AGGIE ENTERPRISES

DECEMBER 2005, CONFERENCE ROOM OF AGGIE ENTERPRISES

Jane Olsen, Marketing Manager, Aggie Enterprises: According to our sales associates, we lost a number of potential orders this past year because we were not as responsive or flexible to special orders as we have been in the past. If we can work together to do a better job, the sales staff feels that we can sell more than 18,000 standard cycles in 2006, and they are equally optimistic about our other products. Jack Walters, Manufacturing Manager, Aggie Enterprises: Last month ago you presented a sales forecast for 16,000 standard cycles next year. Now you've raised that by almost fifteen percent! How do you expect us to meet your needs when you are changing the forecasts on us? Jane Olsen: Do you want me to tell you what we can sell or what we have available to sell given your inability to be meet our customers needs? We could have sold more than 16,000 of the standard cycles last year but for your inability to produce. This company was built on customer service but now your problems are slowly destroying our reputation. You are always slow on special orders. If you had more inventory we wouldn't have the response problem." Hal Larsen, Warehouse Manager, Aggie Enterprises: Forget about adding inventory. It's not only costing us to hold what we have but were out of space in the warehouse. I'd have to lease more space, and that will be expensive. Besides, the problem seems to be that we always have the wrong items in inventory Jane Olsen: "I don't know why you keep having production problems, but I do know that several of our best customers have threatened to drop our products if we don't do a better job of serving them. We cant compete on service and flexibility and then constantly have back orders John Northern, CEO Aggie Enterprises: I've heard enough of this. Jane, I want you to get your best forecasts to Jack as soon as possible. Jack, take the information and develop what you believe to be your best production plan and include all relevant costs. Talk to Hal about inventory cost data. If we need to run a second shift, let me know when we need it and make sure it isn't more expensive than leasing warehouse space. We cant afford the back order and service problems that are starting to sour relationships with customers. See how the process works with the recumbent cycles. If it seems to be working, we can extend it to our other products. We need to move fast, we have less than two weeks to go before 2006 sales start.

PRODUCTION ENVIRONMENT Aggie Enterprises (AE) produces two types of recumbent exercise cycle: standard and deluxe. Each has several models associated with it. While the two are different in terms of the features they offer and parts they use, for production planning purposes they are considered to have similar production requirements and costs. The company uses mostly semiskilled workers. The average worker is paid a starting salary of $11.00/hour plus $3.25 in benefits. This rises to a maximum of $17.00 and $3.75 respectively for an experienced worker, but the average for all workers over the last couple of years has been $12.70 plus $3.50 in benefits. On average, it takes ten worker hours to produce one cycle.

Until now, the company has operated a single eight-hour shift five days a week. Each shift can use a maximum of 150 workers. Overtime can be used, however the labor cost is 150% of the base pay (there is no change in benefit cost) and is limited to eight hours per worker per week. A second shift can be used if necessary but the hourly labor rate would increase by 25% due to a second shift premium (benefit costs would not change). Typically a new employee takes about three weeks to reach full productivity. However, for planning purposes the company assumes full productivity at the time of hire. On average, the cost of hiring and training a new employee is about $1100. If an employee is laid off, the company estimates an average cost of $1800 to cover unemployment and other expenses. There are currently 110 direct labor employees. The company estimates that for every 50 direct labor employees, they need two supervisors, one clerk, and two maintenance people. The total cost for these people is estimated at $200,000 per year, including benefits. The company currently employs six supervisors, three clerks, and six maintenance people for the recumbent line of products. While the company has avoided layoffs, John is willing to consider layoffs. For the coming year, the number of workdays per month is as follows: Month Days Jan 20 Feb Mar 20 23 Apr 18 May Jun 21 23 Jul 21 Aug Sep 21 21 Oct 21 Nov Dec 20 21

According to Hals records, there are currently 1,000 standard and 1,140 deluxe cycles in inventory. He estimates he only has room for 3,000 recumbent cycles in the warehouse. The cost to keep one bike for one month in the warehouse is currently about $9. The lowest cost to lease warehouse space is $12 per cycle/month. Jane has provided the following sales data for the last four years for the recumbent line: Year 2002 2003 2004 2005 Jan 1026 1172 1440 1646 Feb 1421 1619 1907 2032 Mar 1696 1947 2311 2779 Apr 2097 2330 2860 2905 May 2116 2596 2788 3416 Jun 3079 3445 3358 3882 Jul 2478 3075 3069 3928 Aug 2290 2615 3078 3120 Sep 1930 2127 2307 2989 Oct 2097 2608 2434 2392 Nov 1407 1398 1995 2339 Dec 1428 1831 1538 1860

It is now up to Jack to put together a plan for 2006 . . .