Background:

QoSIT Inc is a manufacturer of specialty Datacom infrastructure equipment. The company

competes in the global infrastructure equipment market.

QoSIT uses various qualified sub-contract manufacturers to produce the majority of components

and sub-assemblies required to build each unit. However, due to complexity in testing and the need

for IP protection, final assembly and test is performed in-house.

Advantages:

1. Leading edge platforms (including custom hardware and software)

2. Product configurability

3. Fast delivery time (within 1 week of final customer order)

About the Product:

1. Serviceable lifetime of 10 years

2. Must withstand relatively harsh environment

3. Each unit is custom configured according to customer order

4. Base unit has 12 solid state drive (SDD) slots and 32 optical ports.

5. Configuration options include: # of SDDs, # of optical ports and the software image

(installed software bundle).

6. Each slot or port must be fully tested with an SDD or optical module, regardless whether

it is populated in the final customer configuration.

7. Typically, less than 50% of units sold are configured with all ports and SDDs installed.
About the Work Conditions:

1. 250 days per year (1 shift per day)

2. Each shift is 8 hours

3. 50 minutes/day paid break time (2 10-minute breaks and 30-minute lunch). \

4. Labour cost: $24/hour

5. Overtime cost: 1.5 X base rate after 40 hours/week.

Process types:

Since each unit is custom configured according to customer order, the management team decided

to divide the processes into two parts (for which different process layout and aggregate plan will

be made):

1. Process A: Everything up to Traffic test will be produced continuously at a constant

monthly rate, and kept in environmentally controlled storage units. One assumption made

for this process is that the shelf life of these unfinished regular units is high enough such

that it could be used still next year as the product serviceable life is 10 years.

2. Process B: This process involves steps from customer configuration all the way to

packaging. The production rate for this process will vary on monthly forecast demand.

2019 Forecast:

Assessment of Sales and Marketing Forecasting:

We were provided with the actual sales for Q1, Q2 and Q3 for 2018. We were also provided with

the Q4 forecast for 2018 by the Sales and Marketing team. Historically, the forecast for the coming
quarter provided by the Sales and Marketing team was quite reliable. This point will be taken into

consideration when we compare the marketing forecasts errors to the production forecasts.

In order to obtain the 2019 forecast, the Sales and Marketing team is predicting a 10% increase in

unit sales and at this point is expecting this formula to be uniformly spread over each month in

2019 (10% increase in January from prior Jan). The table and figure below illustrate the actual

sales and forecast sales provided by the Sales and Marketing team. Figure 1 illustrates the plotted

Actual sales and the Marketing demand forecast.

Actual Sales Marketing and Sales Marketing and Sales

(2018) Forecast (2018) Forecast (2019)
Jan 142 156
Q1 Feb 174 191
Mar 711 782
Apr 157 173
Q2 May 191 210
Jun 777 855
Jul 171 188
Q3 Aug 208 229
Sep 818 900
Oct 190 209
Q4 Nov 227 250
Dec 898 988
Table 1: Actual Sales in Q1, Q2 and Q3 of 2018 and Forecasted sales, provided by Sales and Marketing, of Q4 in 2018 and all of
2019.
 `

Figure 1: Actual sales for 2018 and Marketing forecast demand for 2018 and 2019.

Assessment of Production Forecasting:

In order for the Production team to produce a Forecast for Q4 of 2018 and for 2019, a technique

for Seasonal Demand Trend Variation (every 3 months) was followed. The results for the forecast

are illustrated in Table 2 below. Figure 2 illustrates the plotted Actual sales and the Production

demand forecast. See Appendix A for full calculations of the Forecast results.
 Actual Sales Production Seasonal Production Seasonal
(2018) Forecast (2018) Forecast (2019)
Jan 142 200
Q1 Feb 174 236
Mar 711 963
Apr 157 214
Q2 May 191 252
Jun 777 1026
Jul 171 228
Q3 Aug 208 268
Sep 818 1090
Oct 186 242
Q4 Nov 220 284
Dec 899 1154
Table 2: Actual sales of units in Q1, Q2 and Q3 of 2018 and forecast sales of Q4 in 2018 and all of 2019.

Figure 2: Actual sales for 2018 and Production forecast demand for 2018 and 2019.

In order to calculate the accuracy of the followed formula, the Production seasonal forecast model

was compared to the Actual sales in 2018 and the Marketing and Sales forecast values for Q4 of
2018. The Marketing team forecast for a following quarter was deemed to be very reliable.

Therefore, the values of the Marketing forecast values were assumed to be Actual Sale values for

calculating the error values of the Production teams forecasting method. A judgement of the

accuracy of the Production team’s method for forecasting was obtained by calculating the MAPE

values. The errors are illustrated in Table 3 below:

Production Seasonal Forecast MAPE

Actual Sales (2018)
(2018) Error
Jan 142 145 1.98%
Q1 Feb 174 172 -1.14%
Mar 711 708 -0.48%
Apr 157 159 1.08%
Q2 May 191 188 -1.58%
Jun 777 771 -0.73%
Jul 171 173 0.92%
Q3 Aug 208 204 -1.94%
Sep 818 835 2.09%
Oct 190* 186 -1.86%
Q4 Nov 227* 220 -3.11%
Dec 898* 899 0.09%

* values are forecasted by

Marketing
Table 3 : Production forecasting error. The marketing forecast values for Q4 of 2018 were treated as actual values due to their
reliability.

The Production Seasonal Demand forecast exhibited very low error values. Therefore, the model

created by the production team is considered reliable.

Choice of Forecasting Method:

Although both demand forecasts, Marketing and Production, follow a seasonal-variation trend, the

two demand forecasts exhibited some significant differences (approximately 1000 units in 2019).

This difference is mainly due to discrepancies in Q1 of 2019. Marketing is expecting a decrease in

demand in Q1 of 2019 from Q4 of 2018. The demand forecast model built by Production shows a
continuous increase in trend from Q4 in 2018 to Q1 of 2019. Table 3 illustrates a summary of the

Actual Sales, Marketing demand forecast and the production demand forecast. Figure 3 illustrates

the plotted data.

Difference in Demand
Actual Marketing Production between
Sales Forecast Forecast Production & Marketing
Jan 142
Q1 Feb 174
Mar 711
Apr 157
Q2 May 191
Jun 777
2018
Jul 171
Q3 Aug 208
Sep 818
Oct 190 186
Q4 Nov 227 220 -10
Dec 898 899
Jan 156 200
Q1 Feb 191 236 269
Mar 782 963
Apr 173 214
Q2 May 210 252 255
Jun 855 1026
2019
Jul 188 228
Q3 Aug 229 268 269
Sep 900 1090
Oct 209 242
Q4 Nov 250 284 233
Dec 988 1154

SUM for 2019

only 5130 6157 1027
Table 4: Differences between Marketing and Production Demand Forecasts.
 Figure 3: Actual sales, Marketing demand forecast, and Production demand forecast in 2018 and 2019.

The production team CANNOT simply justify building an extra 1027 units than what the Sales

and Marketing team is predicting. There’s a problem with both Forecasting models:

1. The marketing model assumes a constant increase of 10% in demand for each month which

doesn’t take the variations between the quarters into consideration.

2. The Production model assumes a continuous increase in demand from Q4 2018 to Q1 2019.

The assumption by marketing that the demand will decrease in Q1 of 2019 is very

plausible.

Therefore, we decided to build a new adjusted model which will assume a decrease in demand

from Q4 in 2018 to Q1 of 2019 and the model will use the trend model from Production. In order
to develop this model, we used the same slope of the previous regression model (10.401), however,

we assumed that the production in January of 2019 will be similar to Marketing’s forecast (156

units). These assumptions will lead to this regression model for the de-seasonalized forecasted

trend: y = 10.401x + 215.

The adjusted production demand and the previous Marketing demand are illustrated in Table 4.

Figure 4 illustrates the plotted data comparing the Marketing Forecast to the ADJUSTED

Production forecast.

Production Demand
Reassessment
Difference Difference
between between
Initial Adjusted
Production Production
Initial Forecast Adjusted Forecast
Marketing Production and Production and
Demand Demand Marketing Demand Marketing
Forecast Forecast Forecast Forecast Forecast
Jan 156 200 44 156 0
Q1 Feb 191 236 45 185 -7
Mar 782 963 180 758 -24
Apr 173 214 42 170 -3
Q2 May 210 252 42 201 -9
Jun 855 1026 172 822 -33
Jul 188 228 40 184 -5
Q3 Aug 229 268 39 217 -12
Sep 900 1090 190 886 -14
Oct 209 242 33 197 -12
Q4 Nov 250 284 34 233 -17
Dec 988 1154 166 949 -39

SUM 5130 6157 1027 4956 -175

Table 5: Comparison between Marketing Forecast, production forecast and reassess production forecast.
 Figure 4: Actual sales, marketing demand forecast, and the ADJUSTED Production demand forecast in 2018 and 2019.

To conclude, the team decided to proceed with the ADJUSTED PRODUCTION DEMAND

FORECAST (shown in Table 4). This model was chosen since it takes into account the

predictions made by the Sales and Marketing Team. The model also takes into consideration the

trend model provided by the Production team from previous years.

There’s a risk that may occur in following the proposed production plan. The assumption was that

demand will decrease in Q1 of 2019 from Q4 of 2018; which could be a false assumption.

Therefore, in order to overcome this risk; the production team will follow a reactive plan to adjust

capacity in January of 2019. Considering that customer orders have a one week of lead time; also,

since the orders are customized by the customers, the production team cannot finalize a product
until the receipt of a customer order. If customer orders increase dramatically, then the production

team will have to take advantage of the capacity cushion.

One of QoSIT completive factors is their fast delivery times as customers expect deliveries to be

shipped within 1 week of the final customer order.

Due to the seasonality of demand, a seasonal Inventory plan will be followed in order to

smooth/manage seasonal demand patterns on production. Build inventories in low demand periods

and sell during high demand to keep production output delivery relatively stable. This method will

also be used for managing seasonality in raw materials and inputs. A more precise inventory plan

will be prepared along with aggregate planning.

Machines Required and effective capacity:

As mentioned earlier, due to the complexity of testing each unit; the final assembly and testing is done

within the facility. To perform the tests, the following machines are used in the production line:

Equipment Name Used for Total operating time

(mins)

PCBA tester 1. Motherboard post- 45

configuration test

2. I/O Interface board test

Power Supply Testers 1. Power supply test 15

Continuity Testers 1. Bottom Side Continuity Test 60

2. Top Side Continuity Test

3. Final Continuity test

Imaging systems 1. Generic Imaging 1. Generic Imaging: 25

 2. Customer Imaging 2. Customer: 50

Traffic chambers 1. System Stress Test 2905

Final Testers 1. Final Test 30

Table 6: Machines required to be purchased

NOTE: The processes highlighted are customer configured processes (where constant monthly

production is impossible)

To calculate the required number of machines, the following equation (derived from Operations

Management by Stevenson and Hojati) will be used:

𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑡𝑖𝑚𝑒 𝑋 𝐷𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 2019

# 𝑜𝑓 𝑀𝑎𝑐ℎ𝑖𝑛𝑒𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑢𝑑𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑎𝑣𝑎𝑙𝑖𝑏𝑙𝑒 − 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑐𝑢𝑠ℎ𝑖𝑜𝑛

Where,

1. Demand forecast for year 2019:

I. For non-custom process steps: The yearly forecast demand for such steps can be the sum

of all the monthly demands since the company can have a constant monthly production

(which can be kept in inventory and used when needed for custom processes)

𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑓𝑜𝑟 2019 = ∑ 𝑠𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑚𝑜𝑛𝑡ℎ𝑙𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑠 = 4596 𝑢𝑛𝑖𝑡𝑠/𝑦𝑒𝑎𝑟

II. For custom process steps: As mentioned earlier, each unit is custom configured according

to the customer order. Due to this, such processes cannot have a constant production

(since each month will produce different units which differentiate in number of SSDs,

number of optical modules, and the software image). To find the required number of

machines, the least and highest forecast demand is used. Ordering machines based on

these demands will help the management get a minimum and maximum number of

machines needed.

2. Total Operating time for each machine per 1 unit can be found in table 6.
 3. Total production time and capacity cushion:

Labour Related Production Time Minutes

Daily Production [excludes 2 breaks & 1 lunch] 430

Yearly Production Time [245days] 107500

Capacity Cushion 107500 X 0.15 = 16125

Production time for Traffic Chambers Minutes

Total Time available in a year 440730

Capacity Cushion 440730 X 0.15 = 66109.5

Table 7: Production time and Capacity Cushions

Labor related production time determines the operating time for PCBA testers, power supply tester,

continuity testers, imaging system, and final testers as each of these machines requires a technologist. For

traffic chambers (which are computer controlled chambers) only need technologist for loading and

unloading units. The procedure to find the total production time can be found in Appendix x.

Assumptions used to perform the calculations:

1. The Total Operation Time is the time the capital equipment takes to perform an operation on a

unit.

I. The operating time is considered to be the amount of time equipment is running under the

supervision of labour which includes any setup time.

II. For traffic chambers (special case), it involves the time the machine is running without

any supervision.

2. The forecasted demand is 4956 units.

3. It is assumed that the technologist are well trained to use the equipment and will not need any

additional time added to the Total Operation time.

4. QoSIT currently operates 1 shift in production (for 8 hours/day) and runs for 250 days per year.

There are two paid 10 min breaks and a paid 30 min lunch break each day.
 5. No overtime or hiring of temporary workers (each demand is met within the regular hours).

6. The Executive team has mandated a 15% capacity cushion to respond to any unplanned customer

demands.

7. A 5 minute additional time is given between loading and unloading unit in traffic chamber (to

ensure correct handling of units [appendix x]).

8. Total production time does not take into account idle/maintenance time that can occur during the

process.

9. The processes are placed parallel to each other and involves 0 idle time (machine will never run

out of parts); hence making the requirements estimate less conservative.

Machines required:

The table below shows the machines required under ideal conditions, Appendix x2 will

show sample calculations for the machine requirements for traffic chambers, and imaging system.

Capital Equipment Estimated No. of

Equipment Machines

Required

PCBA Testers 2.44 3

Power Supply Testers 0.81 1

Continuity Testers 3.25 4

Imagining Systems 2.396 - 7.586 4-9

Traffic Chambers 38.44 39

Final Testers 0.623 – 3.74 1-4

Table 8: Estimated machines required

Imaging system recommendations:

The imaging system (which costs $55,000 and has a life expectancy of 5 years) is needed for the

generic imaging and customer imaging processes. As both process has different forecast demands,

two different cost analysis will be done. For generic imaging, the cost analysis will be based on

yearly forecast demands (4956 units); while for customer imaging, cost analysis will be performed

for the 4 months with high demand values ( March, June, September, and December).

Depreciation expense of equipment:

Manufacturing equipment are depreciation assets that can be written off as business expense yearly based

on their depreciation rate. The imaging system is assumed to have a life expectancy of 5 years after which

its salvage value is assumed to be $0. To determine yearly expense of imaging system, straight-line

depreciation technique will be used.

Purchase Price per unit ($) 55000

Life Expectancy (year) 5

Salvage Value After 5 Years ($) 0

Year Depreciation Charge Accumulated Depreciation Remaining Book Value

0 0 0 55000

1 11000 11000 44000

2 11000 22000 33000

3 11000 33000 22000

4 11000 44000 11000

5 11000 55000 0

Table 9: Yearly Depreciation expense of the imaging system

 The monthly depreciation (which will is needed for second cost analysis) can be calculated bu

simply dividing the yearly depreciation charge by 12.

$11000/𝑦𝑒𝑎𝑟
𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 = = $ 916.67
12

Cost Analysis for generic imaging:

Machines required = 2 machines

Operation time to meet demand = 25 minutes X 4956 units/year = 123900 minutes/year = 2065 hrs/year

Total regular labor time available = 91375 minutes = 1522.91 hrs/year

Number of workers required = 1

Labor charge = 24 $/hr

Depreciation expense = $11000/machine

Overtime labor cost = 1.5 X $24/hr = $36/hr

𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 + 𝑅𝑒𝑔𝑢𝑙𝑎𝑟 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡 + 𝑂𝑣𝑒𝑟𝑡𝑖𝑚𝑒 𝐿𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡

Number of Imaging System

1 2
Machines to Purchase

Total Machine Running Time

1523 2065
(hr/year)

Regular Labour Costs in 2018

36552.00 49560.00
($)

Total Overtime (hr) 543 0

Overtime per day (hrs) For

2.172 hrs 0
Each Machine
 Overtime Costs in 2018 ($) 19548.00 0

Depreciation Charge 11000.00 22000.00

Total Costs on imaging

67100.00 71560.00
processes in 2018

Table 10: Imaging system needed for Part A of production

NOTE: Check Appendix for equations for total cost.

Looking at the two costs above, it can be seen that for the management team should look to buy only 1

machine for generic imaging process. In addition, it would be suitable for them to follow a reactive strategy

where they can buy additional machines for next year if they expect a dramatic increase in demand.

Cost analysis for customer imaging:

Machines required = 1-7 machines

Operation time to meet monthly demand of 758 = 50 minutes X 758 units/month = 37900 minutes/month

= 631.67 hrs/month

Operation time to meet monthly demand of 822 = 50 minutes X 822 units/month = 41100 minutes/month

= 685 hrs/month

Operation time to meet monthly demand of 886 = 50 minutes X 886 units/month = 44300 minutes/month

= 738.33 hrs/month

Operation time to meet monthly demand of 758 = 50 minutes X 949 units/month = 47450 minutes/month

= 790.8333 hrs/month

Total regular labor time available in a month = 91375/12 = 7614.58 mins/month = 126.91 hrs/month

Number of workers required = 1

Labor charge = 24 $/hr

Depreciation expense = $11000/machine

Overtime labor cost = 1.5 X $24/hr = $36/hr

1. Cost analysis of 758 demand:

Number of Imaging 6.0

System Machines to 1.0 2.0 3.0 4.0 5.0
Purchase

Total Machine Running 127.0 254.0 381.0 508.0 632.0 632.0

Time (hr/month)

Regular Labour Costs in 3048.0 6096.0 9144.0 12192.0 15168.0 15168.0

2018 ($/month)

505.0 378.0 251.0 124.0 0.0 0.0

Total Overtime (hr)

Overtime per day (hrs) 24.2 18.1 12.0 6.0 0.0 0.0
For Each Machine

Overtime Costs in 2018 18180.0 13608.0 9036.0 4464.0 0.0 0.0

($)
Depreciation Charge 916.7 1833.3 2750.0 3666.7 4583.4 5500.0
per month

Total Costs on imaging 22144.7 21537.3 20930.0 20322.7 19751.4 20668.0

processes in 2018

Table 11: Imaging systems needed to meet 758 units for part B of production

2. Cost analysis of 822 demand:

Number of
Imaging System 1.0 2.0 3.0 4.0 5.0 6.0
Machines to
Purchase
Total Machine
Running Time 127.0 254.0 381.0 508.0 635.0 685.0
(hr/month)
Regular Labour
Costs in 2018 3048.0 6096.0 9144.0 12192.0 15240.0 16440.0
($/month)
 Total Overtime 558.0 431.0 304.0 177.0 50.0 0.0
(hr)
Overtime per day
(hrs) For Each 26.8 20.7 14.6 8.5 2.4 0.0
Machine
Overtime Costs in 20088.0 15516.0 10944.0 6372.0 1800.0 0.0
2018 ($)
Depreciation 916.7 1833.3 2750.0 3666.7 4583.4 5500.0
Charge per month
Total Costs on
imaging processes 24052.7 23445.3 22838.0 22230.7 21623.4 21940.0
in 2018
Table 12: Imaging systems needed to meet 822 units for part B of production

3. Cost analysis of 886 demand:

Number of
Imaging System 1.0 2.0 3.0 4.0 5.0 6.0
Machines to
Purchase
Total Machine
Running Time 127.0 254.0 381.0 508.0 635.0 739.0
(hr/month)
Regular Labour
Costs in 2018 3048.0 6096.0 9144.0 12192.0 15240.0 17736.0
($/month)
Total Overtime 612.0 485.0 358.0 231.0 104.0 0.0
(hr)
Overtime per day
(hrs) For Each 29.4 23.3 17.2 11.1 5.0 0.0
Machine
Overtime Costs in 22032.0 17460.0 12888.0 8316.0 3744.0 0.0
2018 ($)
Depreciation 916.7 1833.3 2750.0 3666.7 4583.4 5500.0
Charge per month
Total Costs on
imaging processes 25996.7 25389.3 24782.0 24174.7 23567.4 23236.0
in 2018
Table 13: Imaging systems needed to meet 886 units for part B of production
 4. Cost analysis of 949 demand:

Number of
Imaging
System 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Machines to
Purchase
Total
Machine
Running 127.0 254.0 381.0 508.0 635.0 762.0 791.0
Time
(hr/month)
Regular
Labour
Costs in 3048.0 6096.0 9144.0 12192.0 15240.0 18288.0 18984.0
2018
($/month)
Total
Overtime 664.0 537.0 410.0 283.0 156.0 29.0 0.0
(hr)
Overtime
per day (hrs)
31.9 25.8 19.7 13.6 7.5 1.4 0.0
For Each
Machine
Overtime
Costs in 23904.0 19332.0 14760.0 10188.0 5616.0 1044.0 0.0
2018 ($)
Depreciation
Charge per 916.7 1833.3 2750.0 3666.7 4583.4 5500.0 6416.7
month
Total Costs
on imaging
27868.7 27261.3 26654.0 26046.7 25439.4 24832.0 25400.7
processes in
2018
Table 14: Imaging systems needed to meet 949 units for part B of production

Total cost for the 4 months if 5 machines are bought = 19751.4 + 21623.4 + 23567.4 + 25439.4 = $

90381.60

Total cost for the 4 months if 6 machines are bought = 20688.0 + 21940 + 23236.0 + 24832.0 = $

90696.60
Looking at the calculations above, the management should buy 5 machines based on the demands from the

selected four months. In addition, the management should employ an expansionist strategy and buy all the

equipment start of the year. Using an expansionist strategy will ensure, the total cost will be less (as seen

above), and will provide adequate overtime for workers (buying fewer machines results in overtime which

are not practically applicable in real life, for instance having 4 machines to make 849 units will require 11

hours of overtime which according to labor codes is not allowed).