Operation Management

Operation Management

FoldRite Case Study

Executive Summary

In this case studies, we seek to understand the problem faced by FoldRite and the difficulties

that Martin Kelsey is facing and to provide recommendation for him.

Our finding:

FoldRite exist in a highly competitive environment.

Missed delivery would result in loss of order.

The loss of productivity and yield because of high turnover among factory workers.

Increasing proportional of inexperience workers results in the increase of lead time.

The Demand for FoldRite products was seasonal

Our recommendation:

We recommend 6 strategies that were analyse to provide the right choice for Martin Kelsey to

implement. The 6 strategies are Chase, Level, and Mixed strategies, Subcontracting,

Overtime and Change in design. We focus mainly on Chase, Level and Mixed Strategies as

they were the main principals in Operational Planning. We finally decided that the company

should implement the mixed strategy base on financial analysis and tradeoffs of all the

strategies.

Introduction

At the start of 2010, FoldRite had three major categories with one product each- AlStrong,

GreenComfort and CloudChair. AlStrong, a folding table in which recycled aluminum

replaced the plastic top of the preceding generation tables, accounted for the largest projected

share of the company’s total revenues, at 42%. GreenComfort, a stackable chair upholstered

with a special washable fabric, was expected to generate 34% of the total revenues. Finally,

CloudChair, a new folding chair that conformed to a variety of body shapes, was expected to

provide the remaining 24% of the revenues, including a large portion of the company’s

growth.

The demand for FoldRite furniture is seasonal and fairly stable, increasing in the

spring/summer months. However, the development of the CloudChair (which won a number

of design awards in 2009) as well as the increasing relevance of eco-friendly products led to

an unexpected surge in demand for the company in early 2010. The company had to optimize

its resources (while meeting product quality standards and delivery schedules) and identify

the strategy that would best allow it to meet the unexpected demand. The five strategies it

contemplated were: Overtime, Subcontracting, Hiring New Workers, Training Existing

Workers or Changing the Design.

Financial Costing:

Financial costing is an important decision factors as it will assist the top management to make

potential trade-off to meet the demand of customer. The highest priorities that FoldRite has to

meet is the to ensure that it is able to meet the two weeks delivery time period, as any delay

will lead to loss of goodwill of customer. Delay in delivery will also to lead to increase

competition from rival companies, therefore customer demand must be met and no disruption

to the production line.

Level Strategy: Using Inventory to meet supply and demand

Assumption made by the group: Capacity is able to meet any demand fluctuation,

Formulae for Level Strategy:

Average Demand= Total Demand/ Total month.

Average Demand per day= Average Demand/ Number of production day.

Labour Required (Skilled) per month= Average Demand per day x time taken to produce one

unit x available production hours.

Labour Required (Unskilled) per month= Average Demand per day x time taken to produce

one unit x available production hours.

Cloud Chair AI Strong Green Comfort

Average

Demand/

Month

43690 25576.33 21130.83

Average

Demand/ Day

2622 1534.58 1267.85

Labour

Required

(Skilled)

2622x 2/60x 1/10= 8.74=

9

1534.58x

12.8/60x1/10=

32.7= 33

1267.85x13/60x1/10=

27.4= 28

Labour

Required

(Unskilled)

2622x 9/60x 1/10= 39.3=

40

1534.58x 28/60x

1/10= 71.6= 72

1267.85x 31/60x1/10=

65.5= 66

Total Skilled

Labour

9 +33+28= 70.

Total Unskilled

Labour

40+72+66= 178

Total Salary

(Skilled)

70 labours x10 hours x

(200/12 days) x $25.27=

$ 294816.66

Total Salary

(Unskilled)

178 labours x10 hours x

(200/12 days) x9.9= $

293700

Total Salary per

month

$ 294816.66+ $ 293700=

$ 588516.66

Salary for 6

months

$ 588516.66x6 months= $

3,531,099.96

Chase Strategy: Hiring of New workers

Month Average Skilled Average

Unskilled

Number

of

Skilled

Number of

Unskilled

Total

Salary

March 70 178 69 174 $ 623920

April 70 178 81 212 $ 746219

May 70 178 89 231 $

680389.5

June 70 178 92 241 $

847993.2

July 70 178 86 229 $

766025.6

August 70 178 80 207 $ 692053

Additional

Skilled

Labour

92-70(Average)= 22

Additional

Unskilled

Labour

241-178(Average)=63

Hiring Cost

for Skilled

22x$ 1500= $ 33000

Hiring Cost

for Unskilled

63 labour x $ 66.5= $

4189.5

Total Hiring

Cost

$ 33000+ $ 4189.5= $

37185.5

Total Salary

for 6months

(include hiring

cost)

$ 623920+$ 746219+$

680389.5+$ 847993.2+ $

766025.6+$ 692053+$

37185.5= $ 4393729.8

% increase of using chase strategy= [(Chase Salary- Level Salary)/ Level Salary] x 100

= [($ 4,393,729.8 - $ 3,531,099.96)/ $ 3,531,099.96] x 100

= 24.42 %

Mixed Strategy: Using of both Inventory and hiring new workers to meet demand

Cloud Chair:

Month Jan Feb Mar Apr May Jun Jul Aug

Average Dd 2622 2622 2622 2622 2622 2622 2622 2622

Demand 280 1000 2500 4100 4350 4400 4800 3950

Qty on hand 2342 3964 4086 2608 880 (1258) - -

Al Strong:


Average Dd 1535 1535 1535 1535 1535 1535 1535 1535

Demand 1176 1190 1500 1650 1900 2000 1800 1750

Qty on Hand 359 704 739 624 259 (206) - -

Green Comfort:


Average Dd 1268 1268 1268 1268 1268 1268 1268 1268

Demand 1060 1102 1206 1400 1500 1550 1400 1250

Qty on Hand 208 374 382 250 18 (264) - -

Month Mar Apr May Jun Jul Aug

Salary 588516.66 588516.66 588516.66 847933.2 766025.6 692053

Total Salary (including

hiring cost)

$ 588516.66+ $ 588516.66+ $

588516.66+ $ 847933.2+ $

766025.6+ $ 692053+

$ 37189.5 (hiring cost) = $

4108751.28

% increase of using mixed strategy = [(Mixed Salary- Level Salary)/ Level Salary] x 100

= [(4,108,751.28- 3,531,099.96)/ 3,531,099.96] x100

= 16.35 %

Subcontracting: Paying other parties for work done

Assumption made by the Group: Costing is based on level strategy

Subcontracting Cost = 20% on top of the labour cost + labour cost based on level strategy

= 20/100 x 3,531,099.96 + 3,531,099.96

= $4,237,319.952

Overtime: Instead of hiring more workers, more working hours required on actual staff.

Assumption made by the group: Output/Average demand is based on level strategy

Cloud chair:

Average demand per day : 2622 / (200/12) = 157.32

Additional demand for 4 (Friday)days = 157.32 x 4

= 629.28

= 630

Note: If Overtime will to implement in June, demand will not be met. Therefore overtime

will start in the month of March.

Month March April May June July August September

Average Demand 2622 2622 2622 2622 2622 2622 2622

Actual Demand 2500 4100 4350 4400 4800 3950 2000

Overtime 630 630 630 630 630 630 630

Qty on Hand 4716 3868 2770 1622 74 (624) 628

Based on the chart, Overtime will need to be carried out through the month of September.

Al Strong:


Additional demand for 4 (Friday)days = 92.1 x 4

= 368.4

= 369

Month March April May June July August September

Average Demand 1535 1535 1535 1535 1535 1535 1535

Actual Demand 1500 1650 1900 2000 1800 1750 1500

Overtime - - - 369 369 -

Qty on Hand 739 624 259 163 267 52 87

Green Comfort:


Additional demand for 4 (friday)days = 76.08 x 4

= 304.32

= 305

Month March April May June July August

Average

Demand

1268 1268 1268 1268 1268 1268

Actual Demand 1206 1400 1500 1550 140 1250

Overtime - - 305 305 - -

Qty on Hand 382 250 323 346 214 232

Overtime Cost:

Cost for Cloud Chair: Skilled + Unskilled

= (9 x 10 x 4 x (25.27 + 25.27 x 0.5) x 6 ) + (40 x 10 x 4 x (9.9 + 9.9 x 0.5 ) x 6)

= $81,874.8 + $142,560

= $224,434.8

Cost for Alstrong: Skilled + Unskilled

= (33 x 10 x 4 x (25.27 + 25.27 x 0.5) x 2 ) + (72 x 10 x 4 x (9.9 + 9.9 x 0.5 ) x 2)

= $100,069.2 + $85,536

= $185,605.2

Cost for Alstrong: Skilled + Unskilled

= (28 x 10 x 4 x (25.27 + 25.27 x 0.5) x 2 ) + (70 x 10 x 4 x (9.9 + 9.9 x 0.5 ) x 2)

= $84,907.2 + $83160

= $168,067.2

Total Overall cost: $224,434.8 + $185,605.2 + $168,067.2

= $578,107.2

% of increase = (578,107.2/3531099.96 ) x 100%

= 16.37%

Notes: For cloud chair, overtime may be able to meet the demand on the month of August.

Therefore, there may be a need to hire temporary staff, if not, backlog will occur.

Hiring to meet the demand of August: Additional of 624 cloud chair

Skilled: (624 x 2/60) = 2.08 = 3 workers

Unskilled: (624 x 9/60) = 9.36 = 10 workers

New Cost: Hiring Cost + August Salary

= (3 x 1500) + (3 x 10 x 17 x 25.27) + (10 X 66.5) + (10 x 10 x 17 x 9.9)

= 4500 + 12,887.7 + 665 + 16830

= $34,882.7

New % increment: (34,882.7 + 578107.2)/3531099.96 x 100%

= 612,989.9/35310996.96 x 100%

= 17.35%

Change of Design: Reduction in production time

Assumption made by the group: Output is based on level strategy (2622), The earliest setup

month will be in March.

Workers required will be based on the demand of April, if workers required are based on the

demand of May; there will be a huge amount of inventories stored at the warehouse.

Month January February March April May June July August

Average Demand 2622 2622 Set-up Month 4100 4100 4100 4100 4100

Actual Demand 280 1000 2500 4100 4350 4400 4800 3950

Qty on Hand 0 3964 1464 1464 1214 914 214 364

Number of required workers based on demand of 4100 cloud chairs

Skilled workers: (4100 x 2/60mins)/10hours = 13.6 = 14workers

Unskilled workers: (4100 x 8/60mins(new production times))/10hours = 54.6 = 55workers

Hiring Fee: (New requirement - Actual requirement ) x hiring cost

Skilled: (14 - 9) x 1500 = 7500

Unskilled: (55 - 40) x 66.5 = 997.5

Total hiring fee: 7500 + 997.5 = 8497.5

Total Cost: March to August

March: Set Cost + Hiring Cost + Actual labour salary

= 15000 + 8497.5 + (9x10x18x25.27) + (40x10x18x9.9)

= $135,714.7

April:

14x10x18x25.27 + 55x10x18x9.9

= 63680.4 + 98010

= $161,690.4

May:

14x10x15x25.27 + 55x10x15x9.9

= 53067 + 81675

= $134741

June:

14x10x18x25.27 + 55x10x18x9.9

= 63680.4 + 98010

= $161,690.4

July:

14x10x18x25.27 + 55x10x18x9.9

= 63680.4 + 98010

= $161,690.4

August:

14x10x17x25.27 + 55x10x17x9.9

= 60142.6 + 92565

= $152,707.6

Total Cost for Cloud Chair: $908,235.5

Total Cost for Alstrong: $1,498,312.5

Total Cost for Green Comfort: $1,920,635

Total Overall Cost for 6months: $4,327,183

%increase: (4,327,183 - 3531099.96) / 3531099.96 x 100

= 22.54%

2) What are the risks? How does each of the options accommodate changes in economy

and environment?

Economy Stability

With economic stability, consumers have higher spending power therefore demand would

increase all over the market. Therefore various methods would need to be employed however,

the various strategies would have its own risk and disadvantages too.

During economy stability, when unemployment rate is low, it would be harder to implement

chase and mixed strategy due to workers having higher bargaining power and better choices

in choosing a place to work, eventually hiring cost would be higher. Looking in terms of level

Strategy, it may not have adequate capacity base upon the surge of demand which might

result in backorders and loss of customer goodwill. With the surge of demand, the company

would want to subcontract to have additional capacity but with economic stability the

subcontract would have more bargaining power and its consequence would involve higher

cost. Overtime would be the only best option as it does not have any financial implications on

the company.

Economic Recession

When economic recession is occurring, there would be lesser spending power of the

consumers which would result in low demands all over. Unemployment rate would increase

during the period of recession. Therefore, certain of the strategies would be able to benefit.

The chase and mixed strategy would be easier to implement as people would be looking for

jobs even though if it is for a short term. The company would have higher bargaining power

in terms of recruiting workers as a result hiring cost is lesser. In terms of level strategy, there

would not be much influence on financial costing or production capacity requirement. If there

is a need for subcontracting, it would be cheaper as subcontractors would be looking for

business all around therefore lowering their asking price. With relation to overtime, due to

low demand required there would be lesser need for overtime.

3) How would you weight the options in terms of nonfinancial implications ? ( pros

&cons)

Looking in terms of non-financial implications, one must look through the various tradeoffs

that would affect the workers effectiveness, morale issues and also productivity of the

company. A decision must be made based on the results of the least influence on the

company’s performance. For each individual strategy we would be listing out its pros and

cons to further illustrate and eventually how a decision is being made.

Chase Strategy

Pros: Workers are hired during periods of high demand for a short period of time; therefore

there is no additional working hours for the actual staffs of the place therefore normal

working schedules are followed and not affecting worker’s productivity capability.

Cons: Production has to be on time without any delay which means workers must be

consistent therefore slack is not acceptable. Looking at the constant hiring and firing of staff,

it might affect future employment capability as people would know that job stability is based

on contractual terms.

Level Strategy

Pros: The workers would not need to worry about job security if they are able to meet the

constant production capacity therefore; lesser stress is on the workers which would result in

better work performance.

Cons: Workers maybe underutilize during certain periods due to previous inventory being

able to cover future demand, therefore the company is losing value best on terms of

productivity of workers.

Mixed Strategy

Pros: Is the mixture of both pros of mixed and level strategy.

Cons: Implementation of this strategy is hard if there are difficulties in forecasting, as

accurate data is needed for the mixed strategy to work perfectly.

Overtime

Pros: Over fully utilization of workers and machines and having increase productivity.

Cons: Such as long periods of continuous work reduce worker ability to think straight and

increases the risk of a disastrous mistake; also introduced fatigue due to the sleep deprivation

that leading to declines in quality and yield. Thus, low productivity and high costs will make

Foldrite performance going down..

Subcontracting

Pros: Responsibility is pushed away from the company allowing focus on other production

areas, allow workers to have more slack time due to lesser production requirement.

Cons: High amount of trust is needed as control over production is not in the company’s

hands anymore. Subcontracting can results in possibility of delays which eventually effect

lead time. So, such long response time and quality problems would result lose its revenue in

the future. Therefore, a reliable subcontractor is needed and proper sourcing must be done.

Conclusion

When both pros and cons are fully assessed, we should make a decision based on the least

tradeoffs possible together by seeing which strategy has the most pros and also looking at the

cons which has the least influence on workers and production capability. We would weight

workers morale the most important factor as it would affect productivity eventually.

4) Is the company history a factor in Martin’s choice of options? Would he make a

different recommendation in a different economy or competitive environment?

Facts: Highly competitive environment- missed delivery results in loss of orders

Loss of productivity and yield because of high turnover amount of factory workers and

increasing proportion of inexperience workers- result in increase of lead time.

The company history will be greatly influence Martin’s decision as any choice made without

consideration may lead them back to the company dark age. Therefore, hiring and firing

strategy may not work well with both the investors and the management.

Highly competitive environment means that meeting the demand of customers is always be

highest priority, if not, company reputation will be affected and there will be a loss of

customer’s goodwill.

Therefore, the organization will need to devise a good training program if recruiting staff is

required. A well-though development program will also be required to ensure that the

company will be able to retain workers. These programs will help to reduce high turnover

rate and ensure that all workers receive proper training before working. A well trained

workforce would be able to cope with fluctuating demands and also solve problems that may

arise in the future.

5) What recommendation would you make to Martin Kelsey?

Recommendation to Martin Kelsey

Chase Strategy

To implement chase strategy, additional staff is hired when there is a need for them. The

hiring is done for the reason on meeting the surge in demand of various products. When a

period of a surge of demand is over, the additional staffs that were hired would have their

jobs terminated.

Pros: Implementing this strategy would allow the manufacturing company to meet up with

demand and there would be less chance of backlog orders. There would not be any

underutilization of workers, as the right amounts of workers are hired to produce capacity

that matches demand.

Cons: It can be costly due to the hiring and firing costs; also to train a worker would involve

training cost and time, factors that are very important to an organization. It would not be

effective during periods of low unemployment rate in a country.

Rise in Percentage Cost: 24.42%

Additional Skilled labour: 22

Additional Unskilled labour: 63

Level Strategy

Implementing a level strategy is to have constant production rate with a consistent

employment level. Production level will always be consistent base on the average demand of

certain products; the demand is spread throughout the various months to have a consistent

monthly production rate.

Pros: When this strategy is implemented, there would be full utilization of workers; the

turnover rate of the company would be low, therefore hiring or firing cost, morale of the

workers would not be affected as compared to other strategies. Effective when there is lesser

competitors.

Cons: The holding of inventory during periods of lesser demand would involve some cost. If

there were to be a sudden surge of demand, there would be a rise of backorder cost and loss

of customer’s goodwill. Reputation might be affected in the long run.

Percentage Cost: The base cost ($3,531,099.96) [6 months March-August]

Level Skilled labour: 70

Level Unskilled labour: 178

Mixed Strategy

It is the mixture of chase and level strategy. When there is a sudden surge of demand,

workers would be employed to match the capacity with demand. However the hiring sessions

is lesser compared to Chase Strategy. This is because, with the level strategy being

incorporated, the excess inventory is being used to cover a certain portion of the fluctuated

demand therefore requiring lesser work hours which would result to lesser workers being

hired.

Pros: Implementing this strategy would reduce certain tradeoffs of chase and level strategy. It

would be cheaper then chase strategy due to various reductions in cost, workers would be

fully utilized, able to reduce backorders therefore various cost would be reduce. The ability to

meet with customers demands would help maintain the reputation of the company.

Cons: There are still cons involved; however it would be lesser as compared to both chase

and level strategy. Various cost such as training, hiring and firing cost is still involved but at

a lesser amount as compared to chase strategy. Workers morale would still be affected due to

the continuous hiring and firing, this might affect the production value of a worker.

Additional Skilled Workers: 22

Additional Unskilled Workers: 63


Subcontracting

Subcontracting is done when another manufacturer is hired to help in production of a product.

This method is approached when additional capacity is needed in relation to a sudden surge

in demand whereby the Company is unable to meet by its own capacity.

Pros: When a subcontractor is hired, the responsibilities are pushed to the subcontractor and

therefore more concentration can given to other production lines. The company is still able to

produce its own maximum capacity without hiring additional workers.

Cons: There is lesser control on the production as responsibilities are being pushed. It would

be costly to hire a subcontractor as it also depends on the market situation. A big portion of

trust is needed when getting a subcontractor as vital information is needed to be shared. There

might also be delays due to subcontractor not being able to meet with delivery date.

Rise in Percentage Cost: 20%

Production Design Change

The production design change would only involve Cloud chair production methods, by

implementing this procedure; it would help to reduce 1 minute for producing a Cloud chair.

Pros: If implemented the overall accumulative on time saved in production would be

reflected in the reduction of working hours for cloud chair.

Cons: It would be costly due to backorders cost and possibility lost of customer’s goodwill;

also it affects the production procedure for cloud chair only. Therefore there is not much cost

that is being saved overall.


Overtime

Overtime is done to meet a sudden surge in demand; workers are required to work an extra

shift, day or additional hours to increase the production capacity which matches the demand

asked. Workers would be paid more in addition to their regular pay for the extra services

rendered.

Pros: Overtime allows the company the ability to meet with demand without hiring

additional workers therefore there would be savings in various costs as mentioned above.

Workers are fully utilized as more is produce from them.

Cons: When overtime is implemented, workers morale might be affected as they would have

lesser time for their personal activities. With the moral of workers being affected, there might

be higher turnover rates and the effectiveness of a worker would be lesser than usual which

would result in not being able to meet with demand, hiring and training cost in the future.

Rise in Percentage Cost: 16.37% / 17.35% (Meet August Demand)

Conclusion

Based upon the findings and calculations done, it is best if the company make use of the

Mixed Strategy. With the mixed strategy, the rise of cost is the least compared to the other

various strategies identified. The tradeoffs with the mixed strategy has a smaller amount of

impact it has on the company as it is making use of the pros of both chase and level strategy

while reducing the tradeoffs of both strategies respectively. Therefore the best strategy to be

utilized would be the mixed strategy.

Strategy Level Chase Mixed Overtime Outsource Design

Change

Cost $3531099.96 $4,393,729.

8

$4,108,751.28 $4,109,207.16

$4,144,089.86(Meet

August Demand

$4,237,319.952 $4,327,183

%

increase

Based % 24.42 % 16.35 % 16.37%

17.35%(Meet

August Demand)

20% 22.54%

Reference:

Nigel, S. & Jones, A. & Robert, J. (2011):”Operations Management”, Retrieved in Sep 9,

2012.

Andrew, G., (2010): “Operations Management”. Retrieved in Sep 9, 2012, from

http://www.gaebler.com/Inventory-Management.htm

Carter, M., (2010): “Health and productivity risks in working long overtime hours part one”.

Retrieved in Sep 9, 2012, from

http://alexk2009.hubpages.com/hub/Health-risks-of-Overtime-part-one

Joe, G., (2012): “Benefits of Employee Training Program: Employee Training Plan”.

Retrieved in Sep 9, 2012, from

http://www.morebusiness.com/running_your_business/management/d1023665813.brc

Bozarth, C.C. and Handfield, R.B. (2012) Introduction to Operations and Supply Chain

Management Third Edition. England: Pearson

Slack, N., Brandon-Jones, A, and Johnston, R (2011) Essentials Of Operations Management

Prentice Hall: Financial Times

Documents

Operation Management