s - Mandexor_Memory_Case_Study by stariya


									Question 1

What level of output will be required each month for the plant to meet its
demand?                                                       (10 marks)

Question 2

What production plan would you recommend to meet the demand outlined in
1) above?                                               (30 marks)

Question 3

What combination of „strategies‟ would you recommend in order to
meet the production plan, explaining why you selected these
strategies?                                                 (25 marks)

Question 4
How might production levels be changed in the light of changes in the forecast
demand?                                                     (10 marks)

                                    Mandexor Memory

Case date

Nigel Slack

In November 1999, Mat Frankel was promoted to the post of Operations
Manager of the company‟s European Disk Drive Division, located just outside
Dublin. An American, he had been given the job for two reasons. First, the
parent company in the USA was concerned at the poor record of the Dublin
plant in terms of meeting production targets which, it was felt, he could
improve. Second, the whole of the European operation was about to
reorganise. The reorganisation would take away each division‟s sales and
marketing function and centralise them into a Marketing Division. It was hoped
that this new division would rationalise distribution, reduce overall stock
investment and improve the quality of sales forecasts. Each manufacturing
division would then sell to the sales division at cost, plus a small percentage.
The Marketing Division would take responsibility for all finished goods stocks.
This form of organisation had been used by the US company for some years
and it particularly wanted an American Operations Manager during the
changeover period.

Previously, Mat had been the Production Controller of an equivalent plant in
the USA. His experiences there had developed his ideas on how operations

Operations and Service Management          1
should be run. At his first management meeting in December 1999 he
addressed his new team.

„The main problem with running a plant like this, especially in the computer
business, is that there is such a lot we don‟t know. Of course, we never know
what sales are going to be. Sure, we have forecasts, but I suspect that our
forecasters do little more than guess. And who can blame them? With so
much technical innovation, who knows what lies around the corner? But it is
not only external unknowns that are the problem. We are not even sure of the
true cost of our actions. For example, what is the real cost of holding
inventory? A million dollars worth of inventory can halve in value overnight if
the technology changes. At other times, its value can actually increase if there
is a shortage in the market. Nor do we have any real idea of the true cost of
lost sales if we run out of inventory, or the cost to our reputation if we fail to
meet delivery dates.

„I know what you might say. “How can we find out true costs when we are
continually changing schedules because the forecasts are changing?” Well,
while I have some sympathy with that, we cannot always blame other people.
I know better forecasts would help us significantly, but we must also put more
effort into both planning to cope with inaccurate forecasts and being able to
respond flexibly when we need to. Also, what is the use of complaining when
it is the very nature of management to cope with some fundamental tensions?
Different parts of the business have always wanted different things. The
finance people are concerned with minimising inventory levels so that they
can cut our levels of working capital. Marketing are only concerned with
having plenty of product to sell at any time. In operations, we like to minimise
our own costs by minimising any disruption to our production plans.

„But from now on we are going to take a lead. We are going to plan the
production levels for our factory in such a way as to give everybody what they
want. From now on we schedule in such a way as to minimise our own costs,
give marketing the goods they want when they want them, and keep inventory
levels at a minimum. I know that‟s one hell of a task, but if we don‟t do it, no
one else can.‟

Marketing considerations

Mandexor Memory produced and sold three basic ranges of disk drive,
modified only slightly for different markets. The first range of products was
known as the „Consumer‟ range. These products were relatively small disk
drives which were sold into the consumer market as added memory products.
Some were intended for external use while others were mounted internally.
Also, both external and internal drives were made with different storage
capacities. However, there was a very high degree of parts commonality
between the different types and every model within the range could be
manufactured on the same production line, without modification. The products
in the second range, known as the „PC Drive‟ range, were large disk drives
sold to personal computer manufacturers for assembly into their products.
Again, these came in different sizes and with slightly different specifications,

Operations and Service Management       2
but had a very high degree of similarity and parts commonality. The third
range was known as the „Professional‟ range. These were stand alone drives
of very high capacity mounted within their own enclosures and sold to a wide
range of professional information technology (IT) users.

The Consumer product range was sold primarily through large retailers, both
physical retailers and Internet retailers. More recently, Mandexor had started
selling direct to the public through its own Internet site. As yet, this only
accounted for three to four per cent of total Consumer range sales. The PC
Drives were sold to computer manufacturers under short and medium-term
contracts. Typically, a computer manufacturer would place an order for
several thousands drives of various types to be delivered on specified dates.
Usually this contract allowed the PC manufacturer to vary quantities and
delivery times at relatively short notice without compensation. Although there
was a considerable price competition in this market, Mandexor realised good
margins on its PC range. This was because it had an excellent reputation for
the quality and reliability of its products. The top-end PC manufacturers were
willing to pay slightly more for Mandexor drives because of their proven
reliability. The Professional range of disk drives was sold through a variety of
channels. Some were sold directly through the company‟s Internet site, some
to the larger computer manufacturers for installation as part of their own
systems but most were sold through specialist IT systems suppliers.

Mandexor sold disk drive products from stock all over the world; because of
this market fluctuations were, to some extent, smoothed out. However,
forecasting was notoriously difficult for three reasons. First, computer sales as
a whole were dependent on overall economic growth. While this had been
strong in most markets throughout the late 1990s, regional economic
downturns could still impact on Mandexor‟s sales. Second, technology was
continually shifting both in terms of disk drives themselves and in other
aspects of computing. Although technology changes had not had any major
impact on the company for several years, press speculation surrounding
technology change could cause fluctuations in the supply chain. Third, there
was market seasonality in disk drive sales. This was a result of the Christmas
gift market and, more significantly, financial year end points. Typically, the
August low point was around 60 per cent of the December peak. The actual
retail sales for 1999 are given in Appendix 27.1. Forecasts of the orders for
each range were made every month for the next four-month period. Also,
every quarter a four-quarter forecast was made and occasionally a 12 month
forecast was made. At the monthly sales/production meeting, these forecasts
were used to agree a month-by-month production plan with the Operations

Manufacturing considerations

Manufacturing at the plant consisted of parts fabrication and assembly. Parts
fabrication operations included metal shaping and forming which were done in
batches on various machines. Unusually, Mandexor also produced some of
their „disk media‟. This was the coated surface on which information was

Operations and Service Management      3
stored. The reason for this was partly historical, but was also justified in terms
of keeping close to the technical developments in the media-coating process.
Assembly operations were line-based, with the lines carefully balanced using
standard times. More and more assembly and inspection jobs were being
automated as cost reduction opportunities became evident. Mat Frankel had
said his plant now had a five-day capacity of about 16,500 drives per week.

After the monthly sales / production meeting, the Plant Manager would
translate the production plan into its „standard hours‟ equivalent. This was the
unit of production which enabled production to be aggregated and the loading
on the plant calculated. The standard hours for each product was derived from
the number of direct labour hours needed to manufacture it, and incorporated
various allowances. Thus the monthly forecast for each product type was
multiplied by its standard hour equivalent and summed to obtain the factory

Appendix 27.2 shows the four-month forecasts and the actual factory loadings
at each monthly meeting during 1999. Normally the model mix produced
consisted of about two Consumer range products to three PC range products
to one Professional range product. The standard hours content of the
Consumer range products was 80 per cent of the content of the PC range
products; the Professional range products was 120 per cent of the standard
hours content of the PC range products. If mix changes occurred, assembly
lines could be rearranged. Operators were transferred among the three
production lines with only marginal loss of efficiency – about half the assembly
personnel had been employed for at least four years, and they had developed
versatility in working on the different models. Many parts were
interchangeable among the models and parts were made in job lots so that
product mix changes did not significantly affect labour loads in the parts
machining and processing departments. Because of this and the recent
stability of the product mix, manufacturing personnel usually described output
in terms of „unit drives‟ rather than „standard hours‟.

The plant was heavily unionised but labour relations had been generally good
for the last few years. The company‟s employment record had been good,
with no redundancies and minimum of four weeks‟ notice given for any
working practice change or overtime. Wage rates were about average for the
area, but fringe benefits were better than average. The whole plant shut down
for the last two weeks in July and the first week in August.

Fixing the production programme

January 2000 saw the Sales Division formed and Mat‟s first production budget
meeting. This was the meeting at which the guidelines would be agreed
between Production and Sales for production volumes over the coming year,
and a preliminary overall production plan penciled in.

Mat rather shocked the meeting by making what some regarded as a
„delaying‟ proposal.

Operations and Service Management       4
„I am firmly convinced that we could save considerable amount of money by
examining our production schedules. I propose that we set up a small working
party to examine the costs involved in adopting a number of strategies,

       Keeping production levels constant and absorbing demand fluctuations
        by varying finished goods stocks
       Using overtime on an extensive basis in peak periods and allowing
        underutilisation of labour during slack periods
       Hiring an extra shift for peak production and laying them off later in the
        year, if necessary
       Subcontracting out some of our parts fabrication over to assembly.‟

Rather reluctantly, the meeting agreed to postpone any decisions for two
weeks while the working party examined Mat‟s alternative „strategies‟.

The working party

The working party met five days later and consisted of one representative
from each of Production Control, Accounts, Sales and Marketing, and
Distribution (now in the Marketing Division). They had two documents for
consideration – a sales forecast for 2000 and some brief information prepared
by the Accounts Department concerning each strategy. These two documents
are shown in Appendices 27.3 and 27.4. In addition, the production control
representative tabled a preliminary analysis of production requirements based
on the 2000 forecast. This is shown in Appendix 27.5.

The production control representative put his view of the problem:

„We have to tackle this problem in the right order. First we need to look at the
actual level of output that will be needed over the year, then we can decide
how, ideally, we might like to meet this output requirement. Lastly we need to
have some idea of how to increase or decrease output if our forecast
changes, and under what circumstances we would break away from the
production plan.‟

Appendix 27.1

Actual average weekly orders (rounded) in unit drives 1999

Month              Consumer         PC            Professional     Total
Jan                5500             7950          2750             16200
Feb                5190             7560          2650             15400
Mar                5950             8800          3050             17800
Apr                7100             10400         3500             21000

Operations and Service Management           5
May                5500             8300        2700            16500
Jun                5050             7250        2500            14800
July               4900             7190        2410            14500
Aug                4750             7050        2350            14150
Sept               5050             7550        2550            15150
Oct                5600             7750        2700            16050
Nov                5150             8800        2600            16550
Dec                7550             12150       3800            23500

Appendix 27.3
Average weekly sales forecast for 2000 in unit drives (as of January 2000)

Month              Consumer         PC          Professional    Total
Jan                5960             8940        2980            17880
Feb                6090             9550        3220            18860
Mar                6030             9510        3160            18700
Apr                6540             9770        3290            19600
May                5800             8450        2900            17150
June               5000             7500        2500            15000
July               5000             7500        2500            15000
Aug                5000             7500        2500            15000
Sept               5000             8000        2500            15500
Oct                5500             8200        2800            16500
Nov                5600             8500        2900            17000
Dec                8000             12000       4000            24000

Appendix 27.4

Preliminary costings

Operations and Service Management           6
Cost of Stock
Finished goods stocks are no longer a factory item. Previously we have
charged at an annual rate of 20% of factory cost to include warehousing and
handling costs.
Current warehouse capacity is 20,000 drives. Occasionally extra storage
space is rented.

Current union agreements require 4 weeks notice for any overtime. However,
in practice, some weekday overtime can be arranged at short notice. Up to 2
hours a day can be added to an 8 hour weekday shift. Weekday and Saturday
overtime rates are 150% of standard rates. Sunday rates are 200% of
standard rates.

Temporary workers
Recruitment would incur costs but much of „personnel‟ effort required could
come from existing resources. Productivity of new workers would also be low
but difficult to quantify.

We have put out some work to local subcontractors before – usually simple
parts fabrication work. We generally expect to pay subcontractors between
120% and 125% of our own factory costs.

Appendix 27.5
2000 Volume planning (all figures in unit drives)

  Month        Production           Sales       Average    Total   Cumulative
                 Weeks              Weeks       Weekly    Months    Demand
                                                demand    Demand
   Jan               4               4          17880     71520     71520
   Feb               3               4          18860     75440     146960
   Mar               4               5          18700     93500     240460
   Apr               4               4          19600     78400     318860
   May               5               5          17150     85750     404610
   Jun               4               4          15000     60000     464610
   July              3               4          15000     60000     524610
   Aug               3               5          15000     75000     599610
   Sep               4               4          15500     62000     661610
   Oct               5               5          16500     82500     744110
   Nov               4               4          17000     68000     812110
   Dec               4               4          24000     96000     908110

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Operations and Service Management   8

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