FoldRite Furniture Case Study

Please develop a capacity plan for FoldRite. What recommendations would you make to Martin Kelsey in Feb. 2010? Which option(s) (or combinations of options) should they pursue to meet the surge in demand? What are their specific quantitative (i.e., financial performance) or qualitative implications?

Below some steps that you could use a guideline for your analysis: The steps involved in planning include:

a) Calculating available skilled and unskilled workers .

b) Determining the labor required to fulfill demand .

c) Determining the total cost of fulfilling demand for each option by adding the cost of: .

a) Overtime .

b) Use of subcontractors .

c) Hiring and training workers .

d) Cost of design change .

e) Cost of carrying inventory Additionally, the inventory level and production shortfalls over the 6 month for each option need to be determined to ensure on-time delivery

Background

• Introduction about the case
• Relevant facts related to company
• Setting criteria for choosing an appropriate options
• Financial
• Strategic
• Risks
• Applying a theory
• Analysing alternative solutions
• Conclusions
• Recommendations

Case name: FoldRite Furniture Co: Planning to Meet a Surge in Demand

Foldrite is a furniture company that manufacture products like folding table, stackable chair and a new folding chair. Name of the products are follows:

• AIstrong: Folding table
• GreenComfort: Stackable chair
• CloudChair: Folding chair.

People of the company:

• VP of FoldRite: Jose Ramos
• Production Manager: Martin Kelsey
• CFO: Alice Yung

The company was established in 1988 and was growing naturally. Later in 2006, the growth reduces because of the bad performance, reasons being, productivity loss, high labour turnover, increasing cost of raw materials and insufficient funds. This results in reduced margins and the company decide to change the management in 2007. The new goals made by FoldRite were:

• Innovation in products and processes
• Reducing number of products to increase quality.
• Providing quick services and producing high quality products.
• Lean manufacturing.
• Retention of workforce with reduced turnover.

The above changes help the company to increase its revenue to $60.5 Million and an aggregate growth of 4%. Revenue of FoldRite comes from folding table (42%), stackable chair (34%) and new folding chair (24%). The business is seasonal and accounts high demand of its products in the period starting from March to August. There is 59-60% of annual demand for AIStrong and GreenComfort and 70% for CloudChair. Manufacturing process of FR completely depends upon the skilled and unskilled labour. All the production planning is highly centralized and the products use similar materials that reduces the number of suppliers and overheads related to them. The business is expecting a huge increase in the demand over the next six month. Its current operations are not able to meet this surge in demand and require proper planning and strategy for meeting the demand. A proper capacity plan is require to be developed in order to analyse the case.

Case study analysis outline includes:

• Setting the criteria to choose an appropriate option
• Applying a theory
• Analysing the alternative solutions
• Results and recommendations.

The main three criteria are identified for deciding about the relevant option, which is to be opted in order to meet the increasing demand. These criteria are:

• Financial : expensive to hire new employees with training
• Strategic: short term plan to solve immediate problem
• Risks: risks associated with each and every option

Sales and Operation planning

The process would help the companies to provide better consumer service, shorten lead time, lower inventory, stable production rates and efficient and effective management of business (Apics.org, 2012).

Operation Plan

The main aim of the aggregate operation plan is to identify the optimal combination of rate of production. Level of work force and inventory in hand.

Pure Strategy:

Chase strategy: hiring the employees as the order rate changes

Stable workforce: output varies by changing the number of work hours with the help of flexible work schedules or overtime.

Level strategy: maintain a stable workforce working at a constant rate of output.

Mixed Strategy: combining two or more than two strategies (He and Dong, 2012).

Options for Meeting Surge in Demand

Relevant Cost

• overtime cost
• cost of subcontracting
• hiring and training cost
• cost of design change
• carrying inventory cost

Overtime 

This option consists of making the existing workers to work more than the required hours for meeting the extra demand. The amount of time, a worker works beyond the normal working hours is known as overtime. To achieve the targeted demand or to meet the surge in demand the company can go for this option. The existing workers will be required to work beyond their normal hours and will be get paid in return. The cost incurred for paying the workers for their overtime is known as overtime cost. (Awci.org, 2017). The cost of overtime for skilled workers is $365,940 and of unskilled workers is $554,490. The total cost including the additional cost of overtime for skilled and unskilled workers is $5,078,956. To meet the demand to be compensated with overtime hours, the company need to hire a total of 63 skilled workers and 203 unskilled workers. Analysing the option on the basis of identified criteria:

• Financial: the overtime rate would be 1.5 times of the normal wages rate including benefits.
• Non-financial: may cause fatigue, which results in decline of quality of products.
• Risk: the use of overtime is nothing if the demand is inaccurate.

Subcontractors 

Subcontracting refers to a contractual agreement between the company and an outside person or company. If the company chooses this option, it will subcontract the production of one product to some another company and would pay a subcontracting cost for this agreement. By subcontracting the production of GreenComfort chair to another firm, the company will be able to free more skilled workers in order to meet the other production objectives. Moreover, it will help the company in avoiding the demoralization of workers, hiring cost and also the reduction in quality which was due to the overtime strategy (Morris and Pinto, 2010). The total cost for implementing this option will be $5,356,114. Because of this subcontract the total labour hours and labour cost will be reduced for the production of remaining two products. The total skilled labour hours need for production of AIStrong and CloudChair are 26,902 and unskilled labour hours are 172,902. The total labour cost of both are $2,293,226.53 which is less than the cost incurred in implementing overtime approach. Criteria based analysis of the option is:

• Financial: additional cost of subcontracting
• Non-financial: no need to commit to minimum order and to pay a set-up fee.
• Risks: will not have any control over the quality and unnecessary use of finances.

Hiring and training workers

This is the third option which the company can exercise to meet its increasing demand. The cost of finding a right person to recruit can be high. Moreover hiring of new worker comes with the training cost also. If the company goes for this option, it needs to provide proper training to the employees so that they can do the work and start producing. This will require additional cost.  Hiring the new workers will be costly for the company, if the level of expected demand falls because then the company would have to fire the new workers, which results in demoralization of the employees and reduction in turnover rates (Taylor, 2017). Due to this, company would also not be able to maintain its objective of having a stable productive workforce. The new workers are require to be hired in month of April, June, July and August. The cost of hiring them would be $3499.45, which will be added up to the total cost, making it $4,162,025.45. Criteria analysis:

• Financial : additional recruiting expenses of $3499.45
• Non-financial: would meet the sustainable approach, if the demand target is achieved
• Risks: firing of the new workers would be there, if the demand is not met.

Option 1: Overtime

Design Change

This option will be only applicable to the CloudChair product and a set up cost of $20,000 will be incurred. Change in design will eventually increase the quality of the product.  A period of one month will be required for implementing this option. Change in design will help in increasing the quantity of product and saving money and workers.

• Financial: one time charge of $20,000 for setting up a design
• Non-financial: implementation process require a period of one month
• Risks : no risk is associated with this plan

Carrying cost of inventory

The carry cost of inventory is generally described as a percentage of the inventory cost. It is the cost which a business incurs over a period of time in order to hold or store its inventory. The carrying cost is used to identify the amount of profit that can be made on current inventory. It also helps in determining the level of inventory that is required to be maintained by the company (Coyle, et.al. 2016). For FoldRite furniture Co. to meet the expected demand, if company decide to hold the inventory or stock, there will be cost of carrying inventory. The cost is calculated as 5% of the average inventory. The total inventory at the beginning of the period was $381800 and the total closing inventory was $378800. Average inventory is $380300 and cost of carrying inventory is $19015. If the company implement this option the total cost including carrying cost would be $4,177,541. Analysing the option on basis of criteria:

• Financial : additional cost will be there
• Non-financial: useful only if expected demand is accurate.
• Risks: the stock or items stored may become obsolete or can be replaced by the new version. Quality of the items kept in warehouse may degrade due to some damage or incorrect storage.

Conclusions

The total cost for implementing option 1 that is overtime is $5,078,956. The rate of overtime will be 1.5 of the normal labour rate. The option is quite risky financially rather than non-financially as the cost of having workers which are to be paid overtime is a significant liability for the company. Although by doing overtime, the number of units can be increased quickly (Kinney and Raiborn, 2012). Subcontracting, basically does not involve any risk but it is again a cost which is to be accounted. Although, by subcontracting the production of GreenComfort chair, the labour cost for the production of remaining two items will be reduced but the total cost incurred for the production of all the three products will increase to $7649341. This option will not provide any control over the quality and can be considered as an unnecessary use of funds.  The risk is limited as there is no minimum order needed (Chopra, Meindl and kalra, 2016).

Hiring and training new workers will be the riskiest option because if the demand level falls, then implementing this option will be of no use. Moreover it involves the cost of paying workers along with the benefits. If the option does not pay off, there will be demoralization between the workers who are recently hired followed with the unemployment payments. Although the total cost including the cost of hiring and training workers is comparatively less but the plan is riskiest of all (Anderson, et.al. 2015). Change in the design of model is the least risky plan or does not have any risk. An amount of $20,000 will be the initial cost and time period of one month will be taken for implementing this plan. Apart from all this, changing the design of labour force will be considered as an improvement that will benefit in long run. It will also help in determining whether to increase or decrease the workforce. The last option is cost of carrying inventory. If the company holds and store the inventory, it will incur some cost known as carrying cost. This cost is some percentage of inventory cost, for FR it is 5% of average inventory. In non-financial terms the option would pay off if the demand is accurate otherwise it will be risky to opt for this option. Although holding inventory will help in meeting demand quickly but if held for long time, the items can become obsolete and their quality can be damaged due to various reasons such as inappropriate storage or due to some damage (Lal, 2009). The total cost of opting for design change and cost of carrying inventory is almost same but the risk in carrying cost is comparatively higher than the risk involved in design change.

In order to meet the surge in demand, the production manager Martin Kelsey, should go for option of overtime. Reasons being, there will be no cost of hiring and providing training to the new employees if the existing workers do the overtime. Moreover it will be better to use those workers who know about the organisation and its working environment. The existing workers are familiar with the work and the machines used for production. They will be paid a certain amount for their overtime even though it would be significantly more expensive. The option of overtime is also less risky as compare to the option of hiring and training. It would be much better to incur an overtime cost rather than incurring the cost on training the new workers because if the expected demand falls then the hired and trained new workers will be of no use for the company. Further the company may have to fire the workers which results in demoralization among them and also the image of the company can be affected by this. So on a whole, the production manager should consider increasing the existing workforce to meet the surge in demand as it is less risky than the other options.

References

Apics.org. (2012). SALES AND OPERATIONS PLANNING exploring real-world S&OP practices in supply chain and operations management. [Online] Available at: https://www.apics.org/docs/default-source/industry-content/2012-sales-and-operations-planning.pdf [Accessed 26 Dec. 2017].

Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2015. An introduction to management science: quantitative approaches to decision making. Cengage learning.

Awci.org. (2017). The Real Cost Of Overtime. [Online] Available at: https://www.awci.org/cd/pdfs/8107_b.pdf [Accessed 27 Dec. 2017].

Chopra, S., Meindl, P. and kalra, D.V., 2016. Supply chain management, pp.246.

Coyle, J.J., Langley, C.J., Novack, R.A. and Gibson, B., 2016. Supply chain management: a logistics perspective. Nelson Education.

He, J., He, F. and Dong, H., 2012. Pure strategy or mixed strategy? Evolutionary Computation in Combinatorial Optimization, pp.218-229.

Kinney, M.R. and Raiborn, C.A., 2012. Cost accounting: Foundations and evolutions. Cengage Learning.

Lal, J., 2009. Cost Accounting 4E. Tata McGraw-Hill Education.

Morris, P. and Pinto, J.K. eds., 2010. The Wiley guide to project technology, supply chain, and procurement management (Vol. 7). John Wiley & Sons.

Taylor, T. (2017). ADPVoice: The Costs of Training New Employees, Including Hidden Expenses. [Online] Forbes. Available at: https://www.forbes.com/sites/adp/2017/06/02/the-costs-of-training-new-employees-including-hidden-expenses/#346b83eeafb2 [Accessed 27 Dec. 2017].