1. ForldRite Furniture Co :
PLANNING TO MEET A SURGE IN DEMAND
magister management 2012
Operational Management Presentation
Presented by Group 2:
Aftina – Alfin – Ali – Azhar
Dame – Frisca – Gita – Iman – Indri
2. 1 2 3 4
Company
Profile
and
Synopsis
Problem
Identification
& Constrain
5
Theoretical Analysis
Solutions
Conclusion
Recommendation
Lesson
Learned
Outline
4. 1987
1990s
2006
2007
• Revenue
increase from
$47.5 M
to $60.3 M
• Agregate
growth 3.5%
• Financial
turmoil
• New investor
took over
• Continued
innovation in
both products &
processes.
• Customer
responsiveness
• Lean
maufacturing
• Retention of a
well-
trained,stable &
productive
workforce with
reduced turnover
Part 1 | Company’s Profile & Synopsis
5. Product Categories Product Name High Demand in Season
Folding Table Folding AlStrong Holiday season
Washable & Stackable Chair Green Comfort Holiday season
Folding Chair Cloud Chair Summer
Part 1 | Company’s Profile & Synopsis
Product Competitive Advantages
High Quality
Stylist Innovative
Customized
Environmentally
Friendly
Not Easily
Imitated
8. Part 2 | Problems Identification
0
20000
40000
60000
80000
100000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 Production
2010 Demand
Cloud Chair
0
10000
20000
30000
40000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 Production
2010 Demand
AlStrong
0
5000
10000
15000
20000
25000
30000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 Production
2010 Demand
Green Comfort
9. Product CloudChair AlStrong GreenComfort
Average Market Price 30,00 90,00 88,00
Raw Material 11,73 49,70 50,24
39,10% 55,22% 57,09%
Required Labor
Skilled 2,00 12,80 13,00
Unskilled 9,00 28,00 31,00
Labor Cost
Skilled 0,84 5,39 5,48
Unskilled 1,49 4,62 5,12
Total 2,33 10,01 10,60
7,77% 11,12% 12,05%
Total Cost 14,06 59,71 60,84
Margin 15,94 30,29 27,16
53,13% 33,66% 30,86%
CloudChair has the highest Contribution Margin and lowest market price
more profitable
likely to produce more than others to benefit economic of scale
Part 2 | Problems Identification
Parameters
10. Category Parameters Values
Labor Cost Skilled Worker $19 + 33% benefit = $25.27
Unskilled Worker $10 + 10% benefit = $10.90
Hiring $1,500
Layoff $8,000 (assumption)
Production Operation hours 10 hours / day
Operation days 200 day / year
Working day 4 day / week
Overtime day Friday
Inventory Beginning balanced 0 (at January 2010)
Excess cost Interest Rate x Product Cost
Stock out cost Opportunity cost of Margin
Parameters
Part 2 | Problems Identification
11. Parameters Formula
Demand forcast per month (1) Based on marketing data
Beginning inventory (2) Ending inventory from previous period
Safety stock requirement (3) Half month (two week) of forecasted demand
Production requirement (4) Demand forecasted (1) + Safety Stock (3) –
(Beginning Inventory (2) X 100/95 (yield)
Defect loss (5) 5% X Production Requirement (4)
Finished goods (6) 95% X Production Requirement (4)
Ending inventory (7) Beginning Inventory (2) + Production
Requirement (4) - Demand forecasted (1)
Part 2 | Problems Identification
Parameters
12. Subcontract
• Add extra 20% to cost of labor
• Not need pay set-up fee or commit to minimum order
Design Change
• Cost $15,000 one time charge & take 1 month to implement
• Only applicable to CloudChair Product
Part 2 | Problems Identification
Considerations
Overtime
• Overtime wages were 1.5 time s the normal fully loaded rates
• Introduced fatigue, leading declines in quality
Constant Worker Vary Inventory
High inventory or Shortage of product
Hiring & Layoff
Doesn’t Compatible with Company’s Goals
14. Sales and Operations Planning
Process should help firms to provide:
• Better customer service
• Lower inventory
• Shorten customers lead times
• Stabilize production rates
• Give top management a handle on the business.
Part 3 | The Theories
Aggregate Operation Plan
The main purpose of the aggregate plan is to specify the
optimal combination of:
• Production rate
• Work forces level
• Inventory on hand
15. PURE STRATEGIES
Chase Strategy:
Hiring and laying off employees as the order rate varies
Stable workforce-variable work hours:
Vary the output by varying the number of work hours worked
through flexible work schedules or overtime
Level Strategy:
Maintain a stable workforce working at a constant output rate
MIXED STRATEGY
If two or more strategies used in combination
Part 3 | The Theories
16. AGGREGAT RELEVANT COST
1. Hiring / Lay Off Cost
2. Overtime Cost
3. Inventory Carrying Cost
4. Subcontracting Incremental Cost
5. Part Time Labor Cost
6. Back Order Cost
7. Stock Out Cost
Part 3 | The Theories
21. PLAN 1 : Exact Production, Hiring & Training Workers
Product Jan Feb Mar Apr May Jun Jul
CloudChair 12.611 31.310 62.063 71.860 73.961 85.349 78.597 544.219
AlStrong 29.201 22.538 29.366 29.868 33.125 35.204 31.710 322.601
GreenComfort 26.553 19.674 24.761 24.465 25.831 27.322 23.673 267.198
Production hours required
CloudChair 420 1.044 2.069 2.395 2.465 2.845 2.620
AlStrong 6.230 4.808 6.265 6.372 7.067 7.510 6.765
GreenComfort 5.753 4.263 5.365 5.301 5.597 5.920 5.129
CloudChair 1.892 4.696 9.309 10.779 11.094 12.802 11.790
AlStrong 13.627 10.518 13.704 13.938 15.459 16.428 14.798
GreenComfort 13.719 10.165 12.793 12.640 13.346 14.116 12.231
Working Hours in Month 160 150 180 180 150 180 180 2.000
Workers required per month (Production Hours Required / Working Hours in Month)
CloudChair 3 7 12 14 17 16 15 9
AlStrong 39 33 35 36 48 42 38
GreenComfort 36 29 30 30 38 33 29
CloudChair 12 32 52 60 74 72 66
AlStrong 86 71 77 78 104 92 83
GreenComfort 86 68 72 71 89 79 68
New workers required per month - 30 38 12 95 - -
Layoff worker per month - 46 - 1 - 36 35
Keep a skilled worker with full wage - 13 13 8 - - -
Training unskilled worker to be a skilled per month - 12 - - - - -
Cost fo hiring new workers required per month - 9.163 2.527 798 36.421 - - 58.441
Cost of layoff worker per month - 92.000 - 2.000 - 72.000 70.000 508.000
Straight time cost 201.474 157.788 207.592 210.578 227.110 242.561 215.326 2.227.429
Total Labor Cost 201.474 258.950 210.119 213.376 263.531 314.561 285.326 2.793.870
Material Cost 2.933.218 2.475.848 3.431.516 3.556.465 3.811.637 4.123.444 3.687.258 35.841.006
Total Cost 3.134.692 2.734.798 3.641.635 3.769.841 4.075.168 4.438.005 3.972.584 38.634.875
Sales revenue 3.320.320 3.511.140 5.775.840 7.104.600 6.502.500 8.071.200 7.725.600 65.665.000
Margin 185.628 776.342 2.134.205 3.334.759 2.427.332 3.633.195 3.753.016 27.030.125
Unskilled workers
Production requirement
Skilled workers
Unskilled workers
Skilled workers
22. Problem Analysis Hiring & Training New Labors
PRO CONS
1. Cost. It is profitable
2. Sustainability; can meet demand if
the demand continuous to increase
3. No need to train; the workers can
perform well from the start
1. Demoralization; future lay off of
superfluous labors may demoralize
other workers
1. Sustainability; can meet the demand
if demand continous to increase
1. Cost; management and supervisor
resources
2. Subsequent result; layoff these new
workface and cost the company in
added unemployment insurance
3. Time; training unskliled workers to
skliled position takes four weeks
Full time regular direct
workers
Training unskilled
workers
25. Problem Analysis Constant Level of Production
1. producing above the demand
may result in high inventory
level
2. There are cost of carrying
inventory
3. When demand was very high
but production constant may
result in shortage of product
PROS
1. Labour work in a constant time,
produce the same amount per day
makes labour on high productivity and
avoid fatigue
2. Utility of machine easily measure
3. Furniture design likely to change in
long period
4. Keeping inventory in some level help
Foldrite for fast delivery
Recomendation :
By calculating existing labour based on December 2009 data, Foldrite must add
labour to produce constant level of product without overtime to fulfill demand
forecast for the year of 2010. Cost of additional labour and do constant level of
production, although result in vary of inventory level still below the cost of do
nothing (not add worker, no overtime, no training, no subcontracting and no
change in design)
CONS
28. Problem Analysis Subcontracting
1. Get the job done right and
on time
2. Don’t need to spend
money on recruitment
and training
3. Can have relatively flexible
change according to the
demand
1. Inventory cost and extra
to the cost of labor for the
product.
2. Finding the right
subcontractor can be
difficult
3. Communication can be
problematic
4. Difficult to maintain the
quality of product
PROS CONS
31. Problem Analysis Overtime
1. No need to lay off the
superfluous labors and
thus suffer from the
demoralization and high
unemployment insurance
after the surge in demand
2. Flexibility: can make
change according to the
change of the demand
PROS
1. High cost: overtime wages were 1.5 times
the normal fully loaded rates.
2. Decline in quality and yield: overtime may
lead to labors’ fatigue
3. Potential risk: may not able to meet the
demand if the demand continues to
increase
4. Negative effect on potential labors: the
long-lasting overtime may discourage other
labor join in the company
CONS
34. Problem Analysis Change Design
1. Once for all: increase the
productivity
1. High cost
2. Long time: it takes one month
to change
3. Little effect: the change may
not have too great influence
on the whole productivity
PROS CONS
36. Conclusions
Plan 1 : Exact Production, Vary Workforce
Plan 2 : Constant Workforce, Vary Inventory and Stock out
Plan 3 : Constant Low Workforce, Subcontract
Plan 4 : Constant Workforce, Overtime
Plan 5 : Design Change
Cost Plan 1 Plan 2 Plan 3 Plan 4 Plan 5
Hiring 58.441
Layoff 2.032.000
Excess Inventory 349.092 576.010 576.010
Shortage 1.906.554
Subcontract 1.295.264
Overtime 576.802 576.802
Design change 15.000
Straight time 2.227.429 2.567.280 2.531.060 2.253.160 2.239.220
Total 4.317.870 4.822.926 3.826.324 3.405.972 3.407.032
37. Conclusions
• FoldRite goal to reduced turnover of work force aligned with stable
workforce strategy. To be a lean manufacturer which has flexibility
to response specific customer requirement, the company could
adopt level strategy.
• Demand variations are high for CloudChair product, so the planning
system must include sufficient flexibility to cope with, that can
achieved by cross-training worker to handle a wide variety of
orders, developing alternative source of supply, and engaging in
more frequent replanning during high-demand periods.
• Chasing strategy at Plan 1 with target production to fullfill
demand requirement using flexible workforce by hiring, training,
and layoff labors seems to be suffer with layoff cost and this also
doesn’t compatible with FoldRite goals. Design change did not
siginificant lowering cost (only 1 minutes improvement for
CloudChair product). Other alternative planning are more suitable
with FoldRite strategy to achieve 4 goals.
• Relationship with among various functional unit, including
marketing is a key of success to manage production planning.
38. Recommendations
• More production for CloudChair since it has greater contribution margin
and lower cost of production and cheaper product line.
• Keep planning strategy aligned with company goals by choosing stable
workforce and level strategy. For seasonal product, it’s more efficient to
have constant of labor and subcontracting the rest of demand. This could
affect to lower employee turnover also, managing quality of product and
lowering inventory fluctuation.
• By calculating existing labour based on December 2009 data, FoldRite
must add labour to produce constant level of product without overtime to
fulfill demand forecast for the year of 2010. Cost of additional labour and
do constant level of production, although result in vary of inventory level
still below the cost of do nothing (not add worker, no overtime, no
training, no subcontracting and no change in design).
• The usage of MRP, ERP, SCM, and other IT related system to improve
production planning quality.
39. Lessons Learned
• Cost reduction initiative for labor cost will not
give significant effect if the labor portion only
small amount of overall cost structure. Reduction
of material cost has more impact on cost
reduction since it’s has 6 time larger than labor
cost.
• Seasonal effect of CloudChair should compensate
with other product that has opposite seasonal
effect to reduce risk of materialized demand.