Principles of Operations Management LGT2106 / TUT002

Take-home assignment

Word counts: 2,796

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 Table of contents

1.0 Introduction 1

2.0 Five objectives for operational performance measurement 1

3.0 Data collection 1

4.0 Quantitative analysis 2

4.1 Linear regression 2-4

4.2 Aggregate planning pure chase, pure level 4-6

4.3 Centroid method 選⼀家公司 6-8

化妝品公司的財務報告
5.0 Recommendations 8
最熱⾨護膚品—>會計數據
6.0 Conclusion 其他合理編制 8-9
平均⼯資
References 10

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1.0 Introduction
Namuga has been a smartphone camera manufacturing company since 1995. Recently,
Namuga singed a long-term contract with Samsung for supplying smartphone cameras for
Samsung Galaxy series. The contract starts from January 2020 and will be renewed every 2
years, which means Namuga should be capable of meeting the large demand of cameras from
Samsung. The current manufacturing capacity is insufficient to meet the demand. Namuga
has never manufactured such a large quantity of the cameras to be supplied. The company
believed the contract is a big opportunity to expand its business. Namuga wishes to
continuously renew the contract and keep good relationship with Samsung. In order to meet
the demand of the demand in 2020, it is possible to supply the full quantity by outsourcing.
However, such operation gives low profit margin that is not desirable. Therefore, Namuga
decided to expand its manufacturing facilities based on the forecasted demand of the camera.
Furthermore, for cost-efficient expansions, the company decided to build a long-term strategy
for expanding its capacity. The strategy has to contain numerical data such as what is the
forecasted demand in 2020, how many workers should be hired or laid, and how long should
factory be operated. The numeric data tells exactly how much more capacity has to be
developed for the most-efficient operation. Although the company lacks data about future
demand, it is possible to calculate estimates of the demand.

2.0 Problem description

Currently, there is one manufacturing factory with 50 employees capable of manufacturing
1,040,000 cameras per year. There are three warehouses for storage, currently storing 200,000
cameras. The beginning inventory of the 200,000 cameras will be supplied to Samsung in
2020 due to the first-in, first-out (FIFO) strategy implemented. In order to expand its
capacity, Namuga has to research and calculate exactly how much more to be developed.
However, there is no accurate forecasted demand available to Namuga. If the company
decided to implement a reactive strategy, the company will outsource large quantity, which
leads to a low profit-margin business. In order to achieve the most cost-efficient and profit-
maximizing operation, outsourcing has to be avoided. Thus, Namuga has to hire more
workers and expand its facilities. It is impossible for Namuga to forecast exact number of
demands required. However, it is possible to calculate the estimates of the demand. The
estimates give rough idea of when and how the company should expand its capacity.
Therefore, Namuga can minimize the number of quantities outsourced and minimize cost of
operation.

3.0 Data collection

As mentioned above, there is no accurate forecasted demand available. It is impossible to
predict exact number of quantities demanded in the future. Main objective of forecasting
demand is to minimize the gap between manufacturing capacity and real quantity demanded.
If manufacturing facilities are underutilized, the company has high average fixed cost of
operation due to the small number of goods manufactured. If manufacturing facilities are
overutilized, the company has to outsource the goods causing low-profit margin. Thus, a
logical and delicate demand forecast is necessary. Indirect forecast of the demand is possible.
There is a past data on the number of earphones purchased. Earphones are complementary
goods of a smartphone, because earphones are required to listen to the music. Thus, when the
number of earphones purchased increased, the number of smartphones purchased might be
increased together in a ratio. It is assumed that there will be a positive correlation. Whether
they have a positive correlation will be tested using a linear regression method. Using a linear
regression model, a straight line will be drawn, and the line will be a forecast line that
calculates future demand of the smartphones.
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4.0 Quantitative analysis

4.1 Linear regression

Linear regression is a commonly used causal relationship type forecast model. Linear
regression analysis can forecast long-term period, because a straight line is drawn infinitely.
The model finds out the best-fitting trend line through the scatter points (Swaminathan,
2018). The trend line consists of the predicted dependent values for each of the dependent
values. The best-fitting means a line that has the minimum errors to all the scatter points.

Equation of the linear regression line is shown below:

𝑌𝑌 = 𝑎𝑎 + 𝑏𝑏𝑏𝑏
𝑌𝑌 is a dependent variable, 𝑥𝑥 is an independent variable, 𝑎𝑎 is a y-intercept, and 𝑏𝑏 is a
regression coefficient. Linear regression model examines whether two variables have a
relationship and an independent variable gives a good prediction of a dependent variable
(Statistics Solutions, 2019). Furthermore, the linear regression model identifies strength of
the prediction from the relationship between dependent variable and independent variable.

Namuga planned to expand its manufacturing facilities to meet the capacity of forecasted
smartphone demand for next few years. In order to expand the capacity, first, Namuga has to
forecast the demand. As mentioned above, using the linear regression model, future demand
can be calculated. There is past data of earphones and smartphones purchased available. If
there is a relationship between the number of earphones purchased and the number of
smartphones purchased, the linear regression model can be used. When the data is shown as a
scatter plot, it will be easier to find out whether the relationship exists.

Past data of the number of earphones and smartphones purchased are shown below:
Number of Number of
Period earphones smartphones
purchased (X) purchased (Y)
2002 89,000 350,000
2003 88,000 370,000
2004 91,000 400,000
2005 95,000 410,000
2006 101,000 420,000
2007 110,000 450,000
2008 112,000 470,000
2009 119,000 490,000
2010 120,000 500,000
2011 135,000 560,000
2012 148,000 620,000
2013 152,000 690,000
2014 159,000 740,000
2015 165,000 790,000
2016 180,000 810,000
2017 201,000 840,000
2018 216,000 880,000
2019 227,000 900,000

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Scatter plot of the X values and Y values are drawn below:

The scatter plot shows there is a positive relationship between two variables. Therefore, using
a linear regression model, the demand of the smartphone for next few years can be
forecasted. The number of smartphones purchased depends on the number of earphones
purchased. Thus, the number of earphones purchased is a dependent variable. However, the
number of earphones purchased does not depends on the number of smartphones purchased.
Earphones are necessary for listening to the music from smartphone; therefore, a person who
purchases a smartphone has to purchase earphones. It is because earphones are
complementary goods of a smartphone. On the other hand, earphones are not necessary to
buy when purchasing a smartphone. Thus, the number of smartphones purchased is an
independent variable.

y-intercept, and regression coefficient can be calculated by using the formula below:
∑ 𝑋𝑋𝑋𝑋 − 𝑛𝑛𝑋𝑋�𝑌𝑌�
𝑏𝑏 = 𝑎𝑎 = 𝑌𝑌� − 𝑏𝑏𝑋𝑋�
∑ 𝑋𝑋 2 − 𝑛𝑛𝑋𝑋� 2

Using the equation above, linear regression line equation is calculated: Y = - 0.04 + 4.25X.
According to the equation calculated, approximately four smartphones are bought when one
earphone is purchased. Using the linear equation, future demand of the smartphone can be
calculated. In order to calculate the forecasted smartphone demand, forecasted earphone
demand has to be found. It is because, the forecasted earphone demand is the independent
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variable for the forecasted smartphone demand. According to the research done by
Bloomberg, the demand of the earphone is forecasted to grow 10% yearly. Using the 2019
data, earphone demand can be forecasted by applying the growth rate. Using the equation,
Namuga can forecast the smartphone demand for long-term period.

Forecasted demand of earphone and smartphone is shown below:

Forecasted earphones Forecasted
Period
demand smartphones demand
2019 227,000 900,000
2020 249,700 1,061,224
2021 274,670 1,167,347
2022 302,137 1,284,082
2023 332,350 1,412,487
2024 365,585 1,553,736
2025 402,144 1,709,111
2026 442,358 1,880,021
2027 486,594 2,068,024
2028 535,254 2,274,829
2029 588,779 2,502,310
2030 647,657 2,752,542
2031 712,423 3,027,797
2032 783,665 3,330,576
2033 862,032 3,663,635
2034 948,235 4,029,998
2035 1,043,058 4,432,996
2036 1,147,364 4,876,296

4.2 Aggregate planning

Based on the forecasted demand, the company has to calculate factors required for production
such as raw materials, labor force, working capital, etc. By comparing forecasted demand and
company’s manufacturing capacity, whether the company should expand or not will be
apparent. When the forecasted demand is higher than the current manufacturing capacity of a
company, the company has to invest in expanding its capacity by hiring more labors or
purchasing more machines. In case of the Namuga, only labor force will be calculated and
other factors will not be discussed or calculated. Decisions related to labor force such as hire,
layoff, and overtime work will be examined. The decisions are made in a way that minimizes
the operation cost. Such decision making process is called aggregate planning. It is important
to the company because it balances long-term strategies and short-term production success
(Management Study Guide, 2019). The company can plan for inventory and workforce level
with achieving strategy goals and objectives.

The main objective of the aggregate planning is to achieve an economics of scale. The
economics of scale is achieved when the manufacturing facilities are utilized at the best
operating level. The best operating level means an operating level that a company can provide
services or manufacture products at its best quality. Furthermore, by manufacturing at the
best operating level, the company can enjoy decreasing cost of operation due to the
economics of scale.

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Namuga has one manufacturing factory with 50 employees capable of manufacturing 1,040,000 cameras per year. The current capacity might be
sufficient for meeting 2020’s demand with beginning inventory of 200,000 cameras. As the demand of the smartphone increase, the company
has to expand its capacity to meet increasing smartphone cameras demand. Namuga targeted the ending inventory as two months quantity of the
next forecasted year’s demand. Thus, the company can comply with the higher actual demand without outsourcing production. By adjusting the
number of lines run, number of employees hired and layoff and overtime hours, Namuga can achieve the minimum total operating cost of
$96,276,013. There is a trade-off between number of lines run and overtime hours. Increasing lines run give the higher capacity and lower cost,
but due to the large ending inventory, the inventory carry cost might be too high. Increasing overtime hours give the lower capacity and higher
cost, but it gives lower inventory carry cost compared to the increasing line. Deviation from inventory target directly affect the inventory cost,
thus affecting the total operating cost. The capacity planning has to choose the most cost-efficient decision in expanding its capacity. There has
been lots of scenarios to calculate the minimum total operating cost. One of the important key point in this planning is that there has been no
stockout cost recorded. Instead of outsourcing cameras, the company has to choose to increase number of either lines run or overtime hours. By
achieving sufficient ending inventory, the company does not have to outsource manufacturing smartphone cameras.

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The below graph shows how much does the planning’s capacity deviated from the target:

By achieving the minimum deviation from the inventory target, Namuga can enjoy the
economics of scale. It is because the forecasted demand is not too high or too low that the
company can produce at the best operating level. Namuga can manufacture smartphone
cameras at its best quality enjoying low cost of operation.

4.3 Centroid method

Centroid method is used to identify the location of facilities related to production. The main
objective of the centroid method is to minimize the transportation cost between production or
other related facilities. The centroid method suggests an optimum location considering
distances and production volume. The company can evaluate travel time and transportation
cost to decide whether the suggested location is the best choice. The method suggests the
optimum location by using mathematical calculations and formulas to evaluate transportation
routes (Chron, 2019).

Equation of the centroid method is shown below:

∑ 𝑑𝑑𝑖𝑖𝑖𝑖 𝑉𝑉𝑖𝑖 ∑ 𝑑𝑑𝑖𝑖𝑖𝑖 𝑉𝑉𝑖𝑖
𝐶𝐶𝑥𝑥 = 𝐶𝐶𝑦𝑦 =
∑ 𝑉𝑉𝑖𝑖 ∑ 𝑉𝑉𝑖𝑖

The locations of the facilities are represented as the x-coordinate and y-coordinate. The
volume represents the goods transported from a location to the newbuilding. Depend on the
volume of goods transported, the importance of each facilities is rated. Namuge decided to
build a distribution center for transporting goods to Samsung assembling facility. The purpose
of building the center is to minimize transportation cost from delivering individually from
each facility. There are one manufacturing factory and three warehouses for storage. The
volume transported from the factory is the highest. Therefore, in the centroid method,
location of the suggested center will be closer to the factory.

After the demand forecast, Namuga noticed increased demand will increase transportation
cost of goods. Currently, Namuga has been delivering goods from each individual facility. It
has been cost efficient, because the quantity transported has been small. After the contract
signed with Samsung, the condition changed. Therefore, Namuga decided to build a
distribution center, a cargo bus terminal, between facilities. Using the centroid method, the
company could find an intermediate location between four facilities.
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Below graph shows the current locations of four facilities:

Assuming that Namuga is planning to build a distribution center in 2020, warehouse 1 stores
80,000 cameras, warehouse 2 stores 50,000 cameras and warehouse 3 stores 70,00 cameras
and a factory has a capacity of producing 1,170,000 cameras. As shown from the above table,
in 2020 there are total 1,061,224 cameras to be delivered. Namuga is applying the FIFO
strategy that requires to deliver beginning inventory and manufactured goods to meet the
forecasted demand. Thus 80,000 cameras from warehouse 1, 50,000 cameras from warehouse
2 and 70,00 cameras from warehouse 3 and 861,244 cameras directly from factory will be
delivered. Considering the quantity to be delivered and locations of the facilities, using a
centroid method, the most efficient location could be found.

(861,244 ∗ 200) + (80,000 ∗ 600) + (50,000 ∗ 300) + (70,000 ∗ 100)

𝐶𝐶𝐶𝐶 =
861,244 + 80,000 + 50,000 + 70,000

172,248,800 + 4,800,000 + 15,000,000 + 7,000,000 1,990,048,800

𝐶𝐶𝐶𝐶 = = = 187.56
861,244 + 80,000 + 50,000 + 70,000 1,061,244

(861,244 ∗ 100) + (80,000 ∗ 200) + (50,000 ∗ 500) + (70,000 ∗ 600)

𝐶𝐶𝐶𝐶 =
861,244 + 80,000 + 50,000 + 70,000

86,124,400 + 160,000,000 + 25,000,000 + 42,000,000 313,124,400

𝐶𝐶𝐶𝐶 = = = 295.05
861,244 + 80,000 + 50,000 + 70,000 1,061,244

The centroid method suggests the distribution center should be built at (295.05, 187.56). As
mentioned above, the location is closer to the factory. Compared to the volume of goods to be
transported at factory and three warehouses, the factory has the larger quantity to be
delivered. The method suggests the optimum location of the distribution center considering
the distance and volume of goods. By developing transportation infrastructure, transportation
cost will decrease resulting total operation cost will decrease.

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Below graph shows location of the distribution center:

5.0 Recommendations
Using available data and qualitative analysis, Namuga could forecast demand, build long-
term strategy, expand manufacturing capacity and locate distribution center. The available
data has positive correlation to the smartphone demand that made possible to use linear
regression to forecast future demand. After future demand has been calculated, the company
adjusted workforce to expand its manufacturing capacity. Furthermore, Namuga decided to
improve its profit margin by lowering transportation cost. Thus, using the centroid method,
the company could locate the distribution center.

Although the whole process of forecasting, and planning have logical flows and numerical
data, in real life they are not enough to be implemented. First of all, there are various factors
that affect the future demand such as world economy, industry, competitors, political shocks,
etc. Using a single logical flow to forecast demand does not generate accurate numbers. As
mentioned at the aggregate planning part, only labor force was considered at expanding
manufacturing capacity. Company has to consider lots of factors on operation scheduling and
various ways exist for lowering operating cost. For example, a company can expand its
capacity by implementing automation in the operation and can lower total operating cost by
reducing inventory levels. Lastly, the centroid methods did not consider the real geographical
features such as availability of road, existence of obstacles such as mountain, river, buildings,
etc. In real life, lots more factors should be considered, more quantitative methods should be
used, and more data should be available to minimize errors

6.0 Conclusion
In order to take contract to the long-term, Namuga built a long-term strategy. The strategy
started from forecasting possible quantity of smartphone cameras ordered from Samsung. It is
necessary to deliver goods without delay or any difficulties for keeping the contract alive.
After the forecast, the company has to expand its capacity so that when Samsung orders a
larger quantity, Namuga can show that the company can handle such a large quantity. After
the number of orders, if Namuga successfully deliver right quantity without any problems,
Samsung may trust the company’s capacity and order larger quantity at the next order. The
company also has to consider quality of the goods. In order to improve quality of goods, a
company can invest more money at the R&D or implement automation for constant quality of
goods. By lowering operating cost, the company can use the capital to invest for better
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quality standards. By lowering operational cost and transportation cost, Namuga can invest at
machineries, IT systems, or R&D for better quality standards. By implementing operational
strategies and methodologies, a company can choose the most efficient ways to develop its
business. After the strategies have been developed, a company has to constantly revise,
update and monitor. Strategy itself does not make a business successful. Monitoring and
applying feedbacks are necessary to constantly improve better strategies.

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References

Chron. (2019). What is the centroid method in business? Retrieved from

https://smallbusiness.chron.com/centroid-method-business-24163.html
Statistics Solutions. (2019). What is linear regression? Retrieved form
https://www.statisticssolutions.com/what-is-linear-regression/
Swaminathan, S. (2018, February 26). Linear regression – detailed view. Towards Data
Science. Retrieved from https://towardsdatascience.com/linear-regression-detailed-
view-ea73175f6e86
Management Study Guide. (2019). What is aggregate planning? – Importance and its
strategies. Retrieved from https://www.managementstudyguide.com/aggregate-
planning.htm

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