Group1 Sec A Om Casestudy.docx

FOLDRITE FURNITURE CO. PLANNING TO MEET A SURGE IN DEMAND GROUP NO.: 1 Jeevan Nath – 19023 S. Keerthana – 19026 Nishant Kumar – 19034 Shyamli Soundale – 19051 Updesh Chauhan – 19057 Vishal V Bharadwaj – 19060 SECTION: A DATE OF SUBMISSION: 21-08-2019

EXECUTIVE SUMMARY: Foldrite's demand for folding and stackable chairs is unexpectedly high. It is because the company spent the previous year’s improving the product line, manufacturing quality and efficiency, enabling the customization and also developing the products into stylish and environment friendly products where it gained a competitive advantage over the other companies. In 2007 FoldRite underwent strategic changes by trimming the product lines and consolidating manufacturing plants into one, freeing up capital which led to the above mentioned changes and being better prepared during the adversity of recession than their competitors. The sales in the US and Europe were more than expected and especially in Europe the company enjoyed a competitive advantage due to weak dollar and the stylish foldable chairs introduced were preferred due to the suitability in the European market. In response to the surge in demand, Jose Ramos, VP of manufacturing looked to Martin Kelsey, production manager to develop a plan for the next six months. We compared various options such as subcontracting , overtime , inventory changes , hiring temporary workforce and changing assembly line and we concluded that with the available data that a combination of the options of overtime , subcontracting and inventory changes would be an optimal mix for their production plan.

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STATEMENT OF THE PROBLEM: Jose Ramos is the vice president of manufacturing and Martin Kelsey is the production manager, both were responsible to make a production plan for the company’s next six months. Through the forecast, they found that the demand is going to be high in the upcoming months and there is a possibility that the company cannot meet the demand with its current operational design. A plan for the next six months (short term) is needed to be made, which might reduce such risk and ensure that the company can meet the demand with the same quality standards and manufacturing efficiency. CAUSES OF THE PROBLEM: The following are the reasons that led to the increase in the demand: Strategic planning changes implemented since 2007 led to the following causes of the increase in demand: a) Lean manufacturing: The company has abandoned few of its product lines, such as stackable furniture and traditional folding chairs. These traditional products were already overflowing in the market, as these products are manufactured by other low cost foreign companies as well. Thus, Fold Rite focused on new innovative and modern technologies in this business segment. b) Product innovation: The increased popularity of the cloud chair as it provided comfortable seating that conformed to a wide variety of body shapes even for overweight people replacing the older generation folding chairs. FoldRite captured the enthusiasm for eco-friendly products and capitalized the ‘green opportunity’ which led to an increase in the demand. c) Product customization: FoldRite made customization a part of their operational design by letting customers choose seat cover patterns and colours for GreenComfort chair as well as the colour of the frame and the seat for the cloud chair. d) Providing quick service: The wide variety of customised products offered by FoldRite , shipped in less than a week and often within 48 hours , making it impossible for the offshore manufacturers to match Foldrite’s combination of customization and quick delivery. Recession: The products reported 15% of sales in 2009 from the European market because a weak dollar made the competitive American products price competitive and FoldRite got the cost advantage due to the above mentioned strategic changes ,which in turn may have led to an increase in the demand.

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Foreign market and offshore operations: FoldRite established an office and a warehouse in Gottingen, Germany at the start of 2008 to provide better customer service and faster delivery. Also, Epstein believed Europeans would respond to high quality, stylish furniture that could be stacked away, making it more practical for smaller event spaces typically in Europe. We could see the same happening from the above mentioned data for 2009.

DECISION CRITERIA AND ALTERNATIVE SOLUTIONS: Following are the various factors and their respective alternative solutions which FoldRite should consider before making any changes in their operational design because either the factors are the competitive advantages FoldRite enjoys or the strategic plans they wish to continue implementing: Retention of well-trained workforce: A) Overtime by adding a 10 hrs shift per week VS B) Increasing the workforce temporarily OPTION A) To add an extra shift of 10 hr per week for the next six months of high demand to meet the forecasted production. Assumptions: The manufacturing time per item is assumed to be the same as the time spent by skilled and unskilled labour on that particular product due to lack of relevant data. The respective table for that data is included later in the lean manufacturing decision criteria. All plants of FoldRite follow the same operational design as plant Aurora does which includes the following structure:

Factors

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Hours per Shift

10

Days per week

4

Number of Hours per Week

40

Overtime Capacity per week

50

Overtime wages

17.585

2010 6 MONTHS MAR-AUG ACTUAL DAYS 200 100 104 WEEKS 50 25 26 AVAILABLE CAPACITY (HOURS) 2000 1000 1040 COST @ 17.5 35170 17585 18288.4 OVERTIME CAPACITY (HOURS) 2500 1250 1190 Overtime COST ($)@ 26.3 65943.75 32971.9 31389.23

The advantages of using this option would be retention of skilled workforce which would be good decision as it would reduce the issue of high turnover and increased number of unskilled workforce. The experience of overtime in the short run is a onetime thing because FoldRite has seasonal demand, and the demand after the month of august does not require overtime. We ensure retention of skilled workforce and improve the labour morale by not hiring and firing temporary labour which would have been the alternate option The Disadvantage is the cost of paying overtime wages is high and may also lead to reduction in the quality but we also enjoy higher production without compromising other factors such as lean manufacturing, product innovation etc.

OPTION B) Assumptions: As we have insufficient data about the number of skilled and unskilled labour involved in the production process, we are calculating the average labour wages just as the mean of respective wages without using any weights. The same limitation is for calculating the difference in the cost of goods while choosing this option, so we are limiting the comparison to hiring cost and efficiency.

LABOR Skilled Unskilled

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WAGES PER HOUR($) 19 9

BENEFITS TOTAL WAGES($) 33% 10%

25.27 9.9 New Hired Efficiency. Average wages

HIRING COST($) 1500 50 80% 17.585

ADDITIONAL COST($)

33%

TOTAL HIRING COST ($) 1500 66.5

The regular efficiency in the manufacturing process is given as 95% where as in the above option it is reduced to 80% , also the labourers are going to get paid full wages for the 4 week training period , so this option does not sound viable for the short term period of march 2010 to august 2010 however investing on training the labour in the long run improves operational efficiency. Hence it can be concluded that the choice of investing in training the labour should be a long tern decision. Lean manufacturing: A) Subcontracting VS B) Reducing assembly time for CloudChair VS C) Changes in strategic inventory OPTION A) The option is to subcontract part of the manufacturing for stackable chairs i.e. GreenComfort, which would add an extra 20% to the cost of labour for the products but has no setup cost or commitment for minimum orders. Assumption: We lack sufficient data to observe what part of the manufacturing process can be subcontracted so we are assuming that the cost advantages with this option are proportionate to the cost advantages enjoyed while manufacturing the total demand of 2010. SUBCONTRACTING AMP $88 AMP-LABOR COST/UNIT ADVANTAGE

LABOR INCREASED @ FORECASTED COST/UNIT 20% DEMAND 2,53,570 10.59 12.708 77.41 19628853.7

COST INCURRED 3222367.56

COST INCURRED COST ADVANTAGE

19628853.70 16406486.14

From the table we can infer that it is cost effective to subcontract in the manufacturing process for GreenComfort with respect to the annual demand forecast for 2010. This money can be invested in other alternative options to add along with the above mentioned option such as paying overtime wages or investing in the assembly line to reduce time. This also frees our workforce to invest their time in production of other products and meet the required demand efficiently. OPTION B) To reduce the assembly time for the popular product CloudChair by a min. This task was usually performed by the unskilled labour and our objective was to check if reduction in the assembly time with a one time investment of $15000 in the assembly line modification will get us any cost advantage for the time being.

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Assumptions: The margin on each item is included in the average manufacturing price of that item. Also, we have additionally put a column for the option of overtime shift to see if that option is more comparable to the existing design. CLOUD CHAIR DESIGN $ BEFORE CHANGE AFTER CHANGE INCREASED SHIFT ONE TIME CHARGE ($) 15000 ASSEMBLY LINE(MIN/ITEM) 9 8 8 NO. OF ITEMS /HR 6.666666667 7.5 7.5 NO. OF HOURS AVAILABLE 560 560 600 ITEMS PRODUCED 3733.333333 4200 4500 AMP 30 59360 66780 71550 MARGIN@53% 15.9 51780 56550

We can infer from the above table that reducing the assembly time for CloudChair is not profitable in the short run whereas it may be beneficial in the long run but we do not have the future years’ forecast to quantify that. However, this option looks more promising if we include the overtime hours of 10 hours per week. OPTION C) To let the level of strategic inventory to fall below the two weeks minimum for the short term of 6 weeks. Assumption: The cost of carrying the inventory for a two week period is high and divesting it to a different stream is more economical as we would be enjoying opportunity cost benefits. The number of production days in a month range from 14 to 18 which is comparable to the two week demand inventory level we maintain and hence it would be better to fall back on that as we do have assured supply of raw materials for the same and we don’t necessarily have to stack a demand comparable to a month in 2 week period. We can utilize this cost saved for a different ventures which do include onetime investments such as reducing the assembly time for the CloudChair or paying over time wages to meet the increased demand.

RECOMMENDED SOLUTION, IMPLEMENTATION AND JUSTIFICATION: We recommend to combine the following three options while creating the operational plan for the next six months: 1) Subcontracting part of the manufacturing for stackable chairs i.e. GreenComfort, which would add an extra 20% to the cost of labour for the products but has no setup cost or commitment for minimum orders.

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2) To add an extra shift of 10 hr per week for the next six months of high demand to meet the forecasted production which will include FoldRite paying overtime wages of 1.5x but will ensure skilled employee retention which is a strategic goal. 3) To let the level of strategic inventory fall below the two weeks minimum for the short term of 6 months in terms of fully assembled and partially assembled products. Limiting to stacking the inventory with partially assembled products such as unpainted frames which have to be customized is more advantageous than stacking popular paint choice of the respective products.

IMPLEMENTATION PROCESS: 1) Communicating with the work force about the overtime requirement, their schedule for the next six months and the wage benefits associated with this choice. 2) Aligning the monthly forecast with the reduced inventory stock of partially assembled products. We will ensure the reduced inventory stock consists mostly of the products which have to be customised such as unpainted frames and not stock it with fully assembled products based on popular choices of paint to avoid unnecessary risk associated with volatile demand. 3) Checking what proportion of manufacturing process should be ideal for subcontracting and implement the decision immediately. 4) Aligning the in house capacity of production for other items to the subcontracting product ( GreenComfort ) to reduce any idle time and ensuring efficiency in the production process. 5) Use the cost advantage generated during subcontracting process to pay over time wages and ensure that we do not require any other investments. The investments may have to be taken at a credit of 12% p.a. which cannot be afforded by FoldRite in the current scenario. 6) Creating a synergy between overtime production and subcontracting process. We have to make sure the overtime manufacturing does not become a continuous process so that we don’t produce low quality products.

SUBCONTRACTING AMP $88 AMP-LABOR COST/UNIT ADVANTAGE

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LABOR INCREASED @ FORECASTED COST/UNIT 20% DEMAND 2,53,570 10.59 12.708 77.41 19628853.7

COST INCURRED COST ADVANTAGE

COST INCURRED 3222367.56 19628853.70 16406486.14

2010 6 MONTHS MAR-AUG ACTUAL DAYS 200 100 104 WEEKS 50 25 26 AVAILABLE CAPACITY (HOURS) 2000 1000 1040 COST @ 17.5 35170 17585 18288.4 OVERTIME CAPACITY (HOURS) 2500 1250 1190 Overtime COST ($)@ 26.3 65943.75 32971.9 31389.23

Conclusion: After analysing this case study and quantifying the alternative options we find contradictions where it is mentioned already has sufficient capacity and resources to meet the production demand and they should try to reduce the idle time and capacity, where as we see the production manager Martin Kelsey gathering relevant information from all the associated departments to meet the expected demand efficiently in the short run. The department heads want to make various changes for example reducing the assembly time for CloudChair or training the unskilled labours .We tried to segregate the choices on the basis of their viability either in the short run or the long run and quantified them using the available data making necessary assumption. We found that combining the options of overtime shifts , subcontracting and managing the strategic inventory level provide an optimal mix for the manufacturing process than other alternative options their production manager was considering.

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