Foldrite Furniture Case

Joseph Joy 10044145 Section 6 Gary Bissonette Foldrite Furniture Case

Date: February 2010 To: Martin Kelsey, Production Manager  From: Joseph Joy Subject: Suggested Solution for the expected increased d emand for Foldrite Furniture products. Introduction: On our company’s current production schedule we will not be able to meet the forecasted spike in demand for our products. In the long term hiring new skilled workers while subcontracting unskilled workers would be the best option to meet this extra demand while helping us maintain good labor relations, emphasize our company’s guiding policies and support other important criteria that will be essential to the success of our company. Analysis:

 A major problem that the firm might encounter is the fact that demand might be overestimated, this is particularly a problem because in the past marketing has a history of overhyping our products. Another consideration that should be made is whether this surge in demand will be sustainable in the long run. Some possible reasons that demand may not materialize in the long term include the European Debt crisis which looks to get worse as time goes on and could have detrimental effects on our international sales in Europe. Also coupled with recession in the United States it is quite possible that demand will not materialize as expected because consumers may be less willing to pay a pay a premium for our products in these tough economic conditions. Some further analysis into our products show that they are geared mostly towards the hospitality industry. Many of these consumers in the hospitality industry if  satisfied with our products would be potential repeat customers. Thus it is critical that our delivery times and high quality standards are met, because this will be crucial in keeping up with our forecasted demand. I would classify our  company as a focused market differentiator. The major ways our products have been able to differentiate themselves in this competitive industry include fast d elivery times, customizability and environmental friendliness. Based on the calculations in Appendix A our current production schedule will not be able to meet our forecasted demand. However, we had an excess of both skilled worker and unskilled workers for the month of January and will continue to do so in February and March as seen in Appendix A. Thus if we have these workers produce their expected amount of  production then we will not need to worry about a shortage of products till June. Though this will lead to inventory carrying costs it will be a better situation than having to lay off workers in those initial months or having to pay for an idle unproductive work force. Because firing workers would not match our goal of keeping a well trained workforce with reduced turnover and due to capital restrictions we cannot afford to have an unproductive workforce. Thus starting in June we will have to hire new workers, have current workers work overtime or subcontract out some of the work till August. From the calculations in Appendix A it can be seen that the least expensive option would be hiring subcontractors, followed by having overtime workers and lastly the most expensive option would be hiring new workers. Recommendations:

My recommendation would be to hire skilled workers permanently while subcontracting required unskilled workers. As seen in Appendix A, hiring sixteen new skilled workers will allow you to meet the demand for skilled workers in June, July and August. This decision even accounts for the fact that there is only an 80% productivity yield in the first four weeks of June. In a similar manner subcontracting unskilled workers should begin in June and will be required for the months of July and August. From Appendix A the total cost of this decision comes out to be $451457.60. I would strongly recommend against using overtime as a means to meet the increase in demand because workers will be tired and less productive which could lead to a lower productivity yield than what we currently have. Furthermore, overtime could frustrate many workers who are currently happy with their three day weekends and forty hour weeks. I would also strongly suggest against hiring only new workers because of the uncertainty of demand, especially because under our current capital restrictions we cannot afford to hire new workers if demand fails to materialize. A potential problem w ith subcontracting all our work is the fact that subcontractors will not be as vested in the company’s success as hi red employees would. Likewise, it is vital that skilled workers are

completely vested in our company because they will be driving our production process. Even though it would be ideal to have unskilled workers be completely vested in our company it is a difficult option due to the uncertainty in demand coupled with our tight capital restrictions. Cutting the production schedule by one minute for the Cloud Chair will be beneficial from a long term profitability perspective. Though it may restrict short term cash, it will be essential in the long term to maintain things such as the quick production line that allows our company to deliver our product within two weeks which will be essential in reducing competition from offshore suppliers while maintaining quick service to our customers. Also the design change is an innovative way to help create more potential future growth opportunities by increasing the production capacity. Additionally, based on the calculations in Appendix C the design change has the potential to create over $916151.50 in additional profits within the current y ear. My other recommendation would be to offer consumers a slightly discounted price if they pay for our products in advance. Since the majority of our  sales are geared to the hospitality market this could be an attractive proposal to buyers because many of them require our products for events that are planned months in advance. The main benefit of this implementation is that it allows us to more accurately assess whether the expected increase in demand for our products is actually materializing while easing some of our cash restrictions in the early months of the year. Conclusion:

Our company has much to look forward to this upcoming year due to expected increased demand in our  products. However, due to factors such as macroeconomic conditions the increase in demand for our products is uncertain. Thus our company will implement discounts as an incentive to receive payments from our customers quicker which will in turn allow us to see if expected demand is materializing. Due to cash restrictions we are only going to hire new skilled workers while subcontracting work required for additional unskilled workers. Lastly we will be implementing a design change for our Cloud Chair Product because it creates an immediate positive impact on current revenue while it increases our potential for future growth and helps maintain our quick delivery times.

Appendix A: Monthly Production

January

CloudChair

Fe bruary

March

April

May

June

July

Augus t

Septe mbe r

Octobe r

Novem ber

De ce mbe r  

4480

15000

45000

73800

65250

79200

86400

67150

34000

27000

14400

12600

 AlStrong

18816

17850

27000

29700

28500

36000

32400

29750

25500

25200

20800

15400

GreenComfort

16960

16530

22680

25200

22500

27900

25200

21250

21250

22500

17600

14000

Available Skilled Hours (Monthly Production)*(73 w ork e rs )

11680

10950

13140

13140

10950

13140

13140

12410

12410

13140

11680

10220

9.82

35.09

87.72

143.86

152.63

154.39

168.42

138.60

70.18

52.63

31.58

31.58

Skilled Hours needed for AlStrong

264.08

267.23

336.84

370.53

426.67

449.12

404.21

392.98

336.84

314.39

291.93

247.02

Skilled Hours for needed GreenComfort

Skilled Hours for needed for CloudChair

241.75

251.33

287.37

319.30

342.11

353.51

319.30

285.09

285.09

285.09

250.88

228.07

Production Days in a Month

16.00

15.00

18.00

18.00

15.00

18.00

18.00

17.00

17.00

18.00

16.00

14.00

Required Sk illed Hours

8251

8305

12815

15006

13821

17226

16055

13883

11766

11738

9190

7093

(1866.32)

(2871.05)

(4086.32)

(2914.74)

(1473.33)

644.21

1402.11

2489.82

3126.67

Available-Required

3429.39

2645.26

325.26

# of Needed Skilled Workers (AvailableRequired/ 10*number of production days in a month)

(21.43)

(17.64)

(1.81)

10.37

19.14

22.70

16.19

8.67

(3.79)

(7.79)

(15.56)

(22.33)

# of Nee ded Sk ille d Worke rs (Es tim ate )

(21.00)

(18.00)

(2.00)

10.00

19.00

23.00

16.00

9.00

(4.00)

(8.00)

(16.00)

(22.00)

Available Unskilled Hours Production )*(186 w orke rs )

(Monthly 29760

27900

33480

33480

27900

33480

33480

31620

31620

33480

29760

26040

44.21

157.89

394.74

647.37

686.84

694.74

757.89

623.68

315.79

236.84

142.11

142.11

Unskilled Hours needed for AlStrong

577.68

584.56

736.84

810.53

933.33

982.46

884.21

859.65

736.84

687.72

638.60

540.35

Unskilled Hours needed for GreenComfort

576.49

599.33

685.26

761.40

815.79

842.98

761.40

679.82

679.82

679.82

598.25

543.86

16.00

15.00

18.00

18.00

15.00

18.00

18.00

17.00

17.00

18.00

16.00

14.00

19174.18

20126.84

32703.16

39947.37

36539.47

45363.16

43263.16

36773.68

29451.75

28878.95

22063.16

17168.42

7773.16

776.84

(6467.37)

(8639.47)

(11883.16)

(9783.16)

(5153.68)

2168.25

4601.05

7696.84

8871.58

(12.75)

(25.56)

(48.11)

(63.37)

Unskilled Hours needed for CloudChair

Production Days in a Month Required Unsk illed Hours Available -Re quire d # of Needed Unskilled Workers (AvailableRequired/ 10*Production days in month) # of Needed Unskilled Workers (Es timate)

10585.82 (66.16)

(51.82)

(4.32)

35.93

(66)

(52)

(4)

36

57.60

66.02

58

Cost of Hiring Overtime:

Costof havingskilled workerswork overtime:(June+July+August)=11*18*10*19*1.5+16*18*10*19*1.5+9*17*10*19*1.5=$182115 Costof havingunskilled workerswork overtime:(June+July+August)=38*18*10*9*1.5+54*18*10*9*1.5+30*17*10*9*1.5=$292410 TotalCost ofo vertime:182115+292410=$474525 Cost of Subcontracting:

Costof subcontractingskilled workers:(June+July+August):11*18* 10*19*1.2+16*18*10*19*1.2+9*17*10*19*1.2=$145692 Costof subcontractingunskilled workers:(June+July+August):38*18* 10*9*1.2+54*18*10*9*1.2+30*17*10*9*1.2=$237168 TotalCost ofSu bcontracting:145692+237168=$382860 Cost of Hiring New Workers:

Recruiting costs for skilled workers: 1500*16= $24000 Wage cost for hiring 16 new skilled workers(June+July+August): (16*19*18*10+16*19*18*10*.33)+( 16*19*18*10+16*19*18*10*.33)+ ( 16*19*17*10+16*19*17*10*.33)=$214289.60 RecruitingCosts forunskilled workers:54*2*25+54*2*25*.33=$3591 Wage cost for hiring 54 new unskilled workers(June+July+August): (54*9*18*10+54*9*18*10*.10)+ (54*9*18*10+54*9*18*10*.10)+(54*9*17*10+54*9*17*10*.10)=$283338 TotalCost ofh iringNew Workers:24000+214289.60+3591+283338=$525218.60 Initial Productivity of New skilled workers in first four weeks: . 8(16)=12.8, which is greater than 11 Required for the demand in June Initial Productivity of new unskilled workers in first four weeks: .8(54)=43.2, which is greater than the 38 required for the demand in June

66

54.35 54

30.32 30

(13)

(26)

(48)

(63)

Appendix B: Short Term/ Long Term Implications of decisions. Overtime

Subcontracting

Alignment with 2 1 future growth opportunities Labour  4 3 relationships Key operations 4 3 activities  Near-term margin 2 1 and long-term  profitability impact Strategic “Guiding 4 3 Policies” Impact on future 2 1  product development Competitive 4 3  pressures Capital investment 2 1 restrictions Demand 2 1 uncertainty 1-4, where 1 is most ideal and 4 is least ideal.

Hiring new Workers

Hybrid: Subcontracting unskilled workers and hiring new workers

4

3

1

2

1

2

4

3

1

2

4

3

1

2

4

3

4

3

Long term implications of overtime are that it can be costly in the long run to pay workers at an extra wage rate if demand does materialize. Short term implications include the fact that it much less costly to implement in the short run than hiring new workers. Other long term implications include the fact that it could demoralize the work force due to the long hours which could lead to lower productivity yields. Short term implication of subcontracting includes the fact that it is the least costly option if demand does not materialize. Long term implications include the fact that it would be more costly than hiring new workers in the long run if demand does end up materializing. Another long term implication of  subcontracting is the fact that workers may not be as vested in the com pany’s success as employees of  our company would. Short term implications of hiring new workers include the fact that it is very costly especially if demand does not end up materializing. Long term implications include the fact that it if demand does end up sustaining than it would be a more cost effective decision in the very long run.

Appendix C: Cost/Benefit and Risk/ Reward assessment of Cloud Chair product design change. Assume you are able to fully implement the production ch ange by the beginning April due to the one month delay.

Expected Production from April-December=459800 Mins/item with new design change=8 minutes You save 1 minute on each product produced thus 459800 minutes saved. Thus if production schedule is maintained and workers work same amount of hours with new savings in time then 459800/8=57475 more products can be made. Revenue: 57475*30=$1724250 Costs: 57475*11.73+57475*.84+57475*1.49=$808098.50 Profit gained on extra units produced: 1724250-808098.50=$916151.50 Even though it initially costs $15000; the extra profit gained by this production process change more than makes up for this initial cost.