XYZ Company for Tea Production

XYZ Company for Tea Production
XYZ Co is a prominent company in the FMCG industry. It provides 400 different brands spanning
14 categories of home, personal care and foods products. XYZ is now one of the world’s biggest
companies. Their first business in the Middle East started in Saudi Arabia in the 1930’s and by
1978, the first factory was set up in Jeddah to supply the Middle East region with home and
personal care products. In Egypt, ZYZ established in 1991 a joint venture with an Egyptian
company creating one of the largest FMCG businesses in Egypt.
In 2000, XYZ established its tea factory in Borg El Arab to produce high quality tea. The total
sales for XYZ (the tea factory) were around 50 Million Egyptian pounds during year 2016. The
company is operating under a strategy that aims to provide the best tea tasting experience to its
customers (differentiation strategy).
During the last board of directors meeting, there was a hot discussion about the future of the tea
business. The General Manager of the tea business shared the latest sales numbers. He highlighted
the growth in sales in years 2014 and 2015 reached around 10% annually. However, he referred to
the current economic situation in Egypt and how it affected sales during 2016 with a less than 4 %
growth. Further, he highlighted that the net profits from the tea business decreased by 5 %. The
main reason was the increase in the operations costs with a higher rate than the increase in their
selling prices. The current economic conditions in Egypt curbs the increase in selling prices to the
customers. He added that the current economic situation is expected to continue during the
upcoming period (2017 and 2018). It is still not clear how the prevailing economic conditions will
affect the company sales during 2017. Thus, the General Manager highlighted the need to reassess
the forecasting techniques that they usually use. Besides, there is a need to reconsider the
operations costs while maintaining the same quality of their products. The overall strategy of the
company is to maintain the growth in sales and cutting costs while keeping the same quality of
their famous tea brand.

The Marketing Director identified that consumer needs are well defined and market surveys
confirm that consumers are generally happy with the company’s product. However, he identified
that there is continuous increase in the selling prices to the customers due to the unstable economic
conditions and the problems in the dollar exchange rates.
From the operations point of view, the operations director identified that they are continuously
trying to minimize the operating costs in light with the organization strategy to cut costs while
maintaining the same quality. The operations director claimed that they have regular problems
coming from suppliers; delays, quality problems, etc. He mentioned that the relationship with the
suppliers needs to be reevaluated with respect to their strategic importance. He also added that
they internally are facing some quality problems that need special attention. Although all quality
problems are resolved before reaching customers, they are still contributing in raising the costs of
operations. In addition, the operations manager identified some problems with their current
capacity. He underscored the need to rethink their capacity capabilities.
Product:
XYZ produces 5 different types of tea (tea bags, dust, extra strong, CTC and green tea). The
company has 7 production lines with a max. capacity (Actual O/P) of 230,000 box of tea per month.
During 2015 and 2016, the capacity of the factory barely covered the market demand. Thus, it
seems critical to rethink their capacity for 2017. During the meeting, the operations manager
proposed two capacity alternatives to increase their capacity. The first alternative is to buy a new
production line. The second alternative is to toll manufacture with a third party. The following
table indicates the fixed and variable cost of each alternative:

Operations
Forecasting:
Forecasting is an important activity in XYZ, due to the variation in customer demand patterns all
over the year. The demand pattern fluctuates between stable, seasonal and trend patterns all over
the entire year even though the high standardization of the company products. The only
customization needed is undertaken in the final product packaging which has no effect on the raw
materials used by the company (expect for the packaging materials).
XYZ get their raw materials from both local and international suppliers. The local suppliers supply
the company with the packaging materials, the tea bags, the labels, etc. while the international
suppliers are supplying the raw tea. The lead times of local suppliers are relatively short (10 days)
while those of international suppliers are relatively long (around 1 month).
The Production Process
Production involves a combination of continuous flow and batch processing that provides high
volume and flexibility to customized individual orders (in the packaging stage).
The production processes for the different types of tea are as follows:
1. The warehouse dispatches the raw tea after receiving the production order.
2. After the raw tea is dispatched, the certified tea tasters start to propose the needed blend of
tea and then the blend preparation starts.
3. The mixing stage starts which includes a magnet, mesh and a mixing drum to guarantee
the homogeneity of the blend.
4. The blend then is moved to the sample tank. In the sample tank, samples are taken to do
some quality checks.
5. The blend is then moved to the main tanks according to the type of the blend.
6. There are 7 production lines that are used to produce the 5 different types of products
produced by XYZ. Line 1, 2 and 3 are used to produce tea bags (100, 50 and 25 packs).
Line 5 is used to produce tea bags as well (but the 10 pack). Line 6 is used to produce the
dust while line 7 is used to produce the CTC. Line 4 could produce all the different types
of tea.
7. The final product is then moved to the packaging stage.
Quality
Quality is strongly emphasized at XYZ. Employees are trained in quality concepts and the use of
quality tools. Training is incorporated on-the-job so that employees can see the practical
applications of what they are learning. Employees are responsible for performing in-process
quality checks (quality at the source), and to report any defects they discover to their supervisor.
In that sense, several quality checks are performed; moisture content, bulk density, dust content
and sensory testing.
The close monitoring of step 4 revealed that the company is frequently facing problems with the
moisture content of the tea mixture. The accepted norm of the moisture content ranges between
5% to 7%. The standard deviation of the process is unknown. So, the quality team decided to
collect a sample data (20 samples each with 5 observations) about the moisture content (in
percentage) of step 4 as shown in the following table:

Suppliers
Approximately 20 local and international vendors supply materials (raw tea, packaging, labels,
etc.) to XYZ. In general, XYZ select suppliers based on some predetermined criteria (ex. cost,
quality, delivery, service levels, etc.). They select suppliers (both local and international) that are
ISO 9000 certified. They have an approved supplier list that is updated annually. It could be
identified that the procurement team (with whatsoever supplier) are very much concerned with
complying with the strategic posture of the differentiation strategy strongly recommended by the
top management.
It is also worth to mention that the bulk of the 15 million spent on international supplies (70%) are
coming from 4 main suppliers (divided equally between them) while the main bulk for local
suppliers (around 10 million representing around 80%) spent are coming from three suppliers
(mainly packaging materials).
The main items that are supplied internationally is the raw tea which proved to be very difficult to
change them. The other option that they started to think for is to build strategic alliances with big
farmers abroad. Thus, they collected some primary data about the fixed and variable costs of each
option as shown in the following table:

Nevertheless, it is not only the cost that needs to be considered while taking this strategic move.
Other factors (quality, flexibility and delivery) needs to be further analyzed to assess the two
alternatives.
Inventory and order fulfillment
The company attempts to minimize the amount of inventory. The company has adopted point-ofuse replenishment for some areas of operations, having deliveries come directly to the production
floor. However, there is a real need to reassess this strategy for international purchases. The current
model of ordering and inventory ignores calculated economic order measures as well as quality
discounts that might be offered. For example the needs of XYZ from the raw tea; being as a crucial
ingredient and imported from an international supplier has a total demand of about 250000
tons/month. Ordering costs are $20000 per order, carrying costs are $2 per ton a month. Orders
less than 200000 tons will cost $2500 per ton, 200001 and less than 250000 will cost $ 2400 per
ton, and larger orders will cost $ 2300 per ton. Currently, the organization has an order quantity of
350000 tons per time. The lead-time needed from placing an order until having the order is around
30 days on average.
Finished products usually are immediately shipped to the customer, which in fact targets enhancing
the company’s delivery performance and minimizing finished goods inventory. However, lately
they received many complaints from dealers regarding lost orders and the time required to process
these orders.
The inventory manager and the marketing manager decided to perform an initial study to the flow
of customer orders, starting the arrival of the customer order until the delivery of the order to the
customer.
The following information summarizes the results of their preliminary study:
1. The customer order is sent to the marketing representative at XYZ by an e-mail. One out
of 400 orders are accidently dismissed.
2. The marketing representative prints all the orders every 1 hour on average and is then
picked up by the internal mail service.
3. It takes the internal mail service half an hour on average to deliver the order to the picking
area.
4. Once delivered to the picking area, the order sits takes 3-hour average before being
processed.
5. Once processed, it takes about 30 min. to check the amount of inventory.
6. If the requested product is in stock, a worker picks it to an inspector who takes 10 min to
check the order for correctness. However, 1out of 500 orders shipped are wrong.
7. The transportation division takes the order to the customer (delivery time 3-5 days with
some orders being delivered after one week) with 100% correct deliveries.

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