In November 1999, Mat Frankel was promoted (o 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 centialise 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 manufac- turing 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 par- ticularly 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 should be run. At his first management meeting in December 1999 he addressed his new tear. “The main problem with running a plant like this, especially in the computer business, is that there is such a lot that we don’t know. Of course, we never know what sales are going to be. Sure, we have forecasts, but | 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 itis 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. “1know what you might say. “How can we find out true costs when we are continu: ally changing schedules because the forecasts are changing?” Well, while | have some sympathy with that, we cannot always blame other people. | 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 Its the very nature of management to cope with some fundamental tensions? Different parts of the business have always wanted differ- ent 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 Mandexor Memory 259plenty of product to sell at any time. In operations, we like to minimise our own cas minimising any disruption to our production plans, "But from now on we are going to take a lead. We are going to plan the pio levels for our factory in such a way as to give everybody what they want. From we schedule in such a way as to minimise our own costs, give marketing the gon want when they want them, and keep inventory levels at @ minimum. | know # hall 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, only slightly for different markets. The first range of products was know ‘Consumer’ range. These products were telatively small disk drives which into the consumer market as added memory products. Some were inte ‘external use while others were mounted internally. Also, both external andi drives were made with different storage capacities. However, there was ave i degree of parts commonality between the different types and every model the range could be manufactured on the same production line, without nal tion. The products in the second range, known as the ‘PC Drive’ range, were disk drives sold to personal computer manufacturers for assembly into thelty ucts. Again, these came in different sizes and with slightly different 5 but had a very high degree of similarity and parts commonality. The tht! ‘was known as the ‘Professional’ range. These were stand-alone drives of capacity mounted within their own enclosures and sold to a wide range 0 sional information technology (IT) users. ‘The Consumer product range was sold primarily through large comp ers, both physical retailers and Internet retailers. Moxe recently, Mande started selling direct to the public through its own Internet site. As yet accounted for three to four per cent of total Consumer range sales. The were sold to computer manufacturers under short and medium-term 6 ‘Typically, a computer manufacturer would place an order for several the drives of various types to be delivered on specified dates. Usually tis cor allowed the PC manufacturer to vary quantities and delivery times att short notice without compensation. Although there was considerable pice tition in this market, Mandexor realised good margins on its PC range, because it had an excellent reputation for the quality and reliability of ts The top-end PC manufacturers were willing to pay slightly more for drives because of their proven reliability. The Professional range of disk i sold through a variety of channels. Some were sold directly through the Intemet site, some to the larger computer manufacturers for installation a their own systems, but most were sold through specialist IT systems suppl. Mandexor sold disk drive products from stock all over the world; because market fluctuations were, to some extent, smoothed out. However, foreci notoriously difficult for three reasons. First, computer sales as a whole welt dent on overall economic growth. While this had been strong in most ‘throughout the late 1990s, regional economic downturns could still Mandcxar’s sales. Second, technology was continually shifting both in term 260. Part-4« Planning and contoldives themselves and in other aspects of computing. Although technology changes hhad 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 tetail 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 Manager. © Manufacturing considerations ‘Manufacturing at the plant consisted of parts fabrication and assembly. Parts fabrica- tion operations included metal shaping and forming which were done in batches on various machines, Unusually, Mandexor also produced some of thelr ‘disk meta’. ‘This was the coated surface on which information was 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, ‘vith the lines carefully balanced using standard times. More and more assembly and. inspection jobs were belng automated as cost reduction opportunities became evi- dent. Mat Frankel had said his plant now had a five-day capacity of about 16500 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 pro- duction 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. ‘Tis the monthly forecast for each product type was multiplied by its standard hour equivalent and summed to obtain the factory loading. Appendix 27.2 shows the four-month forecasts and the actual factory Toadings 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 0 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 a versatility In working on the different models. Many parts were inter- changeable 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 pro- cessing 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’. Mandexor Memory 261262 Part 4« Planning and contol ‘The plant was heavily unionised but labour relations had been the last few years. The company’s employment record had been go redundancies and a minimum of four weeks’ notice given for any change or overtime. Wage rates were about average for the area bt i were better than average. The whole plant shut down forthe las 0 and the first week in August. Fixing the production programme ing. This was the meeting at which the guide Production and Sales for production volumes over the coming year, nary overall production plan pencilled in. Mat rather shocked the meeting by making what some regarded proposal ‘our production schedules. | propose that we set up a small working party’ costs involved in adopting a number of strategies, namely: © keeping production levels constant and absorbing demand fluctuat finished goods stocks using overtime on an extensive basis in peak periods and allowing labour during slack periods hiring an extra shift for peak production and laying them off later in they subcontracting out some of our parts fabrication over to assembly” Rather reluctantly, the meeting agreed to postpone any decisions {or while the working party examined Mat's alternative ‘strategies’. The working party The working party met five days later and consisted of one represen of Production Control, Accounts, Sales and Marketing, and Distributlo Marketing Division), They had two documents for consideration. for 2000 and some brief information prepared by the Accounts D cerning each strategy. These two documents are shown in App and 27.4. In addition, the production control representative tabled analysis of production requirements based on the 2000 forecast, Ths Appendix 27.5. ‘The production control representative put his view of the prob ‘We have to tackle this problem in the right order. First we need to Io level of output that will be needed over the year, then we can decide! might like to meet this output requirement. Lastly we need to have so Increase or decrease output if our forecasts change, and under what would break away from the production plan.”264 Appendix 27.1 Actual average weekly orders (rounded) in unit drives 1999 Patt Planing and control Forecast and actual factory loading in standard hoursiweekspe ov speig uy S82NB|S 210N & (oostz) | 6ezrz 0107, ‘os6! | (srS1) | souty cols 5 oo6r | corgi | (ooLrl) | ssore 2 cost s doer | oozsi | o0ssi | GoEn | sowe 05EL 38a oes | ODIs | coors | (o0El) | esse ove i ON | oseL | OOP: | oDLz1 | (OOEEN) | cove ; OL EL i eo | ozs) | over | vozer 6 des | oovet | o0ser Gorsi) | ser 0e Olst ‘Bny | 00051 je ‘00651 wr ees 00881 OT unr] 0s021 (OSH) | sev0E oor Few | o0s0z | 00681 | osost | (osevi) | ses: 0059 vty [sew | geg | ver | ae sBunoow uposa/seres, 655i yoomysinoy puepuers uy Bupeo| Ai0}>924 femme pue 1522103Appendix 27.3 a ‘8 2 = Jan Feb ar Apr May jun sul Aug Sep Nov Dec 266 Part Planning and control : i & ECost of stock Finished goods stocks are no longer 2 factory item. Previously we have charged at an ‘annval rate of 20 per cent of factory cost to include all warehousing and handling costs. Current warehouse capacity is 20 000 drives. Occasionally extra storage space is rented Overtime Current union agreements require four weeks! notice for any overtime. However, in practice some weekday overtime can be arranged at shorter notice. Up to two hours a {day can be worked over the eight-hour weekday shift. Weekday and Saturday overtime rates are 150 per cent of standard rates. Sunday rates are 200 per cent of standard rates. Hire temporary workers Recruitment would incur casts but much of the ‘personnel’ effort required could come from existing resources. Productivity of new workers would also be low, but again this is difficult to quantity. Subcontracting {We have put out some work to local subcontractors before ~ usually simple parts fabrica- tion work, We generally expect to pay subcontract prices of between 120 per cent and 425 per cent of our own factory costs. Mandexor Memory 267268 Appendix 27.5 2000 Volume planning (all figures are in unit drives) Month reduction weeks Jan Fab Mar Apr dun sul ‘aug sep Nov Dec Bpuswuhuenus pee nee iene art Planning and contol