Evaluation of Modernization Project: Extension of Glamstones Quarry Operations - Case Study Example

Evaluation of Modernization Project [Student’s Name] [Tutor’s Name] 6th August, 2011 Table of Contents Evaluation of Modernization Project 1 [Student’s Name] 1 [Tutor’s Name] 1 6th August, 2011 1 Table of Contents 2 INTRODUCTION 3 WAYS OF INCREASING THE PROFITABILITY OF THE QUARRY 3 FINANCIAL VIABILITY OF THE QUARRY 6 DEVELOPMENT 6 EXTENSION OF THE QUARRY 7 OPERATING REGIME 7 OTHER EXPENDITURES 8 ‘CORPORATE SOCIAL RESPONSIBILITY’ 9 “CRITICAL PATH ANALYSIS” –project management plan 12 CONCLUSION 13 REFERENCES 14 EXTENSION OF GLAMSTONE’S QUARRY OPERATIONS INTRODUCTION This report is an action plan by the Management team of Glamstone to the Directors of a UK wide group of quarries (parent company). The report outlines the proposal of how to increase the profitability of the quarry and thereby retain long term viability. The financial viability of the quarry has been assessed on the basis of the projected markets, operating costs and changes to human labour. The report also contains proposals of means of overcoming the resistance from the local community and gaining acceptance to operate in the local area. A “critical path analysis” of the investment has been made ranging from approval by parent Company to quarrying starting in South Quarry. WAYS OF INCREASING THE PROFITABILITY OF THE QUARRY Increasing the profitability of the quarry will ensure that Glamstone retain long term viability. A profitable business enterprise will register good profits through its operations (Donald, et al., 2009). There are several ways into which the quarry can increase its profits. It can either boost its sales revenue or minimize its costs which include operational costs. The main way of increasing the sales revenue is through increase in sales volume. This can be achieved by a reduction in the sales price of the various grades of aggregate to encourage more purchases. Note that the law of demand states that whenever the price is low, more of the product will be demanded. However, the quarry may not succeed so much through this method as the demand for the aggregate has low price elasticity. That is, a reduction in price does not cause a wide change in demand for the aggregate. Therefore, the effective means of improving the profits of Glamstone would be a reduction in the cost of production. Currently, Glamstone has been old technology in its operation which requires a lot of human capital. Extensive modernization will help the quarry to cut down on its operation costs. For instance, the modernized operations will require 10 men as opposed to 30 people who are currently employed to man the operations. A reduction in the number of people employed in the quarry will help to reduce the huge cost it incurs on human labour. Through modernization of operations, the quarry will boost its output from 500,000 tonnes to 750,000 tonnes of aggregate per annum. This increased output will help to meet the rise in demand of the aggregate from the huge regeneration programme planned for a nearby city in which the waterside will be redeveloped for both housing and commercial premises. This market is anticipated to be at least 250,000 tonnes per annum for the 20 years. Improved technology will help in meeting the required high grade aggregate by this market which also attracts an additional £5 per tone of aggregate. This is an increase in the sales volume which helps to increase the profits of the quarry. Loading and haulage costs to crusher per tonne £ High grade aggregate 0.60 Medium grade aggregate 0.60 Low grade aggregate 0.60 Total Loading and haulage costs to crusher per tonne 1.80 The increase in Loading and haulage costs to crusher per tonne will be (20/100)*1.80 = £ 0.36 per tonne Total increase in Loading and haulage costs to crusher per annum = £ 0.36 *750,000 = £ 270,000 Since other operating costs will substantially remain the same, the net gain will be £1,250,000 - £ 270,000 = £980,000. The dollar increase in sales revenue will be more than the dollar increase in operational cost and other costs. Sales revenue increases by £1,250,000 (5*250,000) while loading and haulage costs to crusher will only increase by 20%. When the cost is charged against the revenue recognized, there will be a net gain in the operational activities of Glamstone. This would ensure an increase in the profitability of the Quarry over a long period of time. FINANCIAL VIABILITY OF THE QUARRY The financial viability of the quarry is better assessed on the basis of the projected markets, operating costs and the revisions that will be done on labour cost. Capital budgeting requires that all investment projects that are viable to the business must be within the budget allocated for that matter by the business. In case of multiple projects, the projects which yield a high return should be accepted first in that order. The “Net present value” technique of capital budgeting requires that investment should be done as long the NPV of the project is positive since it yields a return commensurate with the cost of capital (Weygandt, et al., 2009). Since capital is available for modernization and there are prospects for good returns, Glamstone should go ahead with its development projects. DEVELOPMENT The huge regeneration programme presents an increase in demand for the aggregate which cannot be met by the quarry. This is a business opportunity that Glamstone should take its full advantage. It has to adapt in a way that it will supply the entire aggregate requirement to the construction and civil engineering markets over a long period of time. This is an increase in the market share of the quarry. The market research indicating that the new market will require high grade quality of aggregate at an additional selling price of £5 per tonne means an increase in revenue, £1,250,000. EXTENSION OF THE QUARRY The Quarry which Glamstone currently operates has a life expectancy of four years. Limestone is a non renewable resource which means that unless Glamstone strategize its business properly, then it will be out of business in four years’ time since this resource will have become exhausted. The option is available for Glamstone to extend its operations to a South Quarry which has adequate deposits of limestone that can help in meeting its demand for a longer time. It is advisable that Glamstone takes the earliest opportunity before it runs out of supplies since this would negatively affect its goodwill. OPERATING REGIME Through the modernization of the operations of the quarry it will be possible to realize a reduction in manning level for up to 20 people. This will be through the employment of a modern automated crushing operation and a driver loading. This constitutes a significant decline in human labour cost. However, retrenching employees will attract redundancy costs as stipulated by the labour laws. The reduction in the labour cost will off set the redundancy costs in the long run. Though Loading and haulage costs to crusher is anticipated to increase by 20% it is expected to normalize over the following three years on all grades of aggregate. Under the modernized operations output will increase by 250,000 tonnes of aggregate per year which is just enough to supply the anticipated demand in the planned huge regeneration programme in the nearby city. OTHER EXPENDITURES Glamstone should incur other costs with regard to the problems it adds to the local village. This is accomplished through tax pay and fees making it to pay for the amount of harm it does to the society as a whole. If Glamstone has to pay for the cost of pollution it can now compare the total cost (including pollution costs) and revenues of production and determine if it is profitable to extend its operations. Some of these problems cannot be valued in monetary terms. It is hard to place a monetary value on such things deaths (chances are high that school children may be hit by the lorries plying in the route), extinction, destruction of land and many other social costs. Since it is not always easy to put this policy into practice, Glamstone should invest heavily on corporate social responsibility. There is need to have an access to the South Quarry since there is a road runs between the two quarries which is the local bus route to the village. Activities of a business should not impact negatively on the neighbouring community (Dion, 2002). Glamstone should look for alternative means of transport to the local village as it links the North and South Quarries. This requires the diversion of the road for two years while the quarry is extended and then builds a bridge this will cost Glamstone £220,000. The cost saved of £320,000 by adopting this option will be used in the stage costing, the diversion of road, constructing a bridge over the road (cost £50,000), a wide footpath from the housing estate to the road crossing and engage in other social responsibilities which will help Glamstone to get acceptance and avoid opposition by the local community. ‘CORPORATE SOCIAL RESPONSIBILITY’ A business is considered to be a social asset. The Management team of Glamstone should undertake all the activities that promote positive relationships with all the stakeholders within and outside of the quarry with or without the objective of profit generating. Glamstone should observe good business ethics. These principles of behavior will help the business to choose between what is right and wrong, good and bad in all their decision making processes and actions. Glamstone should realize that an a decision will be good if majority of the stakeholders are satisfied. This is where the quarry can maximize trade offs by establishing priorities amongst competing ends. All stakeholders’ needs should be identified, prioritized and consequently satisfied based on the economic objectives of the business. A business entity operates within the confines of a community. Its activities will often affect the neighboring community in a number of ways. For instance, in attempt to get access to the South Quarry, Glamstone plans to close a road for 2 years. This road is the local bus route for the local people and its closure will not be welcome by the locals. In addition, the only means of access to the quarry is through the local village which means an increase in traffic. This creates a problem as children have to cross the main road to get the local village school; there is so much dust pollution to the houses and gardens. Furthermore, the quarry is a hard rock quarry and therefore uses explosives, which is a source of noise. These are commonly referred to as negative externalities. It is therefore in order that the business compensates these communities for the harm done. The best way to go about this is through involvement in ‘corporate social responsibilities’ to the community that is, giving back to the community. Through such activities the business becomes appreciated in the community as a social asset. This is because it helps to improve the standards of living to the community. This is especially important to the business as it will be translated into profit in the long run. Measures should be put in place address the difficulties encountered by the local people as a result of Glamstone carrying out its operations in the local area. The following are the measures proposed by the management team of Glamstone to overcome the difficulties faced by the local community: The local authority will be involved at all stages since they are better placed to explain to the public of any development that is in progress. This will help to counteract any unwarranted resistance from the local people. On an ethical matrix the business should operate where its activities and decisions are both ethical and legal. The lorries travelling through the village will be sheeted to reduce the amount of dust pollution to houses, gardens etc. Glamstone using its modern technology will employ other means of excavation rather than explosives to reduce noise pollution. The business is expected to improve the quality of life in and outside its confines. Therefore, Glamstone should recruit most of its employees from the local village in a bid to improve the economic welfare of the community (Chapin and Weiss, 1962). The modernization of operations, however, will see most of these people lose their jobs as most of them live in Pendle village and its surrounding area. The company will pay a good package for the workers who will lose their jobs as redundancy costs. The Management team of Glamstone is aware that the business is expected to be a good steward of all the factors of production, for example, protection of the environment, and protection of workers within and outside the quarry. Glamstone is therefore expected to have an anticipatory approach. For instance, the North Quarry is expected to be obsolete in four years time, therefore, the business should set plans to have land filling of the excavation sites. This will clear the doubts of exposing the community to problems especially when this excavation sites are filled with water. Glamstone should internalize the externalities. In any type of production, some negative externalities of production are inevitable. The real problem created by negative externalities in the free market economy is that because externalities are not a cost to the business it will only seek what is profitable to itself and not the society as a whole. Glamstone should be required to pay for the cost of cleaning up the problems it create. The quarry will achieve this through the following measures: i. The quarry should incur the cost of building a bridge over the road (cost £50,000) since its activities has increased heavy traffic in Pendle area and the school children need access to the school and there is also the need of a wide footpath from the housing estate to the road crossing. ii. It is possible that the activities of the quarry have caused health and safety concerns leading to the closure of the sports club changing rooms. Glamstone should consider incurring the cost of repairing the village community centre as a sign of goodwill to the community. “CRITICAL PATH ANALYSIS” –project management plan Many activities will be done before quarrying start in the South quarry. All this activities need to have been accomplished within one year when the new market will require supply of the aggregate. Some of the activities will be done concurrently, for instance, quarrying and construction of the bridge. Other activities are dependent on the prior accomplishment of others. For example modernization of the operations cannot start before the approval by the parent company. Task Earliest starting date Length of time taken (in months) Type (whether parallel or sequential) Stage on which the task Depend A. Approval by parent company 1ST Month 1 month sequential B. Modernization of operations 2nd month 2 months sequential A C. Retrenching of 20 employees 4th month 3 months parallel B D. Preparation of project plan 7th month 2 months sequential A E. Stage preparations 9th month 2 months sequential D F. Quarrying starting in South Quarry 11th month 1 month sequential E CONCLUSION The increase in market share of Glamstone products requires good strategic plans to cater for the increase in demand over a long term while maximizing the benefits from this opportunity. Since limestone is a non renewable economic resource, Glamstone should extend its operations to a South quarry which has an estimated capacity of 10 million tonnes of aggregate. This ensures continued operations over a long term as it reduces the risk of running out of the raw materials (Oberuc, 2004). However, this extension will impact on the local village in many ways. Therefore, Glamstone should take social responsibility as a way of cleaning up the problems they create and enhancing its image to the general public REFERENCES Chapin, F. S. and Weiss, S. F., 1962. Factors influencing land development: an urban studies research monograph. Chapel Hill: Chapel Hill Press. Dion, T. R., 2002. Land Development for Civil Engineers. New Jersey: John Wiley and Sons. Donald, E., et al., 2009. Intermediate Accounting. New Jersey: John Wiley and Sons. Oberuc, R. E., 2004. Dynamic portfolio theory and management: using active asset allocation to improve profits and reduce risk. New York: McGraw-Hill Professional. Weygandt, J. et al., 2009. Managerial Accounting: Tools for Business Decision Making. New York: John Wiley and Sons. Read More