Carlos set up RT in 2010 with a small factory to weave and print fabrics used in the fashion industry. RT is located in Brazil, which is one of the world's largest producers of cotton cloth. However, Brazil exports very little as nearly all cotton cloth is used within the country. Timeline of RT 2015 RT becomes a private limited company. Employs more fabric designers. 2016–2018 Improves operations procedures in the factory to increase efficiency and productivity (see Appendix 1). 2019 Take-over of three cotton farms, which secures RT's supply of raw material (see Appendix 2). 2021 Relocates to a larger factory and purchases technologically advanced cotton processing machines (see Appendix 3). 2022 Takeover of Cabana Fabrics (CF), a smaller competitor with two cotton farms (see Appendix 4). A new direction Brazil is a middle-income country and is increasing its exports. One of Brazil's most important exports is soya beans, which make up much of the world's supply. Carlos believes there are several opportunities to diversify to allow for further growth and expansion. RT could enter different fabric markets, start to export its products or develop new products with its farm and factory resources. Carlos aims to achieve 'profit through diversification'. He wants to propose a new business strategy for the next five years to the Board of Directors. Carlos is planning to undertake a PEST analysis but needs advice on this and other approaches he should use to develop RT's new business strategy. Appendix 1: Lean production – extracts from 2018 Operations report RT implemented lean production in its cotton processing factory which has increased efficiency. The cost savings which have resulted from introducing several lean production techniques have increased profit margins. However, there have been some supply interruptions from late deliveries of cotton. Annual labour turnover has increased by 5%. Appendix 2: 2019 Brazil fabric industry magazine article Last week there was a take-over of three of the largest cotton farms in the north of the country by fabric manufacturer RT. The deal, thought to be worth $3.5m, will see RT secure its supply of cotton and enter the farming industry for the first time. Since its establishment in 2010 as a fabric printing firm it has grown so that it weaves its own fabric and now grows its own cotton. This should enable RT to increase its production and make it one of the top five fabric producers in the country. However, a business analyst commented that RT must be aware that managing farms is a very different challenge to managing a factory. Appendix 3: RT's 2021 investment in its new factory and machines • RT's mortgage debt increases to finance the purchase of the factory. • RT's fabric production capacity increases by 66%. • Machines costing $1.5m are financed through a share issue. • Critical path analysis (CPA) helps manage the purchase and installation of machines. Appendix 4: Selected accounting data for RT (before and after the 2022 takeover of CF) [Table: Selected accounting data for RT (before and after the 2022 takeover of CF)] Answer both questions. Evaluate the extent to which RT's operations strategy has supported the success of the business from 2015 to 2023.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] Capital intensive and labour intensive operations.
2. [1] Operations methods: job, batch, flow, mass customisation.
3. [1] Buffer inventory – holding inventory just in case.
4. [1] Supply Chain Management – the takeover allowed control of the supply chain.
5. [1] Lean production – aims to cut down waste during production, including inventory holding costs.
6. [1] Lean production methods – Kaizen, quality circles, simultaneous engineering, cell production, JIT manufacturing and waste management.
7. [1] JIT - components and other supplies arrive just as they are needed on the production line.
8. [1] Kaizen - continuous improvement.
9. [1] Capacity utilisation and outsourcing.
10. [1] Information Technology (IT) and Artificial Intelligence (AI).
11. [1] Process innovation: changing current processes or adopting new ways of producing products or delivering services.
12. [1] Enterprise Resource Planning (ERP) integrates orders, materials, labour and distribution to minimise cost, reduce inventory levels and waste.
13. [1] Critical Path Analysis (CPA) ensures all activities are taken in correct sequential order to meet deadlines and speed up project.
14. [1] Economies of scale – when output increases average costs fall.
15. [1] Between 2015–18 lean production techniques used to increase productivity and efficiency.
16. [1] 2019 purchase of farms secured supply chain for the business making it one of the top five producers in the country.
17. [1] 2021 purchase of new factory sees increase in capacity by 66%.
18. [1] Also increase in capital intensive production with more technically advanced cotton processing machinery purchased.
19. [1] RT uses CPA to help plan the purchase and machinery upgrade.
20. [1] 2022 purchase further increases scale of the business.
21. [1] External growth through backwards vertical integration in 2019.
22. [1] Supply interruptions from late deliveries of cotton.
23. [1] $1.5m spent on machines through share issue.
24. [1] RT can supply its own factories with cotton.
25. [1] Organic growth in 2021.
26. [1] External growth through a takeover in 2022.
27. [1] Increasing Profit margin.
28. [1] Lean production techniques may have had the desired impact as reports of efficiency and productivity have suggested improvements, but could there be other factors at play – training of staff, better suppliers?
29. [1] Lean production puts a lot of pressure on staff to identify and make improvements which could lower morale and thus retention rates if they felt under pressure.
30. [1] Profit margins have increased, and this could have enabled them to retain profits for the purchase of the cotton farms in 2019.
31. [1] The purchase of the farms is a form of diversification – they do not currently run farms and therefore there could be issues with understanding how to efficiently run the farm and integrate in RT business model.
32. [1] The increase in scale and capacity by 66% may not be needed if they do not have the customers to buy the fabrics they produce.
33. [1] Critical Path Analysis would have helped identify critical tasks to ensure the new factory and machinery were ready on time so as to not cost more than it needed to.
34. [1] RT is highly geared and this could mean they have overstretched themselves in their recent expansion of operations and have few opportunities left to invest in other functional areas in the future.
35. [1] The use of lean production techniques will have supported the growth of the business as it would have allowed them to become more efficient – ultimately helping them save money for future growth. However, it has taken three years to implement the lean production techniques which seems like a long time, was there resistance from the staff which has meant the benefits from increased profit margins could have been bigger if this had happened faster?
36. [1] Has JIT had all the benefits they planned? There have been 'supply interruptions in cotton' which is out of their control and would disrupt any JIT delivery plans they have had.
37. [1] Has Kaizen (continuous improvement) been sustained and used across all sites by 2023? As RT has increased in size have they been able to implement this across the bigger sites? Have acquired businesses been open to changes in operational practices to get the efficiency in their businesses?
38. [1] The mergers/takeovers have helped RT secure their supply and expand operationally but did RT have problems with cotton supply – did they need to take over the farms? Most fabric stays in the country so there is not as much market growth or as many opportunities for them, would they have been better marketing their fabric lines and increasing custom that way?
39. [1] The investment in the new premises in 2021 has helped them update and grow but if capacity has increased by 66%, have they got the customers to utilise this capacity? Have they got too big too quickly? Will this lead to diseconomies of scale?
40. [1] Have any of the growth opportunities led to economies of scale and the cost savings they bring? Profits have fallen and gearing has increased so is the business benefitting from being this size?
41. [1] Financially speaking the purchase of the new premises in 2021 and the competitor in 2022 have put a strain on the business. Gearing increased although it is now starting to come down, profits fell, although return on capital is now starting to recover. Does the business now need to consolidate until the ratios have improved? How do shareholders feel about this at the moment? Will they want to pursue further operational strategies that put pressure on the finances?
42. [1] An overall judgement on whether the operational strategy has supported the success of the business will be needed.
43. [0] Accept all valid responses.