap labour as well as highly qualified skilled labour.

Tax benefits: Tax benefits are one of the major factories for a company to outsource its products. India being low on tax-rate is turning out to be the manufacturing hub for the other countries around the globe.

Low Production cost: Low production cost helps generate higher revenues for a firm. Outsourcing the manufacture to India would certainly lower down production cost because of availability of cheap labour, less transportation cost, availability of raw material in one place, etc.

Global market: Outsourcing would help Skagen to target new market and target new customers. This would further expand its brand image and would generate higher revenues.

Customer Retention: Outsourcing of manufacture part by Skagen would help company retain its customers. This is because of the fact that in case of any emergency the parts need not to be brought from other countries rather they would all be available at one single location.

Cons:

Employee dissatisfaction: On shifting the manufacture plant to other country would cause dissatisfaction amongst the employees working in the current situation. Employee's working on the manufacturing firm would be left with no alternative then to quit the firm and this can affect the image of the company in a way.

Confidentiality issues: Outsourcing may cause confidentiality issues for Skagen. So before outsourcing to other companies in other countries the confidentially agreement bond must be signed so that the insight details to the companies strategies should not be leaked to someone outside the company.

Loss of control: Outsourcing to other companies may reduce the control a company has on its subsystem. When hiring employees from other countries it may be so they might prove very loyal to the firm and may lessen down the production resulting in higher cost to the Skagen.

Evaluating Decision Through Decision Making Techniques

In order to evaluate the decision, the report has taken into account a couple of techniques to ensure that the appropriate and correct decision has been taken.

As per Goodwin and Wright 2010, "Decision Analysis involves the decomposition of a decision problem into smaller problems, analyse each problem individually and then integrate the results to make the right decision"

The section below would help the CEO of the company to make a decision regarding the movement of the manufacturing system to China.

SMART ANALYSIS(Goodwin and Wright , 2010) :

SMART (Simple multi-attribute rating technique) is a decision making technique which is used when there are multiple objectives involved. This technique involves all the complexities of a decision and helps the decision makers to make the justified decision at the end.

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The stages involved are:

- Identify the decision maker: The decision maker for making the decision for Skagen designs is the CEO of the company.

- Identify the Alternative Courses of Action: The report is about moving the total manufacture to one single country. So the alternative courses of action would include:

Moving the total manufacture to China

Keeping the current system operative that is outsourcing parts from different countries and assembling them in Denmark.

- Identify the attributes that are relevant to the decision problem: To identify the relevant attributes that are to be taken into consideration, a value tree is constructed:

-Assign the values to the attributes to measure its performance against the alternative.

Comparison between the data retrieved:

India

Denmark

Tax rate

12.5% VAT and 33.99 % Corporate

25% VAT and 25 % Corporate

Labour cost(Hourly compensation rate)

0.91 US dollar

8.3 US dollar

http://www.taxrates.cc/html/india-tax-rates.html (Accessed on 15th Nov, 2010)

http://www.taxrates.cc/html/denmark-tax-rates.html (Accessed on 15th Nov, 2010)

International labour Organisation website (Accessed on 17th Nov, 2010)

Attributes

Current Market (Denmark)

Indian Market

Labour Cost

$ 4.0 Million

$ 1.0 Million

Production cost

$ 4.0 Million

$ 5.0 Million

Taxes

$ 1.2 Million

$ 0.4 Million

Infrastructure Cost

$ 3.0 Million

$ 4.0 Million

Material Cost

$ 2.0 Million

$ 2.5 Million

Transportation cost

$ 1.2 Million

$ 0.7 Million

Total Cost

$ 15.4 Million

$ 13.6 Million

As per the assumptions made and data gathered it can be seen here that moving the manufacture part to India would be a wise decision.

- Determine the weight to each attribute: Assigning weight to each attribute determines the importance of the attribute to the decision maker.

For assigning weight, a scale of 0 to 100 is chosen.

0 (Worst)

100 (Best)

Indian market

Current market (Denmark)

Attribute

Weight

Normalised Weight

Weight

Cheap Labour

100

31

10

Reason to set weight

The main reason to move the manufacture to India is the availability of cheap labour as compared with current market.

Denmark has very high value for the wages paid to labour. This makes this attribute score the lowest weight of the all. The hourly compensation of labour is way too high in Denmark.

Better After Sales

80

25

70

Reason to set weight

Better After sales another extreme factor that will help to generate high revenue and help in customer retention.

The factor that is responsible for generating highest revenue in Denmark is the after sales services

Low production cost

60

19

30

Reason to set weight

Due to availability of parts at one place we need not outsource parts from other countries so it helps save on transportation cost

The outsourcing of parts from various countries increase the cost of production as it may cause some delay in transportation, accidental damage , etc

Higher Productivity

40

13

40

Reason to set weight

As the labour available is cheap and all parts manufactured at one place so it would result in higher productivity

Due to large labour wages and outsourcing parts from other countries the productivity score a less value.

Technology

26

8

60

Reason to set weight

The presence of high technological machines would help the company achieve targets in short span resulting in higher productivity and reduction in waste.

Denmark being a developed nation is very high on technological front.

Manufacturing Quality

14

4

60

Reason to set weight

Labour available in India is highly skilled so this would result in higher manufacturing quality

Highly skilled labour and high technological facilities make this attribute score too high.

320

100

270

Weight to the Benefits Attributes

-Taking the weighted average of the values assigned to each attribute:

Attribute

Indian Market

Current Market (Denmark)

Weight

Normalised Weight

Value * Weight

Weight

Normalised Weight

Cheap Labour

100

31

3100

10

4

Better After Sales

80

25

2000

70

26

Low production cost

60

19

1140

20

11

Higher Productivity

40

13

520

40

15

Technology

26

8

208

60

22

Manufacturing Quality

14

4

56

60

26

Aggregating benefits

70.24

7024

55.60

-Trading benefits against costs: As shown above the benefits involved in moving the manufacture to India scores above over the current market. As can be seen from the graph below the cost of moving the manufacture unit to India is also little less than cost of manufacturing in Denmark. So it would be a wise decision to move the manufacture unit to India in order to generate higher profits.

DECISION TREE ANALYSIS:

Decision tree is a model that represents the various alternatives that will be available to the decision maker under condition when the demand is uncertain. In consists of square nodes that represent decision points and circular nodes represents alternatives. To design decision tree we need to take into account factors either to move the manufacturing to India or China and second is to do nothing i.e. let the parts be outsourced from other countries and their assembly to be done in Denmark.

Here we have assumed that for moving the manufacture to India, if the process succeeds the revenue generated would be around $15 million and in case it fails it would incur a loss of $ 6 Million.

Changes in current operating system

Once the proposal is accepted the manufacture and the inventory subsystem would move to India and after the products are manufactured they are sent to the distribution subsystem of Skagen in Denmark from where they are sent to their independent retailer Tabernus and then to the customers. Shifting the manufacture unit to India would also help them target new markets and attract more customers and in return helping them to generate more revenue.

Conclusion

The proposal to move the manufacture unit to India completely fits into the company strategy and requires movement of manufacture unit to India.

Through the help of decision making techniques it has been shown that the decision to move the manufacture to India is the better option to opt for than to stay in current market and import parts from different countries. The analysis suggests that the proposal is best one to go for when considering factors of cheap labour, low production cost and also it would offer better after sales when compared to Denmark. Yet the decision appears to be risky from the point when we consider factors like technology and Manufacturing quality.

But to go with the decision we have to consider the overall benefits of moving the manufacture to India as it will help the Skagen design to generate higher revenues in long term.