Case Study: Brunswick Distribution Inc. Foundations of Operations Management Professor: ei! Bis"op
DONE BY: Jennifer Fellinger
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#.$ Situationa! %na!ysis James Brunswick had been employed employed at a major freight freight company out in Chicago. His experience mainly came from that senior logistics position that he held within that leading distribution rm and clearly it was all he needed to form a company such as Brunswick !istribution "nc. #lthough he was not alone in any of this $rank %ulaski &ice %resident %resident of 'perations and (ew Jackson &ice %resident %resident of (ogistics (ogistics were right right by his side the entire entire time since college to be exact. exact. James Brunswick ac)uired the idea for B.!.".. so with $rank $rank and (ew in a shed at his grandmothers* residence plus a single loan from the bank they changed their li+es fore+er. Brunswick !istribution "nc. or B.!.".. utili,es more than just a network of manufacturers manufacturers to implement resale strategies getting products from f rom manufacturers to retailers on time and e-ciently. imply put they are classied as single distributors. /heir customer base spans from all o+er their local en+ironment with a focus on )uality and producti+ity. producti+ity. "n and around the city known as one of the agriculture capitals* of the world 0oline "llinois has approximately 2345 resident*s current to 3613 statistics. 7+en without a strategic game plan they dedicated themsel+es to their plan. #t rst they purchased two used +ans for deli+eries with the bank loan. Business began to increase and they completed their rst relocation. 8ith the co+erage of B.!.".. increasing increasing they recei+ed an o9er to distribute high: end kitchen appliances for ;itchen:#id e+en signing the contract in 1553. # milestone to say the least as it in+ol+ed promoting exposure exposure and gi+ing them the opportunity to penetrate a wider range of potential consumers. /he location of ;itchen:#id was 24 miles outside 0oline gi+ing them a strategic proximity proximity ad+antage to their location. By the end of 3666 B.!.".. had almost tripled in capacity within their new building with an increase of 36666 s)uare feet. /hey were accumulating clients while other rms were shutting down regularly. /he expansion of their facility seemed too soon though considering the market decrease decrease surrounding surrounding them the focus should ha+e been on an in+entory system as the end result of their choice only put them in a di-cult situation. 'n the other hand the capital used for the lease on the building could ha+e essentially been used for in+esting in the future that way no nancial strain would ha+e been ac)uired and potentially could ha+e eliminated all or most nancial strain. ome mistakes were made and while few were miniscule others had the possibility of becoming detrimental.
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!ropping low:end items to focus solely on high:end in+entory< income is almost always benecial e+en if it wasn*t much. 'ther retailers may in)uire about their products direct from manufacturers or another distribution company if B.!.".. loses competiti+e edge with their nancial resources. resources. 8ith two distribution channels and only two a new strategy would be the intelligent option. !irect competition decreased decreased o+er the past +e years and while Brunswick assumed the market was going to bounce back yet it still ne+er has. /he orders are are inconsistent with the market market nowadays as it does not pertain pertain to the data in the past. #lthough this e+er:changing e+er:changing market means their dependence on pre+ious history*s data and its reliability reliability is objectionable. 0anufacturer re)uires re)uires the customers* orders in ad+ance a d+ance yet with the way the clients place their orders expecting an approximate approximate =6:56 day and up to 136 days in ad+ance is too much. B.!.".. is obligated to absorb>pick up the slack of the cost. "n the past B.!.".. maintained a safety stock of 13 weeks of in+entory with a ? system and min>max le+els at week = and @< although generally the target turno+er of in+entory should be roughly between @ and 16 weeks. #s a result their strategy concerning in+entory turno+er must be enhanced to t accurate and e-cient standards and )uickly as they are losing opportunities at an intense rate. /his unnecessary strain on B.!."..*s nancials has been been consistently o+erbearing commonly demand payment di9erently lea+ing anything else that is re)uired to be ac)uired through alternati+e methods< howe+er due to their situation any )uote will be a higher payment on anything they borrow. borrow. # possible solution is to gure a common date between the retailers and manufacturers* 0anufacturersA B.!.".. ha+e 26:=6 days to pay. o o etailersA %ayment is due within 4:46 days. /he 14 day gap between each cut cut o9 time exists exists lea+ing it to B.!.".. to exhaust their only option of the credit facility. /he budget must be a more more cost:e-cient structure structure which is concentrated concentrated on the manufacturers and the retailers keeping keeping B.!.".. in the middle as the direct link. # happy medium must be found that doesn*t re)uire B.!.".. to pick up the slack as it is an immense burden and massi+e re)uirement on their nancials. nless they nd a stakeholder stakeholder or other means they will wind up in the same situation as their competition.
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#.& Prob!em Statement 8hat can James Brunswick C7' of B.!.".. do to increase the net earnings of his company which ha+e been declining o+er the past three years despite the increase in sales during the past four yearsD
#.' Financi Fina ncia! a! %na!y %n a!ysis sis B.!.".. EB.!."..F nding itself with rising sales re+enue a+eraging @G a+erage annual increase but declining et et "ncome o+er the preceding preceding three years must decide between an o+erhaul of their existing operation by bringing in new e)uipment and operating techni)ues or expanding into a new facility o9ering greater greater opportunities for increased increased sales. 8hen reaching a decision decision James Brunswick must take take a number of factors into into consideration not only are the nancial metrics important the current current state of the marketplace must be e+aluated e+aluated and B.!."..*s place within that market. market. 8ith regional competitors going out of business B.!.".. has experienced a bump in sales but James Brunswick reali,es reali,es this is temporary temporary and would likely likely +iew these companies closing as a warning of sorts to be conser+ati+e in his plans for B.!.".. 8ell aware of the nancial nancial position of his company Brunswick Brunswick must consider that laying out large amounts of cash does come with risk especially when these funds are are borrowed. borrowed. /he following charts and statements will will show the possibilities and implications of the nal decision Brunswick will ultimately make.
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#.'.$ DuPont %na!ysis
(O* (O% PM +%+O
Curre nt
ew Infrastruct ure
C"an ge
Basic %()% S
C"an ge
2.IG 2.3G 1.@G 165.= G
3.@G 3.G 3.2G =2.IG
!own !own % !own
I.6G .5G 2.2G @I.5G
% % % !own
Fu!!y Integrat ed %()%S .G 2.G 3.3G 5.1G
C"an ge
% % % !own
(O* ,(eturn on *-uity sed to measure measure the protability of company company when compared compared to the in+estment into the company. 8hen looking at the outcomes ou tcomes after all inputs ha+e been made in regards regards to operations of B.!.".. '7 analysis Eg. 4.2.1F shows that the Basic #># would pro+ide the greatest increase in '7 while the new "nfrastructure would see a decline in '7 '7 at least in the short term. term. 8ith a growing growing company it would be assumed that a higher '7 is preferable. preferable.
(O% ,(eturn on %ssets /his metric is used to show the protability of a company in relation to its its assets or how well the company the company uses its assets to generate income. =
sing this metric we see that the ew "nfrastructure brings down the ratio meaning that the B.!.".. would see a reduction in their return on in+estment Ethis would likely change o+er the long termF while an increase is shown with both the Basic #># E2.GF and $ully "ntegrated #># E.5GF with the $ully "ntegrated ha+ing a higher increase.
PM ,et Pro/t Margin /his metric is used to show how much much of sales dollars a rm retains. retains. /his metric is one that B.!.".. will will need to address as it is one of key key issues that James Brunswick is concerned concerned with. 8ith all options et %rot %rot 0argin see increases with the $ully "ntegrated #># with the greatest gain at 2.2G with the Basic #># at 3.3G 3.3G and the ew "nfrastructure "nfrastructure at 3.2G. 8ith this information it is important to also state that an increase in %0 is not always an indicator of increased increased net income. et "ncome will be addressed addressed later in this report.
+%+O ,+ota! %sset +urno0er /his metric is used to display the the total sales generated per dollar dollar of assets. # rm such as B.!.".. that carries high end high margin products a lower asset turno+er can be expected. 8hen looking at the asset a sset turno+er changes when implementing each of the options an across the board drop in ratio is obser+ed with the ew "nfrastructure leading the pack dropping from 165.=G to =2.IG followed by the $ully "ntegrated #># E165.=G:@I.5GF and the Basic #># E165.=G: 5.1GF /his metric will be important to consider once again as it would measure the growth of re+enue and sales.
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#.'.& Operationa! Measures Current
Current (atio In0entor y +urns 2C to Sa!es Fi3ed %sset +urno0e r
3.=
ew Infra1 structur e 2.@@
2.3
C"ang e
C"ang e
Fu!!y Integrate d %()%S
C"ang e
%
Basi c %() %S 3.=@
%
3.=2
%
2.2
%
2.1
!'8
2.1
!'8
21.=G
=4.4G
%
!'8
26.5G
!'8
4=.2G
162.=G
%
21.= G
[email protected] G
%
164.4G
%
Current (atio "s a metric that measures a companys ability a bility to pay short:term obligations.
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/his metric is an important important aspect of the decision making process process with regional competitors competitors closing up shop and concerns regarding B.!.". is often cash poor positioning. #ll of the options that are being being considered re)uire re)uire an increase in debt that would likely re)uire re)uire an increase in sales or reduction in expenses to accommodate. accommodate. 8ith all options it shows shows that an increase can be met Eg 4.2.3F with the ew "nfrastructure increasing the assets of the company and increasing the new cash coming in the greatest increase increase is seen here with a new ratio of 2.@@.
In0entory +urns /his metric is used to show the number of times turns turns per year. year. James Brunswick expresses expresses a desire desire to ha+e an in+entory turn turn ideally at @ with a target of 16. 16. Currently Currently the company is seeing seeing a turno+er of 2.3 turns. turns. # low ratio that the company is experiencing is indicati+e of excess excess in+entory brought on by low sales. 8hen analysing analysing the changes in each option only the new infrastructure pro+ides pro+ides an increase although marginal and not to the degree that Brunswick Brunswick desires. desires. "t appears that despite a projected projected increase increase in sales at the new facility the increase in cost of goods sold plays a signicant factor. factor. Both #># options see a reduction in in+entory turns to 2.1 this would be likely caused again by the increase in cost of goods.
2C to Sa!es ,2orking Capita! to Sa!es /his metric shows how e-ciently e-ciently a company uses it working working capital to generate sales. sing this metric B.!.".. sees only the ew "nfrastructure yielding positi+e results with 8orking 8orking Capital increasing to =4.4G compared to the 26.5G and 21.=G for the $ully "ntegrated #># and Basic #># respecti+ely.
Fi3ed %sset +urno0er /his metric is used to show how well well in+estments into into the companies xed xed assets translate into increases in net sales by comparing net %lant %roperty and 7)uipment to the costs of goods sold. 8ith a large outlay of funds to nance any of the options a higher turno+er on the in+estment of e)uipment e)uipment and facility are a large consideration. consideration. 8ith all options producing positi+e results /he $ully "ntegrated #># o9ers an an increase to 164.4G with the new infrastructure increasing increasing to 162.=G and the Basic #># increasing to @I.1G.
+"e Income Statement Current pro4ection
ew Infrastructu
Basi asic %() %()%S
Fu!!y Integrated 5
et "ncome Change
4@@666
re @3=666 32@666
I1666 13=666
%()%S 16I1666 @2666
8hen addressing B.!."..*s needs et "ncome "ncome is the bottom line. egardless egardless of all other matters a net income is the end goal. By inputting the data into 7xhibit 3 calculator the results show that the $ully $ully "ntegrated system pro+ides the highest net income increase.
Summary #s stated abo+e the ultimate goal for the rm is increasing the net income of the business also taken into consideration when deciding which direction to mo+e an analysis of the markets climate as well as an analysis of the businesses positioning nancially nancially and within the market. #lthough the ew "nfrastructure option presented by $rank %ulaski presents some denite benets the risk of taking on a nancial commitment that the new infrastructure infrastructure presents E13 million dollars and 36 years.F could lea+e B.!.".. in a situation that is too cash poor to function in the e+ent a change in the market occurs. occurs. By taking a route that streamlines streamlines the existing existing business model B.!.".. is positioning themsel+es to be more e-cient and with the potential to expand at a later date if the opportunity arises.
#.'.' 5ua!itati0e %na!ysis 8hat are the a9ects that either option will ha+e ha +e on the rm in the long runD 8hich option is seemingly better for the rmD 8hile (ew has proposed he thinks streamlining the system is a better option $ranks suggestion is to in+est in a new infrastructure. infrastructure.
Current Breakdown In0entory /he system syst em is not automate auto mated d to take orders orders and an d as the current time it only works through two channelsA phone and fax. /hey need to upgrade 16
their system so that they are readily a+ailable when the time comes to deal with a larger scale of demand. ome points are as followsA ncertainty regarding future sales. !ependable deli+ery>short deli+ery time ot enough space with low grade in+entory planning they ha+e now need better in+entory system in their warehouse. !i+ersity in products High in+entory as last minute modications due to retailer*s orders. Currently B!" is seeing an in+entory turno+er rate of 2.3 turns. 8ith the option to implement a new infrastructure deri+es a low in+entory ratio of 2.1 turns it seems the other option is a better solution yet an e+en lower ratio is produced when the calculations for the implementation of a new in+entory system is complete. • • •
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Dri0ers6 Faci!ities 8hen a customer creates an order Brunswick then purchases the products from the manufacturers storing them in their own warehouse. /his system s ystem was working ne when B!" was only dealing with low end products< howe+er they*+e recently recently blossomed into dealing with only high end products. Currently he is trying to decide whether a larger warehouse is more benecial in comparison to an updated in+entory system. 8ith an entirely new facility this can create more space for expansion and still implement the newer system with a possibility to use more than two channels of communication such as an internet:based ordering system.
Sourcing othing is outsourced. outsourced. +ransportation $rom the warehouse to the retailer B!" as the distributor is responsible for that shipment. o what happens if neither the manufacturers manufacturers nor the retailers retailers want to be the one to handle the shipmentsD "t is just another situation that falls in Brunswick*s lap. Information /he informatio info rmation n they t hey ha+e is limited limit ed these thes e informa in formation tion problems probl ems tend t end to lead to situations and ha+e a negati+e e9ect on B!". /hese problems can lead to delays in deli+ery as well #s +arious penalties for if their historical data is this unreliable as the market continues to shift so many ways since B!" opened they will ne+er be able to correctly forecast what may or may not happen. elying on past data to predict predict future sales tends to lose its credibility because this market is ne+er the same. Basic !e0e! 1 Fu!! imp!ementation 7e w6 s P!a n Franks P!an K@.@ million for fully integrated K3 million property 11
system 'perating and training costs of K6.@ million per year a+ing them in shipping and in labor approximately K3464136
K16 million for plant and e)uipment a+ings of K4166666 end result would end up increase prots each year yet cost B!" approximately K12I1=26 /his option opt ion also als o increas in crease e liabili lia bilities ties /his option opt ion is bette b etterr for fo r B!" B! " in the and adds more stress if there*s still longr run and nothing would need a lack of space in warehouse. to be done in the future because they would be prepared for high demand increase in capacity re)uirements and such. Both basic and full systems would /his choice cho ice will w ill decrease decrea se net actually end up decreasing net income as well by approximately income approximately :I million K@ million due to more cost of dollars for B!". goods sold which is not e+en a bad thing.
*ac" %!ternati0es6 Issues 7ew 8ackson and a Better Frank Pu!aski and a ew In0entory System Infrastructure ew in+entory system is mandatory. ew facility will yield an increase to nn eces s a ry it ems mus t be =4.4G working capital compared to ma nag ed th e n: 26.5G a nd 2 1. = G i n pre+ious organi,ationLegati+ity situations.
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!eli+eries at the current time are #s for trans transpor portin ting g the goods goods truck truck not not bein being g hand handle led d in an orde orderl rly y a+ail a+ailabi abilit lity y based based upon upon locat location ion of fash fashio ion n yet yet with with bett better er sy syst stem em new facility gi+e feedback to client t he y can p o ten ti a lly decrease on their own deli+ery times with the deli+ery time from 4 days down to op t i on to + iew th e schedule 3 days. minimi,ing minimi,ing risk of complaints. •
0aterials and in+entory cost would increase by =G.
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0ainta 0aintain in an integr integrate ated d facil facility ity with with mor more sp spac ace e than than what what they they need need right now but this will be better for the future.
8hat if sales increase and demand increaseD #re they going to attempt to maintain a small warehouse or just ha+e to relocate in the futureD 8ith the opportunity to centrally locate themsel+es as well as mo+e to a superior as well as an impro+ed facility isn*t that the more producti+e option one including future planning as wellD 13
#.'.9 *n0ironmenta! Scanning %na!ysis Strengt"s 2eaknesses Opportunity +"reats ,S.2.O.+ # .8.'./ .8.'./ analysis is a point form compilation of strengths weaknesses opportunities and threats facing an organi,ation. # .8.'./. analysis is used to help an organi,ation understand itself. itself. # .8.'./ .8.'./ analysis helps an organi,ation de+elop a +ision and strategy for future de+elopment. # .8.'./. analysis looks at internal and external factors and pro+ides information on organi,ations strengths and weaknesses in relation to opportunity and threats.
Strengt"s:
$our Mears good growth (internal)
!etermination (internal) 7xperience (internal) #greement with ;itchen #id (external)
"ncreased si,e of $acility E26666 NF (internal) ixty mile deli+ery radius
2eakness:
(internal)
8ell:kept nancials (internal) table Oo+ernment Oo+ernment (external) nderstands their core competency (internal)
Opportunity:
Competitors closing oom for growth pdate ordering system E"nterbasedF #reas to add +alue 0ore low end Ehigh +olumeF '9er early payment discounts educe stock Q "ntroduce J"/ educe turn o+er time 0id:8est looking for
ampant uncontrolled growth (internal)
(internal)
mall Peet of deli+ery trucks
'ld fashioned ordering methods (internal) (oan payments (internal) !ebt collection (internal) 0anufacturers lead time re)uired E=6 Q 136F !ays (external)
(ack of nances Einternal)
+"reats:
ew competition et earnings decline "n+entory demand change (oss of existing clients %ayments from clients 7xhausted nances etailers ordering direct Change in market Change in economy 12
alternati+es Eew customersF $inancing a+ailable from Chicago E11GF ew technology "nternet based business potential 7stablish a competiti+e ad+antage
#.'.# Po!itica! *conomic Socia! and +ec"no!ogica! +ec"no!ogica! %na!ysis %est analysis is concerned with the external external inPuences on business the acronyms stands for the %olitica %olitical l 7conomic ocial and /echnological echnolo gical issues that could a9ect the restructuring and streamlining of B.!."..
Po!itica! $ederal $ederal tate policies towards small s mall business could impact B.!.".. strategic plans growth positi+ely or negati+ely in terms of incenti+es or exemptions exemptions in taxation. 0unicipal By laws regarding the property tax and ,oning could a9ect B.!.".. plan to expand their business. 7mployment>unemployment 7mployment>unemployment laws and how it a9ects company*s hiring>ring policies and procedures. procedures. Competition regulation and how it helps or hinders B.!.".. B.!." .. competiti+e edge in technology 7n+ironmental 7n+ironmental (aw and how it impacts company*s protability i.e. Carbon tax. •
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*conomics: 7conomic growth helps B.!.".. expand their business and make dent into new territory to increase their protability. 7conomic recession will a9ect B.!.".. in an unpredictable ways as business slows down impacts their bottom line. /ax /ax relief or exempt exemptions ions will help B.!.".. during the tough times times as it makes up the lost business*s income. •
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Socia!: ocial responsibility impro+es impro+es company*s images by in+ol+ing local community acti+ities i.e. sporting e+ents and cultural festi+als. Consumer attitude and opinions will help B.!.".. impro+e customer customer ser+ice skills and increase protability. #d+ertising and publicity will open B.!.".. new market and position B.!.".. better place for future expansion. •
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+ec"no!ogica!: "n+estment in "nformation /echnology will enhance B.!.".. capability in distribution to ha+e competiti+e edge against their competitors. "ntegrated order fullment system will speed up company*s communication system so they can impro+e their order cycle deli+ery time and cut cost. /echnological /echnological obsolescence i.e. i.e. the need of upgrading systems to keep keep up with changes to optimise processes e-ciency e-ciency and reduce turn o+er time. •
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#.9 %!ternati0es $ Maintain current operationa! structure. James Brunswick could opt to make make no changes to the distribution distribution company and its operational structure. %d0antages: Current Current structure is known and no further training re)uired. /he company could be able to keep keep all their employees. employees. o further debt could be accumulated by expanding to a larger warehouse. Disad0antages: /he company could continue to see a decrease decrease in net earnings. "f the recession continues the company may see a decline in sales. By remaining idle in making decisions the door may be left open for competitors to mo+e into their market
& ;se Frank Frank Pu!aski6s recommendation recommendati on to ser0e more customers $rank %ulaski*s recommendation recommendation is in+est in in a new infrastructure. infrastructure. He wants to expand the company by building building larger storage facilities. facilities. (arger facilities facilities would enable the company to increase annual sales which should result in higher net earnings. %d0antages: /he company could increase increase sales and potentially net earnings. earnings. /he company could become a leader leader in the distribution business. /he company could become a global contender contender in the distribution business. Disad0antages: /he expansion to larger larger warehouses warehouses could strain the company*s nancial budget. 14
"f operating costs are not maintained the company could lose money on a larger scale. "f the recession continues the company could face fa ce bankruptcy if they are not able to ride it out.
' ;se 7ewis 8ackson6s 8ackson6 s recommendation recommenda tion to use a cost e
#.# (ecommendations and %ction P!an 'ur recommendation is to choose #lternati+e #lternati+e 2A
7ewis 8ackson6s recommendation is to stream!ine t"e order fu!/!!ment system. system. =e wants to uti!i>e a cost e
%ction P!an (esearc"
$ 2eek R
$ Mont"
' Mont"
? $ Mont" @ear @ear
& @ear @ear
9 @ear @ear 1=
# @ear @ear
%S)(S options %S)(S decision and order %rrange /nancing De!i0ery and insta!!ation of e-uipment +raining and imp!ementati on *0a!uation of process Debt retired
R
R R
R
R
R
R
R R
/he initial cost of the fully integrated integrated system would be @ million million dollars but the company would would amorti,e this o+er a +e:year +e:year period. /his would eliminate a large in+estment up front and not put a nancial strain on the company. company. /he operating costs would be K.6.@ million dollars yearly yearly and this cost would be considered considered xed expenses. expenses. /his system would ha+e a large large cost sa+ings for the company. # fully integrated system would sa+e the company 1= percent in direct shipping and labor expenses. expenses. #ll sa+ings the company makes makes would be di+ided e)ually between shipping and labor labor expenses. expenses. /he company could opt to nance this o+er a +e:year debt plan at a rate of 16 percent. /his option works because there there are large large sa+ings to be made from more e-cient handling of orders and impro+ed warehouse warehouse communication. /here would also be a sa+ings sa+ings on shipping costs. /his option is also a safer choice because of initial cost layout. layout. !uring a recession recession this is an important factor.
#.A Conc!uding Comments B.!.".. and its founder James Brunswick are facing an issue of declining net income despite rising sales coupled with changes in the market place including competition closing their doors and consumers changing their buying methods. 8ith competition competition closing their their doors and changing buying buying methods James Brunswick must take care in making the nal decision on which a+enue to proceed would expansion lead to potential failure would the status )uo be the best measure or would stream lining lead to better operationsD 8ith market market uncertainty it would be ad+antageous ad+antageous to simply make the company company run smoother and more more e-cient. By expanding the 1I
business Brunswick faces the possibility of taking on too much debt and ultimately ha+e the business fail due to lack of cash Pow with the status )uo a continuation of shrinking shrinking net income could could cause the business to to fail. # streamlined streamlined although does re)uire a nancial commitment o9ers an opportunity for B.!.".. to reduce costs while becoming a more e-cient operation while still still lea+ing the option for expansion expansion at a later date. date. /he former %rime %rime 0inister of "ndia Jawharlal ehru once stated S'b+iously the highest type of e-ciency is that which can utili,e existing material to the best ad+antage.T sing that logic it would be in the best interests interests of B.!.".. to use their existing existing facility and impro+e impro+e on this already successful successful business. 8ith an e-cient system there is to stop B.!.".. from being a greater success.
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