Operations and Quality MGT Case study

Food Manufacturing Leadership and Bottlenecks in a Developing Country

Entrepreneurial Leadership and Operations in a Developing Country

ABSTRACT

Claude flew from the United States to South Africa. While on the plane, he was nervous, but hopeful he could help the company with plant operations and future goals. As the flight ended, he believed that his manufacturing, buying and financial background would help the food processor with focus and expansion. However, he wondered about the mission, objectives, and current plant layout to support this new growth and expansion into other countries. After students complete the case, they will understand how to create a mission statement with corresponding objectives, bottlenecks, plant layout and capacity for a manufacturing operation.

EXECUTIVE SUMMARY

Claude flew from the United States to Amsterdam, Holland and onto South Africa. While on the airplane, he wrestled with his anticipation and nervousness about this opportunity and the effect he could make on an organization located on the African continent. For Claude, this trip was exciting, but he had second thoughts about being in a strange culture and land. He wondered how prepared he was after completing his research, and gathering facts and data on the food processing industry. His biggest concern of the trip was the ability to help this company with strategy, production and the ability to provide implementable solutions.

As the flight started to end, he started to focus on the manufacturer’s issues with strategy and production capacity. He believed his experience and background in production and operations management, accounting, and finance would help SAL, Ltd. continue growing, and ensure that production capacity would support further growth. His background included experience as a buyer in an archery manufacturer, an auditor for a larger manufacturer, an accountant with a communications equipment manufacturer and a financial analyst across many industries. However, he did not know about the company’s technology and if the company was, open to new recommendations. He wondered about the production process, capacity for growth, current financial systems, and if the operations could support future growth.

Keywords: Production, Operations, Plant Layout, Mission Statements, Goals, Capacity, Bottlenecks

SAL, Ltd. Background and History

Claude flew from the United States to Amsterdam, Holland and onto South Africa. While on the airplane, he wrestled with his anticipation and nervousness about this opportunity and the effect he could make on this organization located on the African continent. For Claude, this trip was exciting, but he had second thoughts about visiting a different culture and people.

The airport was crowded with many passengers coming off planes into the country. The airport was in need of some modernization. The temperature was in the mid 70s, but comfortable. He started looking nervously for the taxi company that was to meet him to drive to the hotel. After loading the luggage into the vehicle, they left for the hotel. While traveling to the hotel, Claude noticed a country that is changing and growing. The country was not what he expected. He wondered how prepared he was after completing his research, and gathering facts and data on the food processing industry. His biggest concern of the trip was the ability to help this company with strategy, production and the ability to provide implementable solutions. He arrived at night to a calm city and awaited his first day of the assignment.

Organization Structure and Management

In the morning, Patrick from SA Industrial Intermediaries, the organization that hired Claude as a volunteer, arrived to pick him up at the hotel. Patrick drove Claude to the headquarters to discuss the scope of work and to inquire about any needs he may have for the length of stay. Claude received a mobile phone for local calls. Thereafter, Patrick and Claude stopped at the local currency bureau to exchange U.S. Dollars for the local currency. Afterwards, the pair continued onto the host organization, SAL, Ltd. During the short drive to SAL, Claude noticed the congestion on the streets and the many people walking around the stores and buildings.

The company was located in the industrial section of the city. As Claude arrived at SAL, the roads were in need of major repairs. He wondered how a company could operate without more modern infrastructure. Patrick noted that the roads were in better shape than a year ago. Therefore, the local people were starting to notice changes taking place especially with infrastructure.

As Claude entered SAL, there was a high fence for protection and the lack of modernization. Upon entering, the front shipping area was even with the land and no shipping dock was available for trucks to back up to for pallet loading or larger loads. The managerial offices were painted green and located in the front of the building. Just behind the offices, there was a wall. In front of this wall was a staging area for finished goods and raw material. Patrick introduced Claude to Chad, the Managing Director. He was a man of average statue, but professionally dressed. In addition, Claude met Greg, the finance manager and main contact for Claude.

The four men moved into a small conference room to discuss the scope of the three-week assignment. Patrick stated, “The main focus of this assignment is the evaluation of the internal and external financial reporting system, which may include a re-evaluation of the current accounting software.” Chad, spoke up and suggested, “I would like to identify manufacturing costs given various cost centers”. While Patrick and Chad spoke, Claude started to make some notes on the assignment. In the middle of the conversation, Claude asked, “Do you have an organization chart with current position and the people holding those positions?” Chad responded positively and said, “Keith will provide that item to you.” (See Appendix 1)

Operations

In the middle of his thoughts, Claude asked, “Can you tell me about your operations?” Patrick noted, “SAL, Ltd. provides two basic products and limited services to customers. The first product is fortified cereal-soya composites of varying mixtures. The second product type is soya-meal cake. The services offered to customers include training for livestock feed manufacturers and soya-meal cake distributors and training for bakers on using soya flour in baking.”

During further conversation in the group, Claude identified the raw material for most products were based on soya beans and maize, main ingredients. The majority of soya beans were sourced from Uganda, Eastern Congo, Zambia, and Ethiopia. However, suppliers in South Africa supplied very little of either ingredient. The majority of maize, a main grain, came from the northern part of South Africa. While the majority arrived from within the country, occasionally, maize arrived from Tanzania and Uganda.

Claude remembered that SAL might be poised on great growth. He recalled an article by Cetron and Davies (2010), which suggested that food needs would be great over the next few centuries as the population increased to nine billion. In addition, the developing world is still dealing with finding food to feed starving people versus getting food with good nutritional value. This junction in time could provide a great opportunity for SAL to grow both domestically and internationally.

The other ingredients, sourced from various local distributors, are minerals, vitamins, and packaging materials. The minerals and vitamins came mainly from France and Belgium while the packaging material (i.e. bags, liners and paper bags) arrived from a local supplier for most products produced and including food for the World Food Program, UNICEF, and Medicisin San Frontiers (MSF). Most suppliers provide 90-day payment terms.

Customers included humanitarian organizations such as World Food Program, UNICEF, Red Cross, and MSF. These organizations provided approximately 20% of revenues. The main products purchased by these organizations were soya-fortified cereal where demand exceeded supply. The final consumers of these products were insecure children, elderly people and those recuperating with nutritional needs. The additional consumers included displaced persons, refugees and famine stricken communities in arid and semi-arid regions of East and Central Africa. The products were tailored to those recovering from ailments, lactating mothers and others with malnourishment.

The remaining 80% of revenue came from local supermarkets, retail shops, and live stock feed millers. The local supermarkets and retail shops looked for cereal-soya fortified composites that create nutritional benefits and porridge mix formulations for diabetics and breastfeeding mothers. The feed millers wanted soya cake formulations that help ensure good quality feed with high amino acid needed as part of the feed for poultry and pigs.

After gaining some operational information, the day and meeting was ending. Claude knew tomorrow would be another day with new challenges. Patrick decided to accompany Claude back to his hotel.

Production Process

Claude woke up early the next day at the hotel awaiting the taxi ride to SAL. Claude realized that this volunteer consulting opportunity intrigued him. However, the challenges were going to take some investigative work and gathering data in some cases would not be easy.

Claude arrived at SAL around 9am the following day. As he sat in the conference room, he observed the movement of finished goods. At the same time, he would need to know more about the production process. He felt that he needed to observe the plant floor in action. He sought out the production manager, Pierre.

Pierre walked out onto the floor to give Claude a tour of the production process from beginning to end. Pierre started with the main raw materials, soya beans and maize. Pierre stated, “The first step in the process is the purchase of soya beans and maize, our main ingredients. These ingredients come in 25 pound bags and must be cleaned before processing.” Pierre then took Claude over to the cleaning process, which consisted of a three-by-three foot screen box. “This area handles all of the cleaning for soya beans and maize. The people in this area can handle about 32 MT/day of maize and 8 MT/day of soya beans. This process takes about eight people to reach that level. Management is thinking about purchasing an auto cleaner that could handle 105 MT/day,” Pierre noted. Pierre and Claude then moved to the next stage, the 3mm grinder. “This stage in the production process grinds the soya beans and maize into a coarse granulated mixture, which then move to the vertical mixer. After the initial grinding stage, each component, maize and soya beans, moves to the vertical mixer. The proportion of each mixture comes from the production run setup at the beginning of the day for each of two shifts”, Pierre said. Claude asked, “How much can the grinder and vertical mixer handle?” Pierre replied, “The 3mm grinder can handle 35- 40 MT/day and the vertical mixer can handle about 1.5 MT/hour.”

Then, they moved from the back of the building into the middle of the building looking at the conveyor system for three hopper-extruders, conveyors, 1mm grinders and bagger. Claude, seeing the three sets of machinery, asked, “How much can each of set of machinery handle?” Pierre replied, “Each set of machinery from hopper/extruder to bagger, can process about 7 MT/day.” Afterwards, they moved into a second side area that housed a second mixer. Claude asked, “What is that mixer done?” Pierre noted, “That mixer allows an operator to mix in vitamins and minerals depending on the product being produced during the morning or evening shift. The mixer can handle about 1 MT/hour.”

Claude then spotted another piece of machinery sitting in the corner. “Pierre, what is the machinery not being used against the wall?” Pierre replied, “That machinery is an additional 28 MT/day system that includes the hopper-extruder, conveyor, 1mm grinder and bagger. The problem is that we have not installed the boiler needed to operate that system yet. We will be installing that system in the near future.”

As they moved to the front of the building, Pierre pointed out some additional rooms that housed the QC lab, Electrical room, a non-performing oven, a room for small bag packaging, storage of production supplies, and his office. After the tour, Claude returned to the conference room and started to observe the flow. He noticed that the area in front of each bagger was a temporary storage area that maintained the output for that shift or product run. Then, he saw that the output from each of three baggers was moved near the conference room in front of the finished goods storage area. Afterwards, these product runs were moved again behind the wall for final storage before sale to customers. After the plant tour, Claude returned to his hotel to think about the production process.

When Claude returned the following day, he started to review the types of products SAL sold to various customers. He noticed that SAL produced sugar. Claude went to talk to Pierre. “Pierre, does SAL produce sugar?” Pierre replied, “We have two pin mills that grind sugar. We can produce coarse and fine (powder) sugar. We can handle about 7 MT/day.”

Claude returned to his office and started to draw up the production flow for the plant. He spent the rest of the week laying out the plant and gathering further data on the production process. The following week he started to work on the floor plan. The current floor plan showed that finished goods and raw material storage occupied approximately 6,000 sf. The plant operations including maize and soya bean storage, three current lines of production that included cleaning, 3mm grinder, hopper/extruder, conveyor, 1mm grinder and bagger occupied approximately 10,000 sf. The offices, OC lab, electrical room, small bag packing, storage and room with an oven (not working) occupied the remaining 4,000 sf (See Appendices 2 and 3).

Organization Mission and Goals

The following week Claude started to wonder about future growth after reviewing the plant layout and floor plan. He wondered what the future plans were for SAL given the current plant and floor layout. He started by looking for a mission statement and goals. However, he could not find any information. He realized that management did not have a clear mission and goals for the next five to ten years.

Claude approached Chad to verify his initial thoughts. Claude asked, “Chad, do you have a written mission statement and goals for the next five to ten years?” Chad responded, “We have focused on growth and became successful without a stated mission statement or goals.” After the interview, Claude decided to start exploring the thoughts of each manager regarding their ideas and thoughts on a mission statement and set of goals for SAL. Claude felt that he should start with the managing director, Chad. Claude started, “Chad, what do you feel is the mission of SAL?” Chad replied, “We should lead the extrusion industry in Central and East Africa based on quality, nutritional food (fortified) with movement to West and Southern Africa.” Then, Claude asked, “What should the goals be for the next five to ten years?” Chad said, “We should be able to:

· Develop sales in nine countries versus the current ones (Kenya, Uganda, Sudan, Ethiopia, and Djibouti)

· The goal is to grow the following countries – Rwanda, Burundi, Tanzania over the next 1 to 2 years

· Increase sales to grocery stores and move from 7 out 10 in Kenya to sales in all 10 grocery stores

· Maintain the split in sales of 80% grocery stores and 20% relief agencies

· Maintain, but double sales to Kenyan grocery stores

· Create a distribution network for rural areas in Kenya first, then replicate the same network in other countries and regions

· Create more stability in the supplier network in both maize and soya beans because the sources tend to be eradicate through possible co-operatives for farmers in supplier regions and areas.”

As Claude finished with Chad, he started to walk towards Greg’s office. “Greg, I just met with Chad. I want to pose the same questions to you that I posed to him. What do you think the mission and goals should be for SAL?” Greg replied, “I think that SAL should be to develop more markets in Central and East Africa by providing quality products and responding to disaster demands. The goals should include expanding sales in East and Central Africa, specifically in neighboring countries such as Uganda, Tanzania, Rwanda, Malawi, Zambia, Republic of Congo and Sudan as well as creating a more stable supply network through co-operatives for farmers, utilizing major corporations or dealers, but still maintaining contact with individual farmers. I think this exercise is important for SAL and the managers. I think you should talk to Parker next. He has been with the company for a number of years and may have some good insights.”

Claude headed off to see Parker. Claude knocked on his office doorway. “Parker, can we talk? Greg told me to come and talk to you. I wanted to know what you thought the mission and goals should be for SAL.” Parker said, “SAL should be a leading company with a focus on sales, good profit margin and meeting the need of Central and East Africa through diversification. We should strive over next five years to be in 10 countries including Kenya by purchasing the land and/or a building that can handle expansion in the future particularly when looking at machinery and storage needs. In addition, we need to diversify the supplier base because of seasonality.” Claude had enough to start the process by the end of the day. He figured he would start with Keith the next day.

The following day, after having tea, he went to talk to Keith. “Keith, I have some questions for you from a human resournce perspective. What do you think the mission and goals should be for SAL?” “I think the mission should be to acquire 25% of the Kenyan marketplace through diversification and quality products with a move towards eight countries over the next 10 years in East and Central Africa. As for goals, we should: (a) create outlets for all consumer product lines, (b) create more product awareness and advertising to support growth, (c) increase capacity to meet increase sales, and (d) remain a growing and stable employer”, Keith stated.

After visiting Keith, Claude went around the corner to see Pierre. He knocked on his door and asked, “Can I come in? I have questions and want to get your point of view. I am talking with each of the management team and trying to assess the mission and goals for the company. What are your views?” Pierre thought for a minute. “I think that we need to strive towards products with high quality, customer satisfaction, return a profit to the company and create some return to the workers. The goals must be to obtain a big presence in Kenya, exporting products international, increasing capacity to handle three times current stock levels, improving remuneration within a band and obtaining ISO 9000 certification.” The next stop was to talk to Carl.

“Carl, I have some questions about SAL. Can you tell me from your view what the mission and goals should be over the next five to ten years?” Carl stated, “Growth achievement through expanding product lines, proper systems, and qualified employees should be the first priority. We should strive to expand product lines with an aim towards a main product that other core producers lack or do not maintain a strong presence. We need to create the proper systems and maintain certain production levels plus hire and maintain qualified (skills and experience) labor in sensitive areas. Lastly, we need to look to sales and marketing by expanding successful product lines beyond the two main lines. These goals would be my focus.”

Claude realized, near the end of the day, that only one person remained, Raymond. Raymond headed up Sales and Marketing. He thought that he would talk to him tomorrow.

The following day, Raymond was in his office. Claude stopped to talk to him. “Raymond, I need to get some information from you. I would like to know what you think the mission and goals should be for SAL.” Raymond paused and thought for a moment. He replied, “We need to create market leadership in extrusion in Kenya and throughout the region through excellent customer service, maintaining quality products, a diversified product line and expanded customer base. Our priorities should be to maintain overall profitability product-by-product, attract talent to the organization, manage costs and risks, motivate our employees, and maintain safety in our plant. I believe SAL can prepare for the future and gain a competitive advantage with your help and our talent.”

Claude spent the rest of the day thinking about all he had learned over the past few days. He still needed some additional information. He still needed some perspective. He wondered about the financial results.

Financial Results

SAL saw revenues grow from R 92,679 (2005) to R 200,945 (2009) with an average sales growth over five years of 22%. Bizminer (2010) recorded average industry sales growth of 14.0% for Soy Bean Oil Mills industry. Net profit improved from R 1,305 (2005) to R 3,758 (2009) with an average return on sales of 1.6%. Bizminer (2010a) reported the average industry return on sales for Soybean Oil mills for 12 small firms of 8.7%. The average return on assets and return on equity were approximately 8% and 51%, respectively. The average current ratio of the past five years was .76 (See Appendix 4).

Conclusion

As Claude reviewed his notes from the past two weeks, he started to think about all the conversations he had, but more importantly about the future organization. He wondered if organization structure, mission and goals could support all the different SAL stated goals. However, he could not shake off the questions that remained with him such as: What should the mission statement and SMART goals be for SAL over the next five to ten years? Chad was expecting him to create a new mission statement and goals for the company. What should the new organization chart be to support the mission and goals be for a mid- to large size company be for future growth over the next five years? Again, Chad wanted a new redesigned organization chart to support the new mission and goals. In addition, Chad wanted a comlete by concise supply chain diagram completed to confirm the supply chain for management to follow. These questions remained unanswered, as he got ready for his final meeting next week before returning to the U.S.

Appendix 1 – Current Organization Chart

Appendix 2 – Current Operational Capacity

Appendix 3 – Current Plant Layout

Appendix 4 – Financial Snapshot

SAL Ltd.
Financial Information
	2005	2006	2007	2008	2009
Sales	R 92,679	R 101,919	R 113,694	R 166,946	R 200,945
Sales Growth		10.0%	11.6%	46.8%	20.4%
Operating Profit	R 4,305	R 5,668	R 3,426	R 4,242	R 5,190
OP/Sales	4.6%	5.6%	3.0%	2.5%	2.6%
Net profit	R 1,305	R 2,553	R 1,848	R 954	R 3,758
Return on Sales	1.4%	2.5%	1.6%	0.6%	1.9%
Return on Assets	NA	8.8%	5.9%	3.0%	13.3%
Return on Equity	NA	102.6%	39.4%	15.7%	44.5%
Current Ratio	0.68	0.71	0.86	0.81	0.75
Debt-to-equity	24.2	6.2	5.2	3.2	1.8
Times Interest Earned	1.72	2.89	4.39	1.52	3.63