Question
Refer to the Megamin Mining case study .
MM uses just-in-time (JIT) production in its Oil Production Division.
The long-term demand for oil is usually predictable, and production is reliable unless major problems occur. In 2020, however, there was an unexpected decrease in demand for oil. Uncertainties in the world economy and responses to climate change now make predictions more difficult.
MM has prepared a sales forecast for its oil production for 2022 and 2023 (Table 2).
Table 2: Sales forecast for oil production for 2022 and 2023 (millions of barrels)
§ calculated using a four-quarter moving average based on six years of historic data
† calculated by comparing actual sales with a four-quarter moving average
In 2020, MM had some major problems:
- A catastrophic fire occurred at one of its oilfields.
- The gold mine in Egypt collapsed, trapping 23 miners.
- It experienced a cyber-attack on its computer network.
- An earthquake in Chile damaged the country’s transport system.
In response to these problems, MM had to rely on its contingency planning and its crisis management procedures.
JG Mining (JG) wants to buy MM’s tar sands mining operation for $50 million, but the board of directors are divided. MM recently invested $15 million in their tar sands operation in addition to the original $30 million set-up cost in 1986. Production is at designed capacity, and, although the long-term average rate of return (ARR) for the tar sands operation is below those of most of MM’s other investments, it provides a reliable source of income. However, MM has difficulty selling sulphur, a by-product of tar sands production.
Employees at the tar sands operation are against selling the operation to JG. However, the income from the sale would help MM finance other investments, such as lithium mining, and the sale could help improve MM’s corporate image. MM’s Finance Director, Ethan, estimates that the net present value (NPV) of the tar sands operation is $46 million.
a. Define the term just-in-time (JIT) production.[2]
b. With reference to Table 2, explain one benefit and one limitation for $M M$ of using sales forecasting.$[4]$
c. With reference to $M M$, explain the difference between crisis management and contingency planning.[4]
d. Using information from the case study and additional information above, discuss whether MM should sell its tar sands mining operation to JG.
▶️Answer/Explanation
Ans:
Candidates can answer in terms of JIT production where the focus is on processes that reduce the time within production systems (work-in-progress) and response times with suppliers/customers. The mention of lean production (of which JIT is a part) is useful.
Candidates can also answer in respect of managing stocks (raw materials, work-in-progress, finished products) so that these are available exactly when needed and not before. Award a max of [1] if the answer is only related to JIT stock control.
Candidates can use ‘inventories’ rather than ‘stocks’.
Award [2] for a complete definition.
Award [1] for some understanding of JIT e.g., it mentions ‘lean production’ or ‘stocks’ but not the idea of reducing to a minimum.
Award a max of [1] if the answer is only related to JIT stock control.
a.
Benefits
Businesses need to plan so forecasts are important
Oil industry has been predictable so suitable for the sales forecasting technique and helpful to MM
trend is clearly downward, and MM need to plan for this
Energy demand is clearly seasonal so broad trends not enough
Better workforce planning: planning staff required
Better cash flow management: considering “cyclical and seasonal variation” factors
Increased efficiency, assisting production department in knowing the number of goods to produce and when to produce them
Better tracking and finding problematic issues (deviations), etc.
Limitations
Assumes future is same as past – clearly not the case with unexpected decrease in demand and that long-term predictions are more difficult (economic change and global warming)
Major problems can affect predictions e.g., strikes
Award [1] for one benefit or one limitation, up to a total of [2].
Award [1] for putting each benefit/limitation into context, i.e., reference MM/ Table 2 up to a total of [2].
i.e Award [3] for answers that put a benefit and/or limitation into context but does not make use of Table 2 in relation to sales forecasting for MM.
Only award [4] for answers that make explicit use of Table 2 in relation to sales forecasting for MM.
b.
Contingency planning; Planning how to respond to unlikely events that are a threat to a business
Forward looking
MM are likely to have plans for broad issues such as strikes, fires, floods, earthquakes, failure of IT systems
Will have gathered relevant information
Decide which problems are disruptive and which are critical
Plan likely to be tested and will involve training
Contingency planning can be used to help improve crisis management
Crisis management: The process by which a business deals with a major event that has happened and poses a threat to the business
Dealing with an actual not a possible threat
Information will be available as to the extent of the crisis. e.g., MM may not have planned for so many miners to be trapped underground in Egypt, nor the extent of the Chilean earthquake and the response of the Chilean government
The plan for an oilfield fire may not have been so extreme as catastrophic
Actual events can help future contingency planning
Accept any other relevant difference.
Context comes from issues identified in the case and the nature of the business.
Award [4] for a clear distinction between the two with effective use of the context.
Award [3] if both crisis management and contingency planning are understood in context, but there is no clear distinction made.
Award [2] if there is clear understanding of contingency planning and crisis management but no context is shown.
Award [1] for limited understanding.
c.
Refer to Paper 1 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Arguments for the sale:
It provides finance for expansion into Lithium mining which looks very positive
There are local issues with First Nation Canadians which does not fit in with MM’s ethical values and could bring bad publicity. Selling could improve corporate image
Is $50 million enough if they have already spent $45 million?
Lower than average ARR
MM has difficulty selling Sulphur, a by-product of tar sands production
How about NPV ($46m); is $50m enough?
Arguments against the sale:
Production at capacity and has no major issues, more so than other operations
It provides a reliable source of income – important if other commodities have fluctuating prices
They have invested $15 million, and the mine is possibly worth more than $45million so is $50 million enough?
Employees at the tar sands operation are against selling the operation to JG
Judgement/evaluation
Depends on whether they need the money
Is the return strong enough?
Can they afford to upset the workforce?
Who will ultimately make the decision? What are their views?
If the business is doing well, why sell it?
Final judgement should relate to points raised.
Candidates can use information from Section A and Section B.
Candidates who attempt to make use of Section B information may not write with the same level of depth but should be rewarded positively.
Accept reasonable alternative answers.
Marks should be allocated according to the paper 1 markbands for May 2016 forward section B.
Award a maximum of [4] for a purely theoretical answer or with no effective use of the case (e.g., only repeating case material without development).
Award a maximum of [5] for a one-sided answer.
Award a maximum of [6] if options are considered but there is limited use of data or if there is good analysis of data with limited consideration of issues.
Award a maximum of [8] if options are considered and there is good use of data but there are no significant judgements.