Manufacturing System and Supply Chain Design

Manufacturing System and Supply Chain Design Case Study HORIZONTECH Company, a medium-sized manufacturer of tiller equipment, had sales of $24.5 million and pretax profits of $3.3 million last year, as shown in Table 1. The company manufactures two types of tillers: a mini tiller and a medium-sized front-line tiller. These variants are produced on a single assembly line that undergoes changeovers to meet changing demand. Changeover costs vary according to the type of tiller and the planned production model. Transitioning from the mid-sized front-line tiller to the mini-tiller is simple because the tiller frame remains consistent. The estimated changeover cost is $1500. HORIZONTECH Company manufactures spare parts and components in-house in its machine shop while also sourcing components directly from suppliers. An estimated $11 million was invested in various parts and supplies last year, including engines, bolts, paint, wheels, and sheet steel. The company maintains a $1.7 million inventory of purchased parts to support both the machine shop and the assembly line. Due to the constant supply influx, the plant typically keeps only a few days’ worth of parts on hand when specific tillers are assembled. Faisal, the marketing manager at HORIZONTECH Company, drove to the corporate headquarters in Riyadh, Dammam, and enjoyed the scenery along the way. Faisal had scheduled a meeting with Nassir, his boss and the general manager of HORIZONTECH Company, to discuss the most recent forecast figures for fiscal year 2023. He arrived early. When he arrived at the plant, he discovered that the meeting had already begun, with Khalid, the plant manager, Mohammed, the controller, and Mansour, the personnel officer, all present. Faisal began the meeting by providing an overview of the current situation: “Based on insights gained from our annual sales meeting, it appears that we experienced a greater decline in sales last year than initially projected, owing primarily to back-order issues at the factory. Furthermore, after reviewing the forecast for the coming year, we anticipate that sales will reach 85,850 units in fiscal year 2023. The marketing department is confident in the forecast’s validity and believes it can be exceeded if everything goes as planned.” The primary plant located in Riyadh employs a total of 170 individuals, distributed across various roles. Among them, 102 employees are assigned to the assembly line, 42 work in the machine shop, 17 are engaged in maintenance tasks, and 9 handle office duties. New assembly line recruits start with a wage of $17.20 per hour along with $5.00 per hour in benefits. Senior personnel in maintenance and the machine shop have the potential to earn up to $29 per hour. Typically, it takes about two weeks for new assembly line workers to reach full productivity. After three months, employees have the opportunity to request a rotation to different positions on the line if they seek greater job variety. Some workers have expressed feelings that the work can be somewhat monotonous and repetitive. Table 1. Expenses (in thousands of dollars) Sales 2021 2022 $19,738.70 $24,585.40 Cost of goods sold materials $10,778.00 $13,608.50 Direct Labor Depreciation Overhead G&A expense Selling expense Total expenses Pretax profit $3,570.00 $4,411.50 $1,263.10 $1,635.40 $435.20 $732.70 $459.00 $533.80 $238.00 $334.90 $16,743.30 $21,256.80 $2,995.40 $3,328.60 Despite the fact that the plant is unionized, the union’s relationship with the company has always been positive. However, the company has faced significant employee turnover, with roughly half of the workforce leaving in the last year, resulting in an annual training expenditure of $71,400. Substantial absenteeism, particularly on Mondays and Fridays, has disrupted production. To address this issue, the company employs six “fillers” in the workforce who cover for absent employees on any given day. These filters also help train new employees when they are not actively involved in production tasks. The actual sales and future predictions are outlined in Table 2. Sales not only have significant seasonality but are also contingent on weather conditions. Favorable weather in early spring tends to increase the likelihood of customers purchasing a new tiller. The current production approach can be characterized as a one-shift level workforce strategy, with overtime employed as necessary. Table 2. Sales Data Mini Tillers 2021 Forecast 2021 Actual 2022 Forecast 2022 Actual Latest 2023 Forecast 26520 24140 34680 36040 53550 Mid-Sized Front-line tillers 17850 24344 36210 29920 32300 Total 44370 48484 70890 65960 85850 Although the workforce isn’t consistently leveled due to turnover and short-run production needs, the overarching objective is to maintain workforce stability. Overtime is implemented when the regular workforce falls short of meeting production requirements, and it is compensated at a rate of 150 percent of regular time. The actual monthly production output and sales data for the fiscal year 2022 are detailed in Table 3. Discrepancies between sales and production were accommodated through inventory adjustments. In cases of stockouts, orders were backlogged and fulfilled from the subsequent available production run. The company applied a 25 percent carrying cost per year for inventory, covering capital costs (20 percent), obsolescence (2 percent), and warehouse costs (3 percent). Annually, in March, a Sales and Operations Planning (S&OP) plan is formulated for the forthcoming fiscal year. This plan outlines the production levels for each model type and month throughout the year. It serves as the basis for personnel planning, inventory management, and budget preparation. On a monthly basis, the plan is revised to align with the latest conditions and data. Mohammed emphasized the urgent need to reduce expenses, citing the excess inventory maintained the previous year, which consumed a significant amount of capital. With a 25% carrying cost, the company cannot afford to hold as much inventory in the coming year. Mansour added to the discussion by pointing out that reducing inventories to closely align with demand would result in month-to-month workforce fluctuations, increasing hiring and layoff costs. He stated that it currently costs $1360 to onboard a new employee, which includes reduced productivity during the training phase and recruitment efforts. Furthermore, Mansour estimated that the cost of laying off an employee would be $2550, including severance expenses and supplementary unemployment benefits provided by the company. The ending inventory of the two products at the end of May 2022 is 12325 and 9775 units for Mini Tillers and MidSized Front-line tillers, respectively. In addition, the nominal production rates/day are 595 and 510 for Mini Tillers and Mid-Sized Front-line tillers, respectively. Khalid expressed concern about the need to implement a new shift to accommodate the increased forecast. He emphasized that the plant is currently at full capacity, and the additional units predicted in the new forecast cannot be produced with a single shift. Khalid emphasized the importance of verifying the accuracy of these sales forecasts before committing to the complexities of hiring a full second shift. As lunch approached and the meeting ended, Nassir emphasized the importance of developing a new production plan. He assigned Ali the task of developing a Sales and Operations Planning (S&OP) strategy that considers inventory costs, overtime expenses, hiring, and layoff costs. Nassir stated that if Ali’s plan results in back orders, the company will face higher costs later in the year to meet demand. He made it clear that he would not tolerate a repeat of the stockout that occurred last year. The meeting then adjourned for lunch. Table 3. Sales and production for the year 2022. Mini Tillers July -2021 Production 204 Sales 306 June-2021 Production 5780 Sales 850 August -2021 Production 0 Sales 1462 September*-2021 Production 7480 Sales 1751 October*-2021 Production 0 Sales 1904 November*-2021 Production 7480 Sales 3706 December-2021 Production 3400 Sales 7752 January-2022 Production 3400 Sales 8721 February-2022 Production 3400 Sales 5066 March-2022 Production 3400 Sales 2244 April-2022 Production 3400 Sales 1156 May-2022 Production 0 Sales 1122 Total Production 37,944 Sales 36,040 *The number of overtime hours during these months is 2300 hrs. Mid-Sized Front-line tillers 153 187 5950 510 0 1334.5 6375 1581 0 1904 5950 3145 0 5457 7650 6587.5 0 4505 5100 1360 0 1717 3400 1632 34,578 29,920 Part I 1. Use simple linear regression and two decomposition methods to forecast monthly demand for both products in 2023. Which method would you recommend? This forecast will serve as the basis for sales and operations planning. 2. Develop monthly sales and operations plans for 2023 using the two production techniques taught in this course (level and chase). Which technique is better? Part II Assume that the company is planning to procure the components of the Mid-Sized Front-line tillers from external suppliers. The main concern of the company is the master production scheduling for the Mid-Sized Front-line tillers in the year 2023. The Materials Manager is tasked with a diverse set of responsibilities, encompassing the assessment of all material requirements essential for the production of this type of product, procurement from external suppliers, and overseeing the internal production of components. He developed the bill of materials for the Mid-Sized Front-line tiller as shown in the following figure: The material manager collects data for the component of the Mid-Sized Front-line tillers from the ERP system as follows: ERP Data Part Main Frame Engine Assembly Tines Tine Shaft Handlebar Control Levers Wheels Gearbox Gearbox Housing Fasteners Inventory (units) 1950 1560 4000 1300 1170 1300 780 650 780 1950 Lead Time (Month) 1 3 4 2 1 1 1 2 2 1 3. Calculate economic order and periodic order quantities for the final product of Mid-Sized Frontline tillers. (use the prediction of average demand for Mid-Sized Front-line tillers for the year 2023 developed in Part I. Assume that the holding cost is 25 % of the price ($10000) and the ordering cost is $ 3500. 4. Prepare a master production schedule for the next six months of the year 2023 using the economic order and periodic order quantities calculated in question 3. 5. Develop MRP computing the planned orders release, planned orders received, inventory, etc. for each material in the BOM (use the prediction of average demand for Mid-Sized Front-line tillers year 2023 developed in Part I; Lot size = PPB for the Handlebar and Gearbox housing; Lot size = L4L for the other components). Note that the purchase costs are $1200 and $200 for the handlebar and Gearbox housing, respectively. Ordering cost is $3500. 6. Assume that the final product of Mid-Sized Front-line tillers, wheels, and engine assembly are fabricated in the following work centers, listed with accompanying time requirements: Operation Mid-Sized Front-line assembly Wheels production engine assembly Work Center Setup Time (hr) 10 20 30 3.4 5.1 3.4 Run Time (minutes) 17 8.5 15.3 Using the above BOM and MRP records obtained in question 5 for the final product of Mid-Sized Front-line tillers, wheels, and engine assembly, Calculate the capacity requirements for each of the work centers. Assume that the setup for the two scheduled receipts is complete and that they are half-completed in each case.

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