Operational Management Strategies on Shouldice

¶ … operational management strategies on Shouldice Hospital and Pepe Jeans. This is accomplished by looking at the financial information of each organization and the challenges that they are facing. Once this occurs, is when we can see how these tools will have impact on the operating environment.

Shouldice Hospital

Shouldice Hospital is currently in the process of experiencing rising demand. Given the fact that they have built their reputation based on working with hernia injuries, means that they are becoming a facility of choice throughout Canada. As a result, they have been aggressively focusing on expanding their facility and the hours of operations. To determine if this is economically viable requires examining a number of elements to include: how the facility is currently utilizing its beds, the effects of this kind of expansion program and the long-term financial impacts. Together, these different elements will provide the greatest insights as to if this kind of strategy will help the hospital to prudently expand in meeting the needs of customers. ("Shouldice Hospital," n.d.)

How well is the hospital utilizing its beds?

The hospital could be utilizing their beds more effectively. The best way that this can be achieved is to ensure that the bed capacity increases from 60 to 90 on: Monday, Friday and Saturday. The reason why, is because these days will generally see a reduction of 30 procedures for Monday and Friday. While on Saturday, the hospital is realizing a decrease of 60 beds. This is an indication that the facility is not using all of their beds as effectively as they should. If they could maximize all of them during these days, is when their profit margins will begin to increase. At the same time, they will be able to address the rising demand for these kinds of services. This is important, because it is showing how the hospital needs to utilize their current resources more effectively. Once this takes place, is when administrators can be able to determine future plans for the facility. ("Shouldice Hospital," n.d.)

Develop a similar table to show the effects of adding operations on Saturday. (Assume that 30 operations would still be performed each day.) How would this affect the utilization of the bed capacity? Is this capacity sufficient for the additional patients?

This would cause the total amounts of bed capacity to increase. As, the number of operations would lead to: higher profit margins down the road and larger upfront costs. However, despite the possible risks associated with the expenditures, these increases are occurring based upon the added costs in meeting demand. If the administration can realize that this is a short-term negative. This is when the facility will be able to keep up with rising demand and adjust to any kind of shifts in the marketplace. The below table is illustrating how this will meet the additional requirements of customers. ("Shouldice Hospital," n.d.)

Table1: The Impact of New Strategy on Bed Capacity at Shouldice Hospital

Check In

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

Monday

60

60

60

Tuesday

60

60

60

Wednesday

60

60

60

Thursday

60

60

60

Friday

Saturday

Sunday

60

60

Total

60

("Shouldice Hospital," n.d.)

These different figures are important, because they are showing how this approach would increase the number of procedures by 50%. As a result, this will have positive impact on bed utilization. ("Shouldice Hospital," n.d.)

At the moment, this plan would help to address capacity utilization. However, in the future there will need to be an increase in the number of procedures and facilities available to support them. This is the only way that the hospital will be able to keep up with demand. ("Shouldice Hospital," n.d.)

Now look at the effect of increasing the number of beds by 50%. How many operations could the hospital perform per day before running out of bed capacity? (Assume operations are performed five days per week, with the same number performed on each day.) How well would the new resources be utilized relative to the current position? Could the hospital really perform this many operations? Why? (Hint: Look at the capacity of the 12 surgeons and the five operating rooms.)

The total number of operations that the facility could be able to perform is 180 per day. This is the amount of resources that are being utilized at maximum capacity to achieve these objectives. This means that the overall quality of care will decline. The reason why is from the high number of surgeries that should be performed every single day. As far as the current position is concerned, these resources are being utilized as efficiently as possible. Over the course of time, this will allow the facility to expand this amount without much effort. This is because they are making an adjustment in planning and the number of personnel that will be utilized. Once this takes place, is when there will be a long-term change the operating environment with the staff prepared to meet these goals. This is when their profits margins will begin to increase exponentially. ("Shouldice Hospital," n.d.)

Although financial data are sketchy, an estimate from a construction company indicate that adding bed capacity would cost about $100,000 per bed. In addition, the rate charged for the hernia surgery varies between $900 and $2,000.00 with an average rate of $1,300.00 per operation. The surgeons are paid a flat $600 per operation. Due to all the uncertainties in government health care legislation, Shouldice would like to justify any expansion within a five-year time period. What is the average inventory turnover for the firm? If you were given the assignment to increase inventory turnover, what would you focus on? Why? The company reported that it used $500 million work of raw material during the year. On average, how many weeks of supply of raw material are on hand at the factory?

The average turnover ratio for the firm is 6.67. This was calculated by taking the average fee for the surgery (which is $1,300.00) and subtracting it from the costs associated with delivering these services. Once this occurred, is when we divided 600 into 90 (the maximum number of procedures). This gives you a turnover ratio of 6.67. (Beirny, 2009)

The best way that this can be achieved is to have more surgeries on days when there is not much activity at the facility. This includes: Monday, Friday, Saturday and Sunday. The reason why we would focus on these areas is they will help to increase the total profit margins of the facility. As a result, the average number raw of materials at suppliers is 36 weeks. These elements are important, because they are showing how the hospital has the ability to dramatically increase their earrings and maintain their cost structure. ("Shouldice Hospital," n.d.)

Case 2: Pepe Jeans

Acting as an outside consultant, what would you recommend that Pepe do? Given the data in the case, perform a financial analysis to evaluate the alternatives that you have identified. (Assume that the new inventory could be valued at six weeks' worth of the yearly cost of sales. Use a 30% inventory carrying cost rate.) Calculate a payback period for each alternative.

The best approach is for Pepe to build the finishing facility in the UK. The reason why, is because this would give the company the capabilities of holding orders for at least six weeks and it will provide their supply chain more stability. Once this occurs, is when the firm will have greater amounts of flexibility in dealing with a host of challenges.

However, it is important to note that there will be immediate costs associated with opening and creating a consistent operating environment. While over the longer term, is when there will be a transformation in the business model of the company. If this kind of approach can be used it will allow the firm to maintain the current cost structure and increase their profit margins.

Evidence of this can be seen by looking no further than the current costs Pepe is facing with: the construction and operation of the facility in the first year (which is a total of $1.8 million). This is causing the firm's levels of outstanding debt to increase, in an effort to address the short-term needs of establishing and operating the new plant. To mitigate the impact of these effects, the company should take into account a 30% carrying rate and the total amounts of debt. Once this is complete Pepe will have borrowed 2.34 million pounds during the process. As a result, there are a number of alternative paybacks options that are available. The below chart is illustrating this. ("Carrying Cost of Inventory," 2011)

Table2: Payout Options for Pepe's New UK Finishing Facility

Monthly Payment (in pounds)

Time Frame

195,000

1

97,500

2

65,000

3

48,750

4

39,000

5

32,500

6

27,857

7

24,375

8

21,667

9

19,500

10

These figures are important, because they are illustrating how there are ten different financing options available to the company. Each one will help the firm to keep their levels of outstanding debt low. While at the same time, it is giving them the flexibility to meet the needs of customers and improve the process of delivering the final product. Over the course of time, this will help their underlying profit margins to increase. This is the point that the company can effectively meet the demands of clients.

Are there other alternatives that Pepe should consider?

The best alternative is for the firm is to establish the finishing facility in a location that is close to the manufacturing plant in Hong Kong. To do this means that we must find a location that has low labor costs and in close proximity to China. As a result there are several different countries that we have identified which o could meet the needs of the firm and reduce labor costs. The most notable include: India and China. In each of these countries their total labor costs are fraction in comparison with UK. The below tables are illustrating the labor costs for these regions of the world.

Table 3: Labor Cost for India from 2003 to 2007(in U.S. dollars)

Year

Labor Costs

2003

$.81

2004

$.85

2005

$.91

2006

$.95

2007

$1.17

("India's Organized Manufacturing Sector," 2011)

Table 4: Labor Costs for China from 2003 to 2007(in U.S. dollars)

Year

Labor Costs

2003

$.62

2004

$.66

2005

$.73

2006

$.81

2007

$1.06

("Manufacturing in China," 2011)

These different figures are important, because they are showing how the labor costs in China are fairly low in comparison with other areas. The below table is corroborating this fact by highlighting the total costs of labor and other components that are included in these number for the UK over the last two years.

Table 5: UK Labor Costs from 2008 to 2009 (in U.S. dollars)

Indicator

2008

2009

Total Hourly Compensation Costs

$35.75

$30.78

Hourly Pay for Time Worked

$24.55

$21.14

Direct Benefits

$3.69

$3.18

Social Insurance and Labor Taxes

$7.51

$6.46

("United Kingdom," 2011)

These figures are important, because they are showing the costs of labor are higher in comparison with other regions of the world. As a result, this means that Pepe will pay higher costs for running the plant vs. building it in a location that is close to Hong Kong. Therefore, the company should consider the other alternatives of opening the plant in one the locations mentioned above (India or mainland China).