Case Study of Conroy Manufacturing Company

Business Decision-Making and Analysis

Introduction

The current study is conducted to shed light on the process of decision making which is often taken by companies whether it is manufacturing, retailing, or some other. This study includes an analysis of the decision problem often faced by manufacturing companies while they plan for capital investment. For the context of the current study, the Conroy Manufacturing Company of Australia is been selected. The chosen manufacturing company was established in the year 1960 which decided to diversify its tools and small machines manufacturing business into a market comprised of consumer goods. The company has developed a range of DIY (do-it-yourself) enthusiast products which include electric drills, and tuners for car engines which are sold by Conroy Manufacturing through hardware stores and DIY chains. The company has planned to develop gardening equipment and tools for which it has selected two locations. During planning and decision-making for such capital investment, the company has faced some problems. Here, in this study application of decision analysis and some assumptions are made for decision analysis to advise Conroy Manufacturing to sort out its decision problem. Along with this, strength and limitations of the current analysis is also discussed and the information required for improving the current analysis is also been stated here followed by an overall conclusion.

Question 1

Application of decision analysis towards the problem faced by Conroy Manufacturing in decision-making and advising the company

The Conroy Manufacturing Company of Melbourne, Australia operated in the small machines and tools industry since 1960 has expanded its business in manufacturing industrial paint, building materials, and pre-fabricated garages. During 1970 and early 1980 the company rapidly expanded for which Conroy opened new manufacturing units in Dandenong, Western Sydney, and Ballarat. In the middle of 1980, the company faced financial trouble badly for which the industrial paint manufacturing unit of the company was scaled down and the pre-fabricated garage ceased. In 1998, a new management team was taken over by the company which advised it to step up in the market comprised of consumer goods. After that at the beginning of 2015, the company considered to manufacture gardening equipment and tools. The company has planned to produce an electric lawnmower (LM15).

The market research program conducted by Conroy Manufacturing has provided it with customer-related information to make decisions. For the process of market research and designing of LM15, the company has already incurred a cost of $2.5 million. If the company decides to continue with the production planning of LM15, then it is expected by a company that will be able to develop a prototype successfully by the end of 2015 by incurring a total cost of $8 million. Besides this, if the project is not completed within 2015 then it is expected to be modified for which the company needs to incur $6.4 million more along with another year. However, Kevin Abbott the engineer of Conroy Manufacturing is sure about the success of the project and overcoming the problems within December 2016. As a production site, Conroy has selected a new site at Campbellfield, North Melbourne, and at Laverton Aerodrome of West Melbourne.

The purchase cost of Campbellfield is $6 million which also required an additional cost of $4 million for equipping the site which was previously a mill. Within 2017, January it is expected by the company that the production of LM15 will be started. Here, if the prototype of LM15 took two years to develop successfully then its production is expected to commence after January 2018. The site has a small capability in terms of producing LM15 as it has a capacity of manufacturing 50,000 Lawnmowers per year. On the other hand, the chosen production site at Laverton requires $24 million to construct new building and one full year to complete this action. Similar to the site Campbellfield, this site is also expected to commence production in January 2017.

However, if LM15 requires two years to commence its production then it will also need time up to January 2018. In a single year, Laverton has the capacity of producing 166,000 lawn mowers which is 116000 more than the production capacity of Campbellfield. Campbellfield and Laverton are 30km and 20km from Port Melbourn respectively. For promoting LM15, Conroy Manufacturing has decided to use an advertising campaign through local television, and newspapers for a few months after its launch. After conducting market research and using industry-wide along with economic data the company has faced some problems in estimating annual sales volume (Kang et al. 2016). The marketing department of Conroy Manufacturing has simplified the problem by estimating sales in two market conditions such as good and poor. The probability of sales in these two types of market conditions for the years 2017 and 2018 is 0.7 and 0.3 for good conditions and 0.4 and 0.6 for poor market conditions. Here, the company is facing a problem in selecting the best and most profitable option for constructing a manufacturing site for producing LM15 to expand its business.

For making appropriate decisions for taking initiatives of manufacturing LM15 the company needs to conduct decision analysis. Decision analysis is a management technique where some statistical tools like decision tree analysis, probability forecasting, and multivariate analysis are applied. This analysis aims to help the organization select the most beneficial alternative action from different alternatives under certain circumstances (Govindan et al. 2015).

Decision Tree Analysis:

This is a process of representing a set of decisions schematically that are followed by some varied chances of happening. It is a tree-shaped diagram that represents investment decisions and decision change points to help the analysts investigate the most possible outcomes from such investments (Malliaris & Malliaris, 2015). Here, the Net Present Value of a future project is calculated to evaluate its profitability towards the company in terms of its present monetary value and expected cash flow. The calculated figure of NPV in different conditions and for different alternatives are the components of this analysis.

Figure 1: Decision Tree Analysis

(Source: Created by the researcher)

The above decision tree is constructed for the Conroy Manufacturing Company which is facing a decision problem in selecting the best site option for manufacturing LM15 which is a lawn mower. The company has simplified the market condition in good condition and poor condition from where it is expected to generate cash flow after commencing the manufacturing process of LM15. Here, in this context, the volume of NPV should be the decision factor for selecting the best location for establishing a manufacturing site.

Advantages of Decision Tree Analysis

• It helps the analysts to think about all kinds of possible outcomes or results for upcoming choice (McNeill, 2015)
• Analyses all the possible alternatives
• Decision trees are used to represent complex data
• It emphasizes the important variables by following a prioritization approach

Probability Forecasting:

For decision analysis, another important tool is probability forecasting which helps the analysts to sue and apply the probability of market conditions onto which production, sales, and overall success of an investment depends (Weigend, 2018). For the context of the current study, the marketing department of Conroy Manufacturing Company has estimated the probability of sales of LM15 as 0.7 and 0.4 for good market conditions during January 2017 and January 2018 respectively. Besides this, the department has expected the probability of sales under poor market conditions to be 0.4 and 0.6 respectively for January 2017 and January 2018. According to this, Conroy Manufacturing is advised to take the initiative of selling its LM15 (lawnmowers) in January 2018 after developing the product successfully. In this year, the probability of sales in poor market conditions is higher than the probability in January 2017.

The advantages of Probability Forecasting are as follows,

• It is simple to apply and understand
• This tool is used to provide crucial information about the movement of sales volume
• It acts as a bonus for applying inventory management (Modarres, 2016).

Multivariate Analysis:

This is another statistical analysis used to analyze numeric data that arise from a set of variables. Multivariate analysis is conducted for observing and analyzing simultaneously more than a single outcome or variable (Chatfield, 2018). For the context of the current study, there are two variables for separate two options. The two separate options are the two separate production sites that belong to two different market conditions such as good and poor. This is a more complex tool for decision analysis than the decision tree and probability forecasting.

The advantages of Multivariate analysis are as follows,

• It helps to focus on the relationship between the different variables for quantifying such a relationship (Goodwin & Wright, 2014)
• Provides in-depth analysis and a realistic picture which is not provided by the analysis used to consider a single variable
• Provides an appropriate and powerful significance test as compared to the univariate techniques.

Calculation of NPV it is required for applying Decision Tree analysis and recommending the best option for constructing a production site based on its cost of investment and annual cash flows (Baum & Crosby, 2014).

Net Present Value (NPV) for the Production Site at Campbellfield

It is assumed here, that the production will be started in January 2018 and the cost of capital of 10% is treated as a discount rate.

Assuming this is a good market position from where the company is expected to get a net annual cash flow of $16,000,000

Cost of Investment = $10 million

Net Cash Flow = $16 million per year

Year = 4

Discount Rate per year = (10% ÷ 4) = 2.5%

Net Present Value (NPV) = ${16,000,000 * (1 − (1 + 2.5%)^-10) / 2.5%} - $10,000,000

= ${16,000,000 * (1 − 1.025^-10) / 2.5%} - $10,000,000

= ${16,000,000 * (1 - 0.7812) / 0.025}- $10,000,000

= ${16,000,000 * 0.2188 / 0.025} - $10,000,000

= ${16,000,000 * 8.752} - $10,000,000

= $140032000 - $10,000,000

= $130,032,000

For Poor market condition (Assumed)

Cost of Investment = $10 million (Assumed)

Net Cash Flow = $6 million per year (Assumed)

Year = 4 (Assumed)

Discount Rate per year = (10% ÷ 4) = 2.5% (Assumed)

Net Present Value (NPV) = ${6,000,000 * (1 − (1 + 2.5%)^-10) / 2.5%} - $10,000,000

= ${6,000,000 * (1 − 1.025^-10) / 2.5%} - $10,000,000

= ${6,000,000 * (1 - 0.7812) / 0.025}- $10,000,000

= ${6,000,000 * 0.2188 / 0.025} - $10,000,000

= ${6,000,000 * 8.752} - $10,000,000

= $52,512,000 - $10,000,000

= $42,512,000 (Assumed)

Net Present Value (NPV) for the Production Site at Laverton

For Good Market condition

Initial Investment for the Project = $24 million

Net Cash Inflow per year = $24 million

Number of years = 4

Discount Rate per year = (10% ÷ 4) = 2.5%

Net Present Value (NPV) = ${24,000,000 * (1 − (1 + 2.5%)^-10) / 2.5%} - $24,000,000

= ${24,000,000 * (1 − 1.025^-10) / 2.5%} - $24,000,000

= ${24,000,000 * (1 - 0.7812) / 0.025}- $24,000,0000

= ${24,000,000 * 8.752} - $24,000,000

= $186,048,000

For Poor Market condition

Initial Investment for the Project = $24 million

Net Cash Inflow per year = $8 million

Number of years = 4

Discount Rate per year = (10% ÷ 4) = 2.5%

Net Present Value (NPV) = ${8,000,000 * (1 − (1 + 2.5%)^-10) / 2.5%} - $24,000,000

= ${8,000,000 * (1 − 1.025^-10) / 2.5%} - $24,000,000

= ${8,000,000 * (1 - 0.7812) / 0.025}- $24,000,0000

= ${8,000,000 * 8.752} - $24,000,000

= $46,016,000

After calculating the NPV of the two investment projects that are planned for setting up in two different sites such as Campbellfield and Laverton it is very often to advise Conroy Manufacturing Company to go ahead with the option of Laverton. From this site, the company becomes able to get more financial benefits in comparison to other ones. Moreover, the NPV of the project in good as well as in poor market conditions is also much higher than the NPV of the Campbellfield project in these two market conditions. Moreover, in comparison to Campbellfield, Laverton is quite near Port Melbourne which will be suitable for constructing a production site. This is because, the cost of transporting LM15 and to market it will be less as well as manageable which is required for increasing profit volume (Gotze, Northcott & Schuster, 2016).

Assumptions made for the current study and for calculating NPV from the production unit at Campbellfield are as follows,

• Net cash flow per year = $6 million
• Discount rate = 10%
  

Question 2

Discussion on the strengths and limitations of the analysis conducted in the context of the problem faced by Conroy Manufacturing and the other information required for improving the analysis

The analysis made in the above segment regarding the application of decision analysis in the process of making appropriate decisions by Conroy Manufacturing Company, there are some limitations. Besides the limitations of the above-stated decision analysis which includes statistical decision-making tools such as decision tree analysis, probability forecasting, and multivariate analysis also have strengths. The calculation of NPV is required for evaluating the profitability of an investment option which is a vital part of the decision-making process and decision tree analysis (Levy, 2015).

The strength of the decision analysis which includes the strength of the statistical tools such as decision tree analysis, probability forecasting, NPV analysis, and multivariate analysis is discussed below.

Strength of Decision Tree Analysis:

It is used to perform implicitly in future selection or variable screening and this is a relatively easy method of analysing future outcomes of a decision. This method considers many possible results or outcomes from a particular decision. Besides this, decision tree analysis provides a framework for considering the payoffs associated with decisions and probability for which it is useful for selecting the best option as well as the most informed investment decision. The business organizations that are planning to establish or take the initiative of a new project, decision tree analysis is very helpful as it considers all kinds of possible future outcomes. This helps to identify complex data and prioritize important variables (Zsambok & Klein, 2014).

Limitations of Decision Tree Analysis:

The basic limitation of using this analytical method is that such analysis is made by considering some expectations. The limitations of this method include the inadequacy of predicting numeric value continuously and applying regression. A decision tree is not able to interpret the reliability of the decision and it can produce different outcomes if the root of the tree changes.

Strength of Probability Forecasting:

The main strength of the probability forecasting analysis is its simplicity. This is an easy-to-understand analytical tool. The probability of the market or any other occurrence related to a business organization and its profitability are forecasted with this analysis (Ergu et al. 2014). The volume of future sales is measured by applying this statistical tool as it denotes crucial information regarding the degree (positive and negative) of sales during a specific period. This method helps the inventory management department in managing inventories which mostly includes raw materials, goods in work-in-progress, and finished goods. This analysis also helps to formulate budgets per the probability of demand and sales.

Limitations of Probability Forecasting:

The major limitation of probability forecasting is that the entire analysis is based on assumptions that are not been correlated with each other. The analyst using this analytical tool is not able to view statistics and charts and extract data to make a concrete report. This method includes monotonous and redundant task

Strength of Multivariate Analysis:

This technique use to allow the researchers to look at the inherent relationships between a set of variables and for quantifying such relationships between those variables. The use of cross-tabulation, multiple regressions, and partial correlation helps to control the internal association between the variables. This also introduces different types of variables for determining the link between the dependent and independent variables. Multivariate analysis provides a rich as well as realistic picture as it is used to consider and compare different variables than just one variable (Chatfield, 2018).

Limitations of Multivariate Analysis:

Multivariate analysis is a complex statistical tool for decision analysis. It involves higher-level mathematics for analyzing data. It is a complex as well as an expensive statistical analysis. Furthermore, the outcome of this analysis is not easy to interpret and is based on assumptions that are tough to assess. A large data sample is required for multivariate analysis to generate meaningful results and if that much data is not collected then the result becomes meaningless. Such invalid result is generated due to the errors having high standards in nature.

Strength of Net Present Value (NPV):

The calculation of the Net Present Value of an investment or project using expected future cash flows from that project and it considers the time value of the fund. In this method, cash flow generated after and before implementing a project is used during its entire life span. Risk and profitability associated with a project are prioritized and this method helps to maximize the value of the business organization (Dyson & Berry, 2014).

Limitations of Net Present Value (NPV):

This investment appraisal technique is tough to use and is not able to provide accurate decisions when the initial investment of the projects is different. The calculation of a proper discount rate is difficult and this method may generate incorrect results when the projects have different life spans. The assumptions used in this method often become inappropriate which influences management's decision to select the most suitable investment option negatively (Götze, Northcott & Schuster, 2015).

For improving decision analysis stringent market research is required to be conducted by Conroy Manufacturing Company. Assumptions that are needed to be made for the analysis must be reliable. The following information is required for better analysis

• Rate of demand and its growth
• Discount rate which is required for calculating NPV
• Variables that could influence the sale of LM15
  

Conclusion

To make the most effective decision the management board of a company needs to conduct decision analysis. Besides applying decision analysis, the company is also required to use investment appraisal techniques for measuring and evaluating the profitability of an investment option. For the context of the current study on Conroy Manufacturing Company of Melbourne, the management of the company needs to apply the above-mentioned decision analysis and investment appraisal techniques like NPV to make appropriate decisions. Contact 'Assignment Help' to read more.

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