operation management
TRANSCRIPT
Operation Management
FoldRite Case Study
Executive Summary
In this case studies, we seek to understand the problem faced by FoldRite and the difficulties
that Martin Kelsey is facing and to provide recommendation for him.
Our finding:
FoldRite exist in a highly competitive environment.
Missed delivery would result in loss of order.
The loss of productivity and yield because of high turnover among factory workers.
Increasing proportional of inexperience workers results in the increase of lead time.
The Demand for FoldRite products was seasonal
Our recommendation:
We recommend 6 strategies that were analyse to provide the right choice for Martin Kelsey to
implement. The 6 strategies are Chase, Level, and Mixed strategies, Subcontracting,
Overtime and Change in design. We focus mainly on Chase, Level and Mixed Strategies as
they were the main principals in Operational Planning. We finally decided that the company
should implement the mixed strategy base on financial analysis and tradeoffs of all the
strategies.
Introduction
At the start of 2010, FoldRite had three major categories with one product each- AlStrong,
GreenComfort and CloudChair. AlStrong, a folding table in which recycled aluminum
replaced the plastic top of the preceding generation tables, accounted for the largest projected
share of the company’s total revenues, at 42%. GreenComfort, a stackable chair upholstered
with a special washable fabric, was expected to generate 34% of the total revenues. Finally,
CloudChair, a new folding chair that conformed to a variety of body shapes, was expected to
provide the remaining 24% of the revenues, including a large portion of the company’s
growth.
The demand for FoldRite furniture is seasonal and fairly stable, increasing in the
spring/summer months. However, the development of the CloudChair (which won a number
of design awards in 2009) as well as the increasing relevance of eco-friendly products led to
an unexpected surge in demand for the company in early 2010. The company had to optimize
its resources (while meeting product quality standards and delivery schedules) and identify
the strategy that would best allow it to meet the unexpected demand. The five strategies it
contemplated were: Overtime, Subcontracting, Hiring New Workers, Training Existing
Workers or Changing the Design.
Financial Costing:
Financial costing is an important decision factors as it will assist the top management to make
potential trade-off to meet the demand of customer. The highest priorities that FoldRite has to
meet is the to ensure that it is able to meet the two weeks delivery time period, as any delay
will lead to loss of goodwill of customer. Delay in delivery will also to lead to increase
competition from rival companies, therefore customer demand must be met and no disruption
to the production line.
Level Strategy: Using Inventory to meet supply and demand
Assumption made by the group: Capacity is able to meet any demand fluctuation,
Formulae for Level Strategy:
Average Demand= Total Demand/ Total month.
Average Demand per day= Average Demand/ Number of production day.
Labour Required (Skilled) per month= Average Demand per day x time taken to produce one
unit x available production hours.
Labour Required (Unskilled) per month= Average Demand per day x time taken to produce
one unit x available production hours.
Cloud Chair AI Strong Green Comfort
Average
Demand/
Month
43690 25576.33 21130.83
Average
Demand/ Day
2622 1534.58 1267.85
Labour
Required
(Skilled)
2622x 2/60x 1/10= 8.74=
9
1534.58x
12.8/60x1/10=
32.7= 33
1267.85x13/60x1/10=
27.4= 28
Labour
Required
(Unskilled)
2622x 9/60x 1/10= 39.3=
40
1534.58x 28/60x
1/10= 71.6= 72
1267.85x 31/60x1/10=
65.5= 66
Total Skilled
Labour
9 +33+28= 70.
Total Unskilled
Labour
40+72+66= 178
Total Salary
(Skilled)
70 labours x10 hours x
(200/12 days) x $25.27=
$ 294816.66
Total Salary
(Unskilled)
178 labours x10 hours x
(200/12 days) x9.9= $
293700
Total Salary per
month
$ 294816.66+ $ 293700=
$ 588516.66
Salary for 6
months
$ 588516.66x6 months= $
3,531,099.96
Chase Strategy: Hiring of New workers
Month Average Skilled Average
Unskilled
Number
of
Skilled
Number of
Unskilled
Total
Salary
March 70 178 69 174 $ 623920
April 70 178 81 212 $ 746219
May 70 178 89 231 $
680389.5
June 70 178 92 241 $
847993.2
July 70 178 86 229 $
766025.6
August 70 178 80 207 $ 692053
Additional
Skilled
Labour
92-70(Average)= 22
Additional
Unskilled
Labour
241-178(Average)=63
Hiring Cost
for Skilled
22x$ 1500= $ 33000
Hiring Cost
for Unskilled
63 labour x $ 66.5= $
4189.5
Total Hiring
Cost
$ 33000+ $ 4189.5= $
37185.5
Total Salary
for 6months
(include hiring
cost)
$ 623920+$ 746219+$
680389.5+$ 847993.2+ $
766025.6+$ 692053+$
37185.5= $ 4393729.8
% increase of using chase strategy= [(Chase Salary- Level Salary)/ Level Salary] x 100
= [($ 4,393,729.8 - $ 3,531,099.96)/ $ 3,531,099.96] x 100
= 24.42 %
Mixed Strategy: Using of both Inventory and hiring new workers to meet demand
Cloud Chair:
Month Jan Feb Mar Apr May Jun Jul Aug
Average Dd 2622 2622 2622 2622 2622 2622 2622 2622
Demand 280 1000 2500 4100 4350 4400 4800 3950
Qty on hand 2342 3964 4086 2608 880 (1258) - -
Al Strong:
Month Jan Feb Mar Apr May Jun Jul Aug
Average Dd 1535 1535 1535 1535 1535 1535 1535 1535
Demand 1176 1190 1500 1650 1900 2000 1800 1750
Qty on Hand 359 704 739 624 259 (206) - -
Green Comfort:
Month Jan Feb Mar Apr May Jun Jul Aug
Average Dd 1268 1268 1268 1268 1268 1268 1268 1268
Demand 1060 1102 1206 1400 1500 1550 1400 1250
Qty on Hand 208 374 382 250 18 (264) - -
Month Mar Apr May Jun Jul Aug
Salary 588516.66 588516.66 588516.66 847933.2 766025.6 692053
Total Salary (including
hiring cost)
$ 588516.66+ $ 588516.66+ $
588516.66+ $ 847933.2+ $
766025.6+ $ 692053+
$ 37189.5 (hiring cost) = $
4108751.28
% increase of using mixed strategy = [(Mixed Salary- Level Salary)/ Level Salary] x 100
= [(4,108,751.28- 3,531,099.96)/ 3,531,099.96] x100
= 16.35 %
Subcontracting: Paying other parties for work done
Assumption made by the Group: Costing is based on level strategy
Subcontracting Cost = 20% on top of the labour cost + labour cost based on level strategy
= 20/100 x 3,531,099.96 + 3,531,099.96
= $4,237,319.952
Overtime: Instead of hiring more workers, more working hours required on actual staff.
Assumption made by the group: Output/Average demand is based on level strategy
Cloud chair:
Average demand per day : 2622 / (200/12) = 157.32
Additional demand for 4 (Friday)days = 157.32 x 4
= 629.28
= 630
Note: If Overtime will to implement in June, demand will not be met. Therefore overtime
will start in the month of March.
Month March April May June July August September
Average Demand 2622 2622 2622 2622 2622 2622 2622
Actual Demand 2500 4100 4350 4400 4800 3950 2000
Overtime 630 630 630 630 630 630 630
Qty on Hand 4716 3868 2770 1622 74 (624) 628
Based on the chart, Overtime will need to be carried out through the month of September.
Al Strong:
Average demand per day : 1535 / (200/12) = 92.1
Additional demand for 4 (Friday)days = 92.1 x 4
= 368.4
= 369
Month March April May June July August September
Average Demand 1535 1535 1535 1535 1535 1535 1535
Actual Demand 1500 1650 1900 2000 1800 1750 1500
Overtime - - - 369 369 -
Qty on Hand 739 624 259 163 267 52 87
Green Comfort:
Average demand per day : 1268 / (200/12) = 76.08
Additional demand for 4 (friday)days = 76.08 x 4
= 304.32
= 305
Month March April May June July August
Average
Demand
1268 1268 1268 1268 1268 1268
Actual Demand 1206 1400 1500 1550 140 1250
Overtime - - 305 305 - -
Qty on Hand 382 250 323 346 214 232
Overtime Cost:
Cost for Cloud Chair: Skilled + Unskilled
= (9 x 10 x 4 x (25.27 + 25.27 x 0.5) x 6 ) + (40 x 10 x 4 x (9.9 + 9.9 x 0.5 ) x 6)
= $81,874.8 + $142,560
= $224,434.8
Cost for Alstrong: Skilled + Unskilled
= (33 x 10 x 4 x (25.27 + 25.27 x 0.5) x 2 ) + (72 x 10 x 4 x (9.9 + 9.9 x 0.5 ) x 2)
= $100,069.2 + $85,536
= $185,605.2
Cost for Alstrong: Skilled + Unskilled
= (28 x 10 x 4 x (25.27 + 25.27 x 0.5) x 2 ) + (70 x 10 x 4 x (9.9 + 9.9 x 0.5 ) x 2)
= $84,907.2 + $83160
= $168,067.2
Total Overall cost: $224,434.8 + $185,605.2 + $168,067.2
= $578,107.2
% of increase = (578,107.2/3531099.96 ) x 100%
= 16.37%
Notes: For cloud chair, overtime may be able to meet the demand on the month of August.
Therefore, there may be a need to hire temporary staff, if not, backlog will occur.
Hiring to meet the demand of August: Additional of 624 cloud chair
Skilled: (624 x 2/60) = 2.08 = 3 workers
Unskilled: (624 x 9/60) = 9.36 = 10 workers
New Cost: Hiring Cost + August Salary
= (3 x 1500) + (3 x 10 x 17 x 25.27) + (10 X 66.5) + (10 x 10 x 17 x 9.9)
= 4500 + 12,887.7 + 665 + 16830
= $34,882.7
New % increment: (34,882.7 + 578107.2)/3531099.96 x 100%
= 612,989.9/35310996.96 x 100%
= 17.35%
Change of Design: Reduction in production time
Assumption made by the group: Output is based on level strategy (2622), The earliest setup
month will be in March.
Workers required will be based on the demand of April, if workers required are based on the
demand of May; there will be a huge amount of inventories stored at the warehouse.
Month January February March April May June July August
Average Demand 2622 2622 Set-up Month 4100 4100 4100 4100 4100
Actual Demand 280 1000 2500 4100 4350 4400 4800 3950
Qty on Hand 0 3964 1464 1464 1214 914 214 364
Number of required workers based on demand of 4100 cloud chairs
Skilled workers: (4100 x 2/60mins)/10hours = 13.6 = 14workers
Unskilled workers: (4100 x 8/60mins(new production times))/10hours = 54.6 = 55workers
Hiring Fee: (New requirement - Actual requirement ) x hiring cost
Skilled: (14 - 9) x 1500 = 7500
Unskilled: (55 - 40) x 66.5 = 997.5
Total hiring fee: 7500 + 997.5 = 8497.5
Total Cost: March to August
March: Set Cost + Hiring Cost + Actual labour salary
= 15000 + 8497.5 + (9x10x18x25.27) + (40x10x18x9.9)
= $135,714.7
April:
14x10x18x25.27 + 55x10x18x9.9
= 63680.4 + 98010
= $161,690.4
May:
14x10x15x25.27 + 55x10x15x9.9
= 53067 + 81675
= $134741
June:
14x10x18x25.27 + 55x10x18x9.9
= 63680.4 + 98010
= $161,690.4
July:
14x10x18x25.27 + 55x10x18x9.9
= 63680.4 + 98010
= $161,690.4
August:
14x10x17x25.27 + 55x10x17x9.9
= 60142.6 + 92565
= $152,707.6
Total Cost for Cloud Chair: $908,235.5
Total Cost for Alstrong: $1,498,312.5
Total Cost for Green Comfort: $1,920,635
Total Overall Cost for 6months: $4,327,183
%increase: (4,327,183 - 3531099.96) / 3531099.96 x 100
= 22.54%
2) What are the risks? How does each of the options accommodate changes in economy
and environment?
Economy Stability
With economic stability, consumers have higher spending power therefore demand would
increase all over the market. Therefore various methods would need to be employed however,
the various strategies would have its own risk and disadvantages too.
During economy stability, when unemployment rate is low, it would be harder to implement
chase and mixed strategy due to workers having higher bargaining power and better choices
in choosing a place to work, eventually hiring cost would be higher. Looking in terms of level
Strategy, it may not have adequate capacity base upon the surge of demand which might
result in backorders and loss of customer goodwill. With the surge of demand, the company
would want to subcontract to have additional capacity but with economic stability the
subcontract would have more bargaining power and its consequence would involve higher
cost. Overtime would be the only best option as it does not have any financial implications on
the company.
Economic Recession
When economic recession is occurring, there would be lesser spending power of the
consumers which would result in low demands all over. Unemployment rate would increase
during the period of recession. Therefore, certain of the strategies would be able to benefit.
The chase and mixed strategy would be easier to implement as people would be looking for
jobs even though if it is for a short term. The company would have higher bargaining power
in terms of recruiting workers as a result hiring cost is lesser. In terms of level strategy, there
would not be much influence on financial costing or production capacity requirement. If there
is a need for subcontracting, it would be cheaper as subcontractors would be looking for
business all around therefore lowering their asking price. With relation to overtime, due to
low demand required there would be lesser need for overtime.
3) How would you weight the options in terms of nonfinancial implications ? ( pros
&cons)
Looking in terms of non-financial implications, one must look through the various tradeoffs
that would affect the workers effectiveness, morale issues and also productivity of the
company. A decision must be made based on the results of the least influence on the
company’s performance. For each individual strategy we would be listing out its pros and
cons to further illustrate and eventually how a decision is being made.
Chase Strategy
Pros: Workers are hired during periods of high demand for a short period of time; therefore
there is no additional working hours for the actual staffs of the place therefore normal
working schedules are followed and not affecting worker’s productivity capability.
Cons: Production has to be on time without any delay which means workers must be
consistent therefore slack is not acceptable. Looking at the constant hiring and firing of staff,
it might affect future employment capability as people would know that job stability is based
on contractual terms.
Level Strategy
Pros: The workers would not need to worry about job security if they are able to meet the
constant production capacity therefore; lesser stress is on the workers which would result in
better work performance.
Cons: Workers maybe underutilize during certain periods due to previous inventory being
able to cover future demand, therefore the company is losing value best on terms of
productivity of workers.
Mixed Strategy
Pros: Is the mixture of both pros of mixed and level strategy.
Cons: Implementation of this strategy is hard if there are difficulties in forecasting, as
accurate data is needed for the mixed strategy to work perfectly.
Overtime
Pros: Over fully utilization of workers and machines and having increase productivity.
Cons: Such as long periods of continuous work reduce worker ability to think straight and
increases the risk of a disastrous mistake; also introduced fatigue due to the sleep deprivation
that leading to declines in quality and yield. Thus, low productivity and high costs will make
Foldrite performance going down..
Subcontracting
Pros: Responsibility is pushed away from the company allowing focus on other production
areas, allow workers to have more slack time due to lesser production requirement.
Cons: High amount of trust is needed as control over production is not in the company’s
hands anymore. Subcontracting can results in possibility of delays which eventually effect
lead time. So, such long response time and quality problems would result lose its revenue in
the future. Therefore, a reliable subcontractor is needed and proper sourcing must be done.
Conclusion
When both pros and cons are fully assessed, we should make a decision based on the least
tradeoffs possible together by seeing which strategy has the most pros and also looking at the
cons which has the least influence on workers and production capability. We would weight
workers morale the most important factor as it would affect productivity eventually.
4) Is the company history a factor in Martin’s choice of options? Would he make a
different recommendation in a different economy or competitive environment?
Facts: Highly competitive environment- missed delivery results in loss of orders
Loss of productivity and yield because of high turnover amount of factory workers and
increasing proportion of inexperience workers- result in increase of lead time.
The company history will be greatly influence Martin’s decision as any choice made without
consideration may lead them back to the company dark age. Therefore, hiring and firing
strategy may not work well with both the investors and the management.
Highly competitive environment means that meeting the demand of customers is always be
highest priority, if not, company reputation will be affected and there will be a loss of
customer’s goodwill.
Therefore, the organization will need to devise a good training program if recruiting staff is
required. A well-though development program will also be required to ensure that the
company will be able to retain workers. These programs will help to reduce high turnover
rate and ensure that all workers receive proper training before working. A well trained
workforce would be able to cope with fluctuating demands and also solve problems that may
arise in the future.
5) What recommendation would you make to Martin Kelsey?
Recommendation to Martin Kelsey
Chase Strategy
To implement chase strategy, additional staff is hired when there is a need for them. The
hiring is done for the reason on meeting the surge in demand of various products. When a
period of a surge of demand is over, the additional staffs that were hired would have their
jobs terminated.
Pros: Implementing this strategy would allow the manufacturing company to meet up with
demand and there would be less chance of backlog orders. There would not be any
underutilization of workers, as the right amounts of workers are hired to produce capacity
that matches demand.
Cons: It can be costly due to the hiring and firing costs; also to train a worker would involve
training cost and time, factors that are very important to an organization. It would not be
effective during periods of low unemployment rate in a country.
Rise in Percentage Cost: 24.42%
Additional Skilled labour: 22
Additional Unskilled labour: 63
Level Strategy
Implementing a level strategy is to have constant production rate with a consistent
employment level. Production level will always be consistent base on the average demand of
certain products; the demand is spread throughout the various months to have a consistent
monthly production rate.
Pros: When this strategy is implemented, there would be full utilization of workers; the
turnover rate of the company would be low, therefore hiring or firing cost, morale of the
workers would not be affected as compared to other strategies. Effective when there is lesser
competitors.
Cons: The holding of inventory during periods of lesser demand would involve some cost. If
there were to be a sudden surge of demand, there would be a rise of backorder cost and loss
of customer’s goodwill. Reputation might be affected in the long run.
Percentage Cost: The base cost ($3,531,099.96) [6 months March-August]
Level Skilled labour: 70
Level Unskilled labour: 178
Mixed Strategy
It is the mixture of chase and level strategy. When there is a sudden surge of demand,
workers would be employed to match the capacity with demand. However the hiring sessions
is lesser compared to Chase Strategy. This is because, with the level strategy being
incorporated, the excess inventory is being used to cover a certain portion of the fluctuated
demand therefore requiring lesser work hours which would result to lesser workers being
hired.
Pros: Implementing this strategy would reduce certain tradeoffs of chase and level strategy. It
would be cheaper then chase strategy due to various reductions in cost, workers would be
fully utilized, able to reduce backorders therefore various cost would be reduce. The ability to
meet with customers demands would help maintain the reputation of the company.
Cons: There are still cons involved; however it would be lesser as compared to both chase
and level strategy. Various cost such as training, hiring and firing cost is still involved but at
a lesser amount as compared to chase strategy. Workers morale would still be affected due to
the continuous hiring and firing, this might affect the production value of a worker.
Additional Skilled Workers: 22
Additional Unskilled Workers: 63
Rise in Percentage Cost: 16.35%
Subcontracting
Subcontracting is done when another manufacturer is hired to help in production of a product.
This method is approached when additional capacity is needed in relation to a sudden surge
in demand whereby the Company is unable to meet by its own capacity.
Pros: When a subcontractor is hired, the responsibilities are pushed to the subcontractor and
therefore more concentration can given to other production lines. The company is still able to
produce its own maximum capacity without hiring additional workers.
Cons: There is lesser control on the production as responsibilities are being pushed. It would
be costly to hire a subcontractor as it also depends on the market situation. A big portion of
trust is needed when getting a subcontractor as vital information is needed to be shared. There
might also be delays due to subcontractor not being able to meet with delivery date.
Rise in Percentage Cost: 20%
Production Design Change
The production design change would only involve Cloud chair production methods, by
implementing this procedure; it would help to reduce 1 minute for producing a Cloud chair.
Pros: If implemented the overall accumulative on time saved in production would be
reflected in the reduction of working hours for cloud chair.
Cons: It would be costly due to backorders cost and possibility lost of customer’s goodwill;
also it affects the production procedure for cloud chair only. Therefore there is not much cost
that is being saved overall.
Rise in Percentage Cost: 22.54%
Overtime
Overtime is done to meet a sudden surge in demand; workers are required to work an extra
shift, day or additional hours to increase the production capacity which matches the demand
asked. Workers would be paid more in addition to their regular pay for the extra services
rendered.
Pros: Overtime allows the company the ability to meet with demand without hiring
additional workers therefore there would be savings in various costs as mentioned above.
Workers are fully utilized as more is produce from them.
Cons: When overtime is implemented, workers morale might be affected as they would have
lesser time for their personal activities. With the moral of workers being affected, there might
be higher turnover rates and the effectiveness of a worker would be lesser than usual which
would result in not being able to meet with demand, hiring and training cost in the future.
Rise in Percentage Cost: 16.37% / 17.35% (Meet August Demand)
Conclusion
Based upon the findings and calculations done, it is best if the company make use of the
Mixed Strategy. With the mixed strategy, the rise of cost is the least compared to the other
various strategies identified. The tradeoffs with the mixed strategy has a smaller amount of
impact it has on the company as it is making use of the pros of both chase and level strategy
while reducing the tradeoffs of both strategies respectively. Therefore the best strategy to be
utilized would be the mixed strategy.
Strategy Level Chase Mixed Overtime Outsource Design
Change
Cost $3531099.96 $4,393,729.
8
$4,108,751.28 $4,109,207.16
$4,144,089.86(Meet
August Demand
$4,237,319.952 $4,327,183
%
increase
Based % 24.42 % 16.35 % 16.37%
17.35%(Meet
August Demand)
20% 22.54%
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