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 companys 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 companys 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 Average Demand/ Month Average Demand/ Day Labour Required (Skilled) Labour Required (Unskilled) Total Skilled Labour Total Unskilled Labour 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 Salary for 6 months $ 294816.66+ $ 293700= $ 588516.66 $ 588516.66x6 months= $ 3,531,099.96 40+72+66= 178 9 +33+28= 70. 2622x 9/60x 1/10= 39.3= 40 2622x 2/60x 1/10= 8.74= 9 1534.58x 12.8/60x1/10= 32.7= 33 1534.58x 28/60x 1/10= 71.6= 72 1267.85x 31/60x1/10= 65.5= 66 1267.85x13/60x1/10= 27.4= 28 2622 1534.58 1267.85 43690 AI Strong 25576.33 Green Comfort 21130.83

Chase Strategy: Hiring of New workers

Month

Average Skilled

Average Unskilled

Number of Skilled

Number of Total Unskilled Salary

March April May

70 70 70

178 178 178

69 81 89

174 212 231

$ 623920 $ 746219 $ 680389.5

June

70

178

92

241

$ 847993.2

July

70

178

86

229

$ 766025.6

August Additional Skilled Labour Additional Unskilled Labour Hiring Cost for Skilled Hiring Cost for Unskilled Total Hiring Cost Total Salary for 6months (include hiring cost)

70 92-70(Average)= 22

178

80

207

$ 692053

241-178(Average)=63

22x$ 1500= $ 33000

63 labour x $ 66.5= $ 4189.5 $ 33000+ $ 4189.5= $ 37185.5 $ 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 Average Dd Demand Qty on hand Jan 2622 280 2342 Feb Mar Apr May Jun 2622 4400 (1258) Jul Aug

2622 2622 2622 2622 1000 2500 4100 4350 3964 4086 2608 880

2622 2622 4800 3950 -

Al Strong: Month Average Dd Demand Qty on Hand Jan 1535 1176 359 Feb Mar Apr May Jun Jul Aug

1535 1535 1535 1535 1190 1500 1650 1900 704 739 624 259

1535 1535 1535 2000 1800 1750 (206) -

Green Comfort: Month Average Dd Demand Qty on Hand Jan 1268 1060 208 Feb Mar Apr May Jun 1268 1550 (264) Jul Aug

1268 1268 1268 1268 1102 1206 1400 1500 374 382 250 18

1268 1268 1400 1250 -

Month
Salary Total Salary (including hiring cost)

Mar
588516.66 $ 588516.66+ $ 588516.66+ $ 588516.66+ $ 847933.2+ $ 766025.6+ $ 692053+ $ 37189.5 (hiring cost) = $ 4108751.28

Apr
588516.66

May

Jun

Jul

Aug

588516.66 847933.2 766025.6 692053

% 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 Average Demand Actual Demand Overtime Qty on Hand

March 2622 2500 630 4716

April 2622 4100 630 3868

May 2622 4350 630 2770

June 2622 4400 630 1622

July 2622 4800 630 74

August 2622 3950 630 (624)

September 2622 2000 630 628

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 Average Demand Actual Demand Overtime Qty on Hand

March 1535 1500 739

April 1535 1650 624

May 1535 1900 259

June 1535 2000 369 163

July 1535 1800 369 267

August 1535 1750 52

September 1535 1500

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 Actual Demand Overtime Qty on Hand 1206 382

1268 1268 1268 1268 1268 1400 1500 1550 140 250 305 323 305 346 214 1250 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 Average Demand Actual Demand Qty on Hand

January February March 2622 280 0 2622 1000 3964 Set-up Month 2500 1464

April May 4100 4100 1464

June

July

August

4100 4100 4100 4100 4350 4400 4800 3950 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 companys 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 workers 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 companys 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 Martins 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 Martins 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 customers 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 customers 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 customers 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%

Reference: Nigel, S. & Jones, A. & Robert, J. (2011):Operations Management, Retrieved in Sep 9, 2012. Andrew, G., (2010): Operations Management. Retrieved in Sep 9, 2012, from http://www.gaebler.com/Inventory-Management.htm Carter, M., (2010): Health and productivity risks in working long overtime hours part one. Retrieved in Sep 9, 2012, from http://alexk2009.hubpages.com/hub/Health-risks-of-Overtime-part-one Joe, G., (2012): Benefits of Employee Training Program: Employee Training Plan. Retrieved in Sep 9, 2012, from http://www.morebusiness.com/running_your_business/management/d1023665813.brc

Bozarth, C.C. and Handfield, R.B. (2012) Introduction to Operations and Supply Chain Management Third Edition. England: Pearson Slack, N., Brandon-Jones, A, and Johnston, R (2011) Essentials Of Operations Management Prentice Hall: Financial Times