Chair Manufacturing Operation. Operation Strategy (Ankush Moham) Process (Jae Won Yu) Forecast &...

Treehugger Furniture Company

Chair Manufacturing Operation

Operation Strategy (Ankush Moham)

Process (Jae Won Yu)

Forecast & Production (Prab Sandhu)

Site & Equipment (Alvin Hoang)

Workforce & Layout (Marco Echandi)

Material Planning (Adil Almoshawuh)

Introduction

Objective◦ To provide quality chairs to cost sensitive middle

class customers

Priority◦ Minimize upfront capital investment◦ Maximum equipment utilization◦ Reduce material and product transportation cost

Operation Strategy

Process Choice: Batch

◦ Minimal equipment purchase

◦ Maximum equipment utilization

◦ Reduced overhead (4 sub-group)

◦ Great cost saving process for simple assembly product

Process Choice & FlowCut:

Legs / leg supports

Cut: Seat-frame boards

Cut: Back slats

Lathe: Back legs

Lathe: Front legs

Lathe: Leg supports

Drill: Back legs

Drill: Seat-frame boards

Assembly: Ladder-

back

Assembly: Seat

Assembly: Seat-frame

Paint

Assembly: Seat

cushion

Drill: Front legs

Process Step 1

Process Step 2

Process Step 3

Process Step 4

Process Step 5

Process Step 6

Process Step 7

Process Step 8

Process Step 9

Cut: Legs / leg supports


Cut: Back slats

Lathe: Back legs

Lathe: Front legs

Lathe: Leg supports

Drill: Back legs

Drill: Seat-frame boards

Assembly: Ladder-

back

Assembly: Seat

Drill: Front legs

Cut: Legs / leg supports


Cut: Back slats

Lathe: Back legs

Lathe: Front legs

Drill: Back legs

Why use casual judgment method?

◦ It’s a long term project – longer than two years

◦ Linear regression Functional relationship between two or more

correlative variables Useful for long-term forecasting of major occurrences

and aggregate planning y = a + bx

Forecasting: Casual Judgment Method

Product ForecastMonth Units

1 12002 20003 2300 QTR 1 55004 21005 14006 1600 QTR 2 51007 25008 20009 1800 QTR 3 6300

10 260011 220012 1800 QTR 4 660013 222414 226515 2306 QTR 1 679516 234717 238818 2429 QTR 2 716419 247020 251121 2551 QTR 3 753222 259223 263324 2674 QTR 4 790025 271526 275627 2797 QTR 1 826828 283829 287930 2920 QTR 2 863631 296132 300133 3042 QTR 3 900434 308335 312436 3165 QTR 4 9373

Year

1Ye

ar 2

Year

3

Month 1 2 3 4 5 6 7 8 9 10 11 12

Unit 1200 2000 2300 2100 1400 1600 2500 2000 1800 2600 2200 1800

Chase strategy◦ Match the production rate to the order rate by

hiring and laying off employees as the order rate varies

Stable workforce◦ Variable work hours – Vary the output by varying

the number of hours worked through flexible work schedules or overtime

Level Strategy◦ Maintain a stable workforce working at a constant

output rate. Shortages and surpluses are absorbed by order backlogs and/or lost sales

Production Planning Strategy

Aggregate Production Planning Requirement

Aggregate Production Planning Requirements

Year 1 Year 2 Year 3

QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4

Beg inventory 0 1375 1275 1575 1650 1699 1791 1883 1975 2067 2159 2251

Demand forecast (From linear regression) 5500 5100 6300 6600 6795 7164 7532 7900 8268 8636 9004 9373

Safety stock (.25 * demand forecast)

1375 1275 1575 1650 1699 1791 1883 1975 2067 2159 2251 2343

Production requirement (Demand forecast + safety stock - beginning inventory)

6875 5000 6600 6675 6844 7256 7624 7992 8360 8728 9097 9465

Ending inventory (Beg inventory + production req - demand forecast)

1375 1275 1575 1650 1699 1791 1883 1975 2067 2159 2251 2343

Production Plan ExampleProduction Plan 4: Constant Workforce + Overtime

Year 1 Year 2 Year 3

QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4 QTR 1 QTR 2 QTR 3 QTR 4 Total

Beginning inventory 0 1375 1275 1575 1650 1699 1791 1883 1975 2067 2159 2251

Working days per month 60 60 60 60 60 60 60 60 60 60 60 60

Production hours available (working days * 8 hr/day * 20 workers) 3180 3180 3180 3180 3180 3180 3180 3180 3180 3180 3180 3180

regular shift production (production hours/5 hrs per unit) 636 636 636 636 636 636 636 636 636 636 636 636

Demand forecast 5500 5100 6300 6600 6795 7164 7532 7900 8268 8636 9004 9373

Units before overtime (beg inv + regular shift production - demand forecast) -4864 -3089 -4389 -4389 -4509 -4829 -5105 -5381 -5657 -5933 -6209 -6486

Units overtime 4864 3089 4389 4389 4509 4829 5105 5381 5657 5933 6209 6486

Overtime cost (units overtime * 5hr/unit * 6hr) $145,920 $92,670 $131,670 $131,670 $135,281 $144,861 $153,146 $161,430 $169,714 $177,998 $186,282 $194,566 $1,825,207

Safety stock 1375 1275 1575 1650 1699 1791 1883 1975 2067 2159 2251 2343

Units excess (units before overtime - safety) only if positive amount 0 0 0 0 0 0 0 0 0 0 0 0

Inventory cost (units excessive * 1.50) 0 0 0 0 0 0 0 0 0 0 0 0

Straight - time cost (production hours available * 4) $44,160 $44,896 $45,632 $46,368 $47,104 $47,840 $48,576 $49,312 $50,048 $50,784 $51,520 $52,256 $578,496

TOTAL $2,403,703

Production Plan Comparison

CostConstant Workforce

Vary Inventory

Exact Production

Vary Workforce

Low Workforce

Subcontract

Constant Workforce

Overtime

Hiring $63,692

Layoff

Excess inventory $8,517

Shortage

Subcontract $1,184,946

Overtime $1,825,207

Straight Time $578,496 $578,496 $578,496 $578,496

$587,013 $642,188 $1,763,442 $2,403,703

Manufacturing Site

Winner• Medford, OR

Other Candidates• China• India• South East Asia

Business Cost (Medford, OR)

Categories Cost1 Land Cost Approx. $4.50/sq-ft

2 Cost to Construct, or Lease $0.30-$0.60/sq-ft. New construction $35-$45/sq-ft

3 Corporate Income Tax 6.6% Net Income

4 Sale Tax None

5 Property Tax $14.41/1000

6 Inventory Tax None

7 Worker’s Compensation $0.16-$0.47/100 salary

8 Unemployment Insurance 3% first $23k salaryThereafter is the 1.6% state Avg.

9 Business License Fees $100/yr

10 Electricity Rates Oregon: $0.0745/Kilowatt hrNational average: 0.1040/ Kilowatt hr

11 Wages Latest Minimum Wage: $8.40/hr

12 Unemployment rate 10%-13%

EquipmentsEquipment

TypeCost Maintenance Unit Note

Straight Cutter$2000 2hr/wk PM

95% uptime2 Fast process time, reliable

Flex Cutter$2800 3hr/wk PM

90% uptime2 Fast process time, but lowest reliability

Lathe$8000 3hr/wk PM

95% uptime3 Long process time, require more units

Drill$1000 1hr/wk PM

98% uptime2 Fast process time, minimal PM, reliable

4 small and experienced work groups◦ Required for batch process methodology

High quality standards Work as a team in designated area to build skills

Cut team Lathe team Drill team Assembly team

Local workers◦ Help benefit our local economy

Workforce

Simple◦ Batch process

Minimal tool changeover time

Low overhead

Cost Effective◦ Shared tools◦ Smaller facility

LayoutRaw Materials

Straight/Flex Cutter

Lathe

Drill

WIP holding

area

Assembly

Area

Shipping

Receiving

Objective◦ The calculate cost of the needed raw materials.

Assumptions◦ Fixed price for each raw material◦ Every piece of raw materials is inspected prior to

delivery◦ Cost of delivering the raw material to the factory

is included in the price of the raw materials

Materials Requirement Planning

Cost of raw material needed to manufacture one chair


Type of Raw

MaterialCost/ea.

Parts of a Chair that can be made with one unit of this raw material

Type Quantities Cost/Unit Unit/Chair Cost/Chair

Rod $1.50Set of Back\Front

legs1 $1.50 2 $3.00

Rod $1.50 Leg Supports 3 $0.50 4 $2.00

Thin Board $2.00 Back Slats 6 $0.33 4 $1.33

Thick Board $2.50 Seat-frame boards 10 $0.25 4 $1.00

Seat Cushion $5.00 Seat cushion 1 $5.00 1 $5.00

Total cost of raw materials to manufacture one chair $12.33

Example (cost of 2,000 chairs)


Raw Material Needed Cost/Unit Quantity (R) Cost

Rod for Set of Back\Front legs $1.50 4000 $6,000

Rod for Leg Supports $1.50 2668 $4,002

Thin Board $2.00 1334 $2,668

Thick Board $2.50 800 $2,000

Seat Cushion $5.00 2000 $10,000

Total cost of raw materials $24,670

Initial Capital Investment◦ Equipment = $35,000

Monthly Cost (Avg. 2000 chairs)◦ Labor = Approx. $15,000◦ Material = Approx. $25,000◦ Logistics = Approx. $10,000◦ Building = Approx. $7,000

Total Cost◦ $92,000

Revenue / Month◦ Sales price = $59.99◦ Revenue = $120,000◦ Profit = $63,000

Breakeven Point◦ 3 months

What Does This Mean To You?

Hug a tree everyday!

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