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case study

kloss planters and harvesters

Kevin Cho, general manager at Kloss Planters and Harvesters (KPH), left the meeting with his strategic planning team wondering whether it made sense to replace the separate factory for planters and harvesters with a single factory that could assemble both.

A briefhistory of planters and harvestors

Since humans started farming, they have sought to ease the task of planning and harvesting their crops. In this Naturalis historica, Gaius Plinius (AD23-79) DESCRIBED A REAPING MACHINE THAT BROKE OFF THE EARS OF CORN AND ACCUMULATED them in a box. In 1799, the first verifiable patent for a reaping machine was granted to the English inventor Joseph Boyce. In 1831, Cyrus Hall McCormic introduced the world's first corn reaper under the name of the Virginia Reaper was powered by a horse. Over time, other companies introduced combine harvesters that were self-propelled and powered by a combustion engine. Harvesters today allow a farmer to harvest large cornfields in the comfort of air-conditioned cabs!

After years of planting corn the way Squanto had taught the settlers, help arrived for American farmers when hand planters were introduced during the late 1800s and early 1900s. Some of these devices allowed farmers to plant two acres per day instead of the single acre possible with hand-planting. Today, planters can seed multiple rows while travelling at 10 miles per hour. The evolution of both planters and harvesters has certainly made the farmer much more effective.

KPH Production planning

KPH assembled planters in Davenport, Iowa and harvesters in Ames,IOWA. Demand for each product was highly seasonal,as shown in table 8-12. Corn was generally planted between march and may and harvested between september and november. As a result, demand for planters peaked in March, whereas demand for harvesters peaked in September. Each factory aimed for a production plan that allowed them to meet annual demand at the lowest possible cost.

The capacity of each factory was determined by the number of assembly workers available. Each machine (planter or harvester) required 100 labor hours for assembly. Each factory operated for 20 days a month, 8 hours a day. Assembly workers were paid $20/hour during regular time. Overtime was paid at the rate of $30/hour. Given the highly seasonal nature of demand, KPH laid off some workers during the low season and rehired them for the peak. Ech layoff cost KPH $5000 and each rehiring cost $3000. Each factory generally built inventory in anticipation of the peak. It cost $300 to carry a machine in inventory from one month to the next. KPH could also choose to delay a customer order by stocking out in a given month and filling in the stockout from next month's production. However, each unit delayed in this manner cost $2000 in discounts offered to customers to keep them happy. The company had a policy of ensuring that there were no stockouts in December so the new year started out without any unfilled orders. The material cost for each machine was $20,000.

The planter factory ended December with 244 workers and 250 planters in inventory. The harvester factory ended December with 100 workers and 50 machines in inventory. The production plan at each factory attempted to meet demand in table 8-12 at the lowest possible cost while ensuring that the factory ended Deember of the coming year with the same labor and inventory as the previous December.

Options for new factories

Given the age of the current factories, Kevin planned to replace them with new factories. One option was to replace each factory with a similar new factory. The other option was to expand the Davenport factory to allow both planter and harvester assembly. The investment for the two options was going to be very similar. Thus, Kevin requested his strategic planning team to identify any advantages of a single factory.

The team pointed out the countercyclical nature of demand for planters and harvesters canceled their individual seasonality of demand to some extent. Common assembly steps for the two products would allow KPH to use the same labor for the two products. This had the potential to significantly reduce the number of employees laid off and rehired each year. Besides improving employee morale, such a change had the possibility of reducing costs. Kevin asked the team to quantify any cost-related and employee-related advantages offered by the single factory. He would base his decision on these numbers.

Questions:

1. What is the total cost of each option?
2. Which option do you recommend to Kevin?
3. Can you devise an option better than those two proposed in the case study to minimize total costs?
4. If KPH wants to have the same number of employees over the production period(12 months) without any overtime, how many people should work? What are the cost implications of this decision?
5. If KPH allows at most 4000 hours of overtime per month for planter, what is the production plan? Is this a cost effective decision? Why?

Table 8-12 demand forecast for planters and harvesters

month	planters	harvesters
january	600	100
february	850	100
march	1300	100
april	800	100
may	550	100
june	100	200
july	100	500
august	100	1000
september	100	1500
october	100	700
november	100	450
december	300	100