Question 1b
Rezillos: Company information
Rezillos Engineering (Rezillos) is a listed company, manufacturing pumps and valves for use in the chemical industries.
These highly engineered components must be integrated into Rezillos’ customers’ own plant and equipment. The company has grown significantly via acquisition in the last 20 years to become a worldwide business.
The overall objective of the company is ‘to deliver sustainable growth in value to the shareholders by working in partnership with customers to deliver innovative and value-for-money solutions utilising the skills of the highly-trained workforce.’
The chief executive officer (CEO) has recognised that the company has been so focused on making acquisitions that it has not improved other aspects of management. He has asked you to produce a report for the board of Rezillos to cover a number of areas.
Performance reporting system
The CEO would like an evaluation of the performance reporting system used at the strategic board level by Rezillos. The current performance report used for the annual review at board meetings is given as an example (Appendix 1).
Customer survey
At the most recent round of meetings with stock market analysts, the board has been criticised about a customer survey whose results were announced at these meetings. The criticisms centred on the method of calculation, sampling and the disclosures in the press release. The board of Rezillos is concerned by the impact of this on their reputation in the market and needs to understand whether the criticism is justified. The press release and some further internal details
about the method and the results of the customer survey are given in Appendix 2.
Benchmarking proposal
Rezillos has three divisions based in its three countries of operation (Beeland, Teeland and Veeland). In order to drive forward the integration of the divisions, the CEO has decided that they should be benchmarked against each other.
He is aware that this is not the only method of benchmarking and so, initially, wants you to provide an understanding of the different types of benchmarking and an evaluation of the usefulness of the proposed type of benchmarking for the divisions. Finally, he has supplied data in Appendix 3 to allow you to complete the benchmarking exercise and comment on the metrics used and the results.
It is now 1 December 20X8.
Required:
Write a report to the board of Rezillos to:
(b) Assess the analysts’ criticisms of the customer survey results in Appendix 2. (9 marks)
| Appendix 1 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Rezillos | Year to 30 September | |||||||
| Beeland | Teeland | Veeland | Total | Total | Growth | Profit as a | % of revenue | |
| Company | Industry average | |||||||
| 20X8 | 20X8 | 20X8 | 20X8 | 20X7 | ||||
| $m | $m | $m | $m | $m | ||||
| Revenue | 738 | 2,030 | 923 | 3,691 | 3,504 | 5·34% | ||
| Cost of sales | 497 | 1,391 | 601 | 2,489 | 2,363 | |||
| –––– | –––––– | –––– | –––––– | –––––– | ||||
| Gross profit | 241 | 639 | 322 | 1,202 | 1,141 | 32·6% | 29·8% | |
| –––– | –––––– | –––– | –––––– | –––––– | ||||
| Other operating costs | ||||||||
| Selling and distribution costs | 89 | 208 | 101 | 398 | 380 | |||
| Administration costs (note 1) | 74 | 171 | 83 | 328 | 321 | |||
| –––– | –––––– | –––– | –––––– | –––––– | ||||
| Total | 163 | 379 | 184 | 726 | 701 | |||
| –––– | –––––– | –––– | –––––– | –––––– | ||||
| Operating profit | 78 | 260 | 138 | 476 | 440 | 8·18% | 12·9% | 9·7% |
| –––– | –––––– | –––– | –––––– | –––––– | ||||
| Finance costs | 88 | 88 | ||||||
| –––––– | –––––– | |||||||
| Group profit before tax | 388 | 352 | 10·5% | |||||
| Tax | 78 | 71 | ||||||
| –––––– | –––––– | |||||||
| Group profit after tax | 310 | 281 | 8·4% | |||||
| –––––– | –––––– | |||||||
| Return on capital employed (ROCE) | 8·64% |
Note
1. Administration costs contain an allocation of product development costs to each division.
Appendix 2
Press release from Rezillos: Customer survey results
Rezillos has performed an extensive survey of its customer base and is proud to announce an average customer rating of 7·0 (out of 10). This bears positive comparison with a leading competitor of Rezillos who performed a survey last year scoring an average rating of 6·0.
The survey asked for a customer rating on a scale of 0 to 10, where 10 was exceptional, 5 was good and 0 was unacceptable.
End of press release
Extract from Rezillos internal document on calculation of customer rating
The survey was carried out by the staff at head office who sampled customers from all three divisions.
Raw data
| Customer number | Rating | Account size ($m) | Division |
|---|---|---|---|
| 1 | 10 | 1·5 | Beeland |
| 2 | 9 | 3·3 | Beeland |
| 3 | 9 | 2·1 | Beeland |
| 4 | 6 | 6·4 | Beeland |
| 5 | 6 | 152·0 | Teeland |
| 6 | 6 | 11·2 | Beeland |
| 7 | 6 | 10·5 | Beeland |
| 8 | 6 | 74·0 | Veeland |
| 9 | 5 | 21·0 | Veeland |
| Other notes: |
|---|
| 1. The company has 180 customers in total. |
| 2. The customer number is an identification number for administrative purposes. |
| 3. Each division has its own marketing and customer support function although product development is a head office function. |
| Appendix 3 (all data is for 20X8 unless otherwise stated) |
|---|
| The benchmarking exercise is partly complete with the metrics requiring to be calculated identified by question marks. |
| Beeland | Teeland | Veeland | |
|---|---|---|---|
| Benchmarking metrics | |||
| Growth of market | 8·5% | 3·2% | 5·0% |
| Revenue growth | 12·5% | 3·2% | 4·8% |
| Operating margin | 10·6% | 12·8% | 15·0% |
| Inventory days | 162 | 162 | ? |
| Order book growth | 5·2% | 5·3% | ? |
| Number of face-to-face interactions with division’s top 10 key customers | 260 | 120 | 40 |
| Percentage of revenue from new products introduced in the last three years | 24·9% | 29·0% | ? |
| Reduction in incident rate | 3·4% | 0·0% | ? |
| Utilisation of learning and development programme | 1·20 | 1·26 | ? |
| Notes |
|---|
| 1. The industry standard method of calculating incident rate is: |
| Incident rate = number of incidents per year x 200,000/number of employee labour hours paid |
| 2. The company’s employees work on average 40 hours per week for 50 weeks per year. |
| 3. Utilisation of learning and development programme is measured by the number of training days per employee. |
| 4. Key customers are designated by the divisional management. |
| 5. A single inventory management system has been implemented across the whole company. The following data has been collected to assist in the completion of the benchmarking exercise: |
| Veeland | |
|---|---|
| Revenue from new products introduced in the last three years ($m) | 163 |
| Cost of sales ($m) | 601 |
| Inventory ($m) | 267 |
| Number of incidents (20X8) | 68 |
| Number of incidents (20X7) | 74 |
| Number of employees (20X8) | 6,600 |
| Number of employees (20X7) | 6,250 |
| Order book ($m) 20X8 | 932 |
| Order book ($m) 20X7 | 885 |
| Number of training days | 6,450 |