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b) What strengths do you see? Ans. Following is the analysis for the operations during 1979. The aggregate demand and production are calculated in terms of Labour index and then the comparison is made. We assume that the shipment is done as per the demand and therefore, the shipment figures can be taken as the demand.
Op Inv Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Aggregate monthly production 19504 5872 13656 4584 6606 5720 4928 6823 10468 10559 8082 14022 63 91383 Aggregate monthly demand 0 659 6811 3064 4543 5922 9210 7139 16602 16728 14744 16686 766 102874 Cumulative monthly production 19504 25376 39032 43616 50222 55942 60870 67693 78161 88720 96802 110824 110887 Cumulative monthly demand 0 659 7470 10534 15077 20999 30209 37348 53950 70678 85422 102108 102874 Monthly production in labor Index 1159.0 343.2 601 366.8 366.4 440.6 400.1 524.5 665 510.6 543.6 668.4 0.0 38.5 299.8 245.2 252.0 456.2 747.8 548.8 1054.7 808.9 991.7 795.4 Monthly demand in labor index Cumulative prodn in labor index 1159.0 1502.2 2103.2 2470.0 2836.4 3277.0 3677.1 4201.6 4866.6 5377.2 5920.8 6589.2 Cumulative demand in labor index 0 38.5 338.3 583.4 835.4 1291.6 2039.3 2588.1 3642.8 4451.7 5443.4 6238.8
Table 1: Analysis for 1979 Actual Production Plan
Figure 1
Figure 2 The graph of actual production of Kool King lies above the Level Production graph. An efficient policy would be one where the curve is always above the demand plot and at the same time, the inventory level is maintained at minimum possible. So, a policy in which the curve lies in between the level production and demand chase would be more efficient. Here, the curve departs from the level curve and at the same time carries more inventory. It would be better if they had gone for level production or a hybrid of level and demand chase. This is a major problem faced here as it is leading to a higher inventory cost of $108263 even at 10% cost of capital. Another problem faced is to review and reschedule the plan because as production progressed, information was received which tended to force changes in the original plan. Due to this, it was required that the plan was kept flexible at all times. The strengths of the operation are: a) As we observe in Figure 1, the curve for production in term of labour hour index is close to linear and a constant aggregate production level in terms of labour hour index has been maintained. b) Although there is scope for reduction of inventory costs by moving to a hybrid strategy, the curve is close to level production and is close to the efficient policy.
2. What problems experienced in 1979, are likely to recur in 1980? There was a need to maintain flexible production plans because as production progressed and the management received more information about the demand, the plan was required to be changed from time to time. So, the management was not able to stick to its initial charted out production policy but had to review it regularly. This problem was bound to recur in 1980. In 1979, the inventory level was more and if the same production policy is followed, the same problem would recur. 3. Look carefully at Kool Kings use of capacity. a) Can they meet the 1980 forecast? In 1980, as per the forecasted demand, 281 weeks would be required for production (see exhibit 1). They will be able to meet this by either increasing the number of shifts by hiring extra workers for the extra number of weeks required or by implementing overtime. The analysis for the same has been shown subsequently. With the present resources and without overtime, meeting this forecast would not be possible. b) Are they handling changeovers well? Support your answers with appropriate calculations. In 1979, they had designed the plan in order to switch over four times. This was the efficient way of handling the changeover because it was sequenced in a way such that the demand of each product was met with minimum number of changeovers. However, during implementation, they had to changeover five times which led to a higher cost. In the designed plan, they required 8 days during the changeover, which was 10 days in the actual implemented plan along with an additional cost of $6000.
4. As an operations manager, establish an aggregate plan and describe operating policies to revise production schedules. Answer The unit of aggregation chosen is labour hour index. In order to produce the forecasted demand for 1980, extra number of days required is 54 weeks. On doing the cost analysis between choosing overtime or hiring extra workers and carrying out extra shifts, we find the best cost effective method. We find that Cost of overtime (112*8*9*54= $435456) is greater than the Cost of hiring 112 workers and carrying out extra shifts (112*365+ 112*6*8*54= $331184) Cost of overtime = 112workers * 8hrs * $9 * 54 days =$435456 (Assuming overtime of 2hrs for 216 days) Cost of hiring 112 workers for 54 days and then firing them = 112workers *(cost of hiring $285.5 + cost of lay off $81) + 112 * $6 wage* 8hrs * 54 days =$331184 So, we plan the new production in which we will include an extra shift for the time when demand is higher, so that we can reduce the inventory level. The analysis for the same has been shown in Exhibit 1. Here we have assumed that the closing inventory of 1980 will be almost same as that of 1979. As shown in Exhibit 2, the planned production for 1980 using this policy has been plotted. Here, from the month of May, we have added an additional shift. Thus, we get a hybrid strategy for efficient production plan wherein we are able to keep the inventory level low and thus save over the cost. The cost of saving achieved can be interpreted from Exhibit 3. The capital spent over carrying excess inventory in 1979 is $ 108263. But, in this analysis of hybrid strategy, we find that the capital spent over excess inventory is $ 6602 only. This has been achieved as the overall inventory level has reduced compared to the previous strategy and also because the number of weeks in which the inventory was higher than 15000 is 29 in the new strategy which was 39 in the earlier strategy for 1979.
550 2750 2750 2750 2750 2750 2750 2750 2750 1650 2750 2200 975 1625 1625 1625 975 1300 1625 975 1625 1625 1625 825 1375 1100 1375 975 1625 1625 650
975 1625 1625 1625 1625 1625 3250 3250 3250 3250 3250 3250 3850 5500 5500 4950 2750 4400 1650
46750
11000
40950
8125
4675
1443532.561
118377.509
108264.9421
6601.822617
5. What should Mr.Lewis do? From the above analysis we find that in order to plan out for the forecasted demand for 1980, Mr. Lewis should firstly go on to hire 112 workers for 54 days and employ them for an additional shift. The time when he should incorporate additional shifts should be when the demand is rising at a higher rate and this is around May. So, during this time he can hire 112 workers and make them work an additional shift for 54 days and then fire them. This cost incurred is lesser than that for incorporating overtime, as seen in the solution for question4. Thus, he should go ahead with a hybrid strategy, wherein, he starts with a level production and then goes on to increase the shifts in order to match the demand.
Additional Information for analyzing Kool King Case: 1. Assume the following cost structure when you are evaluating alternatives: Inventory carrying cost = $30/unit/year Cost of hiring = $284.50/worker Cost of layoff = $81/worker Regular wages = $6/hour Overtime Wages = $9/hour 2. Assume one shift operation of line would require 112 workers. 3. Assume that each shift is 8 hours long. Underproduction is permitted. However, the workers get paid for the entire shift length. 4. Plant shutdown in fiscal 1980 is assumed to be one month (From August 8-Sept 7, 1980). Previous years shutdown continues till September 7, 1979. 5. Assume that the level of ending inventory in August 1980 is same as that planned for August 1979 (i.e. 8013 units) 6. Assume that the shipment pattern given in exhibit 5 is representative of the requirement in fiscal 1980 also. 7. Do not include super and slimline in your calculations. 8. Note that under the current operation, the plant works 5 days a week with one shift and the regular holidays are observed as per exhibit 4. 9. Please note that each change over between the products (for example from Midget to Breeze Queen) requires two shifts. This loss of production time is in addition to the $6000 cost mentioned in the case.