Question
On a Friday afternoon in February 2010, Jose Ramos, VP of manufacturing at FoldRite Furniture Company of Aurora Colorado, stopped by the office of Martin
On a Friday afternoon in February 2010, Jose Ramos, VP of manufacturing at FoldRite Furniture Company of Aurora Colorado, stopped by the office of Martin Kelsey, recently hired production manager, to discuss developments of the day. The conference call with sales managers that morning revealed that market demand for FoldRites products was unexpectedly high. However, this good news placed a burden on the firms operations management, which had to optimize the use of manufacturing resources while meeting quality standards and delivery requirements. Ramos looked to Kelsey to develop a production plan for the next six months based on the new forecast.
Background:
Founded in 1987, FoldRite soon developed a reputation for innovation with the introduction of light and durable folding tables and stackable chairs. By the late 1990s, FoldRite sold three product lines into a range of markets including business and government offices, hotels, convention centers and schools. Revenue increased from $47.5M in 1999 to $60.3M in 2006, representing an annual aggregate growth rate of 3.5%. The year 2006 however brought a financial turmoil. One major cause, management later concluded, was the loss of productivity and yields caused by high turnover rate among factory workers and the increase in the number of inexperienced workers. By the end of 2006, the lead time reached 6-8 weeks up from a norm of 4 weeks- and on-time delivery dropped to 30-40% from an average of over 90%. In an increasingly competitive marketplace, the missed deliveries resulted in the loss of orders.
In 2007, a group of private investors took over the company and recruited a new CEO, Marcel Epstein, who had substantial skills in sales, marketing and executive management. Coming from a consumer service background, Epstein was quick to realize the need for innovation and customer service. He hired a new manufacturing VP, Jose Ramos, and together they came up with a set of strategic policies. They reduced the number of products and consolidated manufacturing from four smaller facilities into one. This freed up capital that enabled the purchase of new automation tools, and reduced delivery times and improved margins.
Products:
At the start of 2010, FoldRite had just one product in each of its three product categories:
- AlStrong: A folding table in which recycled aluminum replaced the plastic top of the preceding generation of tables. Alstrong provides almost 42% of the company revenues (see Exhibit 1).
- GreenComfort: A washable and stackable chair upholstered with a specially coated washable facric. GreenComfort provides around 34% of the company revenues (see Exhibit 1).
- CloudChair: A folding chair providing comfortable seating even for overweight people. The rest of the company income comes from this product.
To achieve short lead times, the company maintains a strategic inventory of fully assembled products and partially assembled parts to cover 2 weeks of forecast demand.
The factory in Aurora operates in 10 hours shift for 4 days of the week, for a total of 40 hours a week. Fridays are set aside to increase production using overtime and / or extra labor if necessary, and to perform maintenance on machineries. Accounting for holidays, the company planned 200 regular production days per year, and each month corresponds to 18 regular days on average.
Workforce:
Skilled laborers perform tasks such as thermal forming and robotic welding. Unskilled workers also perform a variety of jobs including assembly, inventory control and warehousing. All workers make an average of $19 per hour plus benefits that cost the company a total of $25 per worker-hour. Currently a total of 60 workers are employed in the manufacturing facility, corresponding to 600 labor hours per production day and 60*10*18 = 10800 regular production hours per month.
Manufacturing and Assembly Process:
The products use similar materials, which reduced the number of suppliers and the procurement overhead, and increased quality. For all types of production, the tasks that generated the components proceed simultaneously and bring components together for subassembly, and subassemblies together for final assembly, to minimize work-in-progress inventory. Final assembly of the products take place on moving conveyers, with the exception of customized products such as chairs with unusual color combinations.
All production planning is highly centralized. The production planner assigned workers to various tasks based on daily production plans derived from the weekly plan. Daily production goals are set to fulfill confirmed orders and keep inventory constant. The company has sufficient workers to manufacture the annual forecast demand (Exhibit 2) over the 200 regular production days in 2010, perhaps with some overtime. The actual hours each worker works is determined based on actual demand.
Forecast:
Monday morning Kelsey began collecting information for his report from a number of FoldRite managers. Anthony Fasono, the VP of sales, provided him with his forecast for the rest of the year for all three products as well as the actual volume of the products shipped in 2009 (see Exhibit 2). Fasono was especially concerned about CloudChair. He told Kelsey, the chair has generated great buzz in the market. Manufacturing has got to meet the productivity goals because this kind of an opportunity might not come again for a long time. He added that customers are likely to cancel orders if the company failed to deliver within two weeks.
Later Kelsey talked to Alice Jung, the CFO. Jung reminded him that the credit is tight, therefore a large outlay of cash for inventory would add costs in terms of borrowing from the credit line, as well as decrease the product development and R&D budgets. Jung provided Kelsey with the average production costs and labor requirements of the products (Exhibit 3).
Kelsey then discussed hiring factory workers with Mary Jane Montague, the HR manager. Montague said hiring a worker would cost $1500 in recruiting and administrative expenses. Firing a worker would mean paying indemnification fees, which corresponds to an average of $100 per month the worker has been employed.
Production Planning:
After Kelsey had acquired the necessary information, he found out that the viable options to meet demand include the following:
- use of overtime by asking the staff to work an extra shift (e.g. a 10-hour shift on Fridays): the labor costs per extra hour is $35 per worker.
- increasing the number of staff starting in April until August, to take advantage of idle production capacity: this option involves building inventory using a constant level of production. The forecast demand is at its peak level from April to August, therefore the extra workforce needs to be used during this period (i.e. the workforce level should be equivalent to the average requirement between April and August). The inventory holding cost is estimated as $10 per unit labor hours used to produce it.
- subcontracting some of the production of GreenComfort: This option would add an extra 30% to the labor cost for the production of the subcontracted units, but given the current state of the economy, FoldRite does not have to pay a set-up fee or commit to minimum orders.
- The team could also consider a combination of these options.
Discussion Questions:
- Develop the cost analysis plans for overtime, hiring and subcontracting options. Which one of these plans looks to be the most economic option? (Hint: You might try to express all costs based on how many labor hours will be necessary to satisfy the forecasts starting with March until the end of December.)
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International Financial Accounting And Reporting
Authors: Ciaran Connolly
6th Edition
1912350025, 978-1912350025
