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 demand for Foldrite Furniture products. Introduction: On our companys 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 companys 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 delivery 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 with subcontracting all our work is the fact that subcontractors will not be as vested in the companys success as hired 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 year. 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 CloudChair AlStrong GreenComfort January 4480 18816 16960 February 15000 17850 16530 March 45000 27000 22680 April 73800 29700 25200 May 65250 28500 22500 June 79200 36000 27900 July 86400 32400 25200 August 67150 29750 21250 Septem ber 34000 25500 21250 October 27000 25200 22500 Novem ber 14400 20800 17600 Decem ber 12600 15400 14000

Available Skilled Hours (Monthly Production)*(73 w orkers) Skilled Hours for needed for CloudChair Skilled Hours needed for AlStrong Skilled Hours for needed GreenComfort Production Days in a Month Required Skilled Hours Available-Required # of Needed Skilled Workers (AvailableRequired/ 10*number of production days in a month) # of Needed Skilled Workers (Estim ate)

11680 9.82 264.08 241.75 16.00 8251 3429.39

10950 35.09 267.23 251.33 15.00 8305 2645.26

13140 87.72 336.84 287.37 18.00 12815 325.26

13140 143.86 370.53 319.30 18.00 15006 (1866.32)

10950 152.63 426.67 342.11 15.00 13821 (2871.05)

13140 154.39 449.12 353.51 18.00 17226 (4086.32)

13140 168.42 404.21 319.30 18.00 16055 (2914.74)

12410 138.60 392.98 285.09 17.00 13883 (1473.33)

12410 70.18 336.84 285.09 17.00 11766 644.21

13140 52.63 314.39 285.09 18.00 11738 1402.11

11680 31.58 291.93 250.88 16.00 9190 2489.82

10220 31.58 247.02 228.07 14.00 7093 3126.67

(21.43) (21.00)

(17.64) (18.00)

(1.81) (2.00)

10.37 10.00

19.14 19.00

22.70 23.00

16.19 16.00

8.67 9.00

(3.79) (4.00)

(7.79) (8.00)

(15.56) (16.00)

(22.33) (22.00)

Available Unskilled Hours Production )*(186 w orkers)

(Monthly 29760 44.21 577.68 576.49 16.00 19174.18 10585.82 (66.16) (66) 27900 157.89 584.56 599.33 15.00 20126.84 7773.16 (51.82) (52) 33480 394.74 736.84 685.26 18.00 32703.16 776.84 (4.32) (4) 33480 647.37 810.53 761.40 18.00 39947.37 (6467.37) 35.93 36 27900 686.84 933.33 815.79 15.00 36539.47 (8639.47) 57.60 58 33480 694.74 982.46 842.98 18.00 45363.16 (11883.16) 66.02 66 33480 757.89 884.21 761.40 18.00 43263.16 (9783.16) 54.35 54 31620 623.68 859.65 679.82 17.00 36773.68 (5153.68) 30.32 30 31620 315.79 736.84 679.82 17.00 29451.75 2168.25 (12.75) (13) 33480 236.84 687.72 679.82 18.00 28878.95 4601.05 (25.56) (26) 29760 142.11 638.60 598.25 16.00 22063.16 7696.84 (48.11) (48) 26040 142.11 540.35 543.86 14.00 17168.42 8871.58 (63.37) (63)

Unskilled Hours needed for CloudChair Unskilled Hours needed for AlStrong Unskilled Hours needed for GreenComfort Production Days in a Month Required Unskilled Hours Available-Required # of Needed Unskilled Workers (AvailableRequired/ 10*Production days in month) # of Needed Unskilled Workers (Estim ate)
Cost of Hiring Overtime:

Cost of having skilled workers work overtime: (June+July+August)= 11*18* 10*19*1.5+16*18*10*19*1.5+9*17*10*19*1.5=$182115 Cost of having unskilled workers work overtime: (June+July+August)= 38*18*10*9*1.5+54*18*10*9*1.5+30*17*10*9*1.5=$292410 Total Cost of overtime: 182115+292410=$474525 Cost of Subcontracting: Cost of subcontracting skilled workers: (June+July+August): 11*18* 10*19*1.2+16*18*10*19*1.2+9*17*10*19*1.2= $145692 Cost of subcontracting unskilled workers: (June+July+August): 38*18* 10*9*1.2+54*18*10*9*1.2+30*17*10*9*1.2= $237168 Total Cost of Subcontracting: 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 Recruiting Costs for unskilled 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 Total Cost of hiring New 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

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

Hiring new Workers Hybrid: Subcontracting unskilled workers and hiring new workers

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.

4 1 1 4

3 2 2 3

1 4 1 4 4

2 3 2 3 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 companys 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 change 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.