You are on page 1of 33

CDP2: KOMERGO

VIA University College Group 2

March 2012

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Value Chain Management


Group 2:

Anamaria Petrea (131886) Martin Nielsen (145184) Alison Smith (168165)

Gabriele Cilciute (167447)

Supervisors: Frank Schou Nielsen, Agnieszka Zulewska Project: CDP 2

Number of characters: 27 691

Date:30 March 2012

Page 2

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Table of Contents
Table of Figures ................................................................................................................................... 4 Introduction ......................................................................................................................................... 5 Project Background ......................................................................................................................... 5 Specification of Purpose .................................................................................................................. 5 Problem Formulation ....................................................................................................................... 5 Delimitation ..................................................................................................................................... 6 Marketing ............................................................................................................................................ 7 SWOT Analysis ............................................................................................................................... 7 Introduction of the new product ...................................................................................................... 8 Forecasting .......................................................................................................................................... 8 Methods ........................................................................................................................................... 8 Planning ............................................................................................................................................. 11 Production Strategy ....................................................................................................................... 11 Production plan and Lead Time .................................................................................................... 13 The evaluation and improvement of supply chain......................................................................... 15 Ordering ......................................................................................................................................... 17 Economical Part................................................................................................................................. 18 Form of competition - Monopolistic competition ......................................................................... 18 Taxes.............................................................................................................................................. 18 Costs of production........................................................................................................................ 18 Price strategy ................................................................................................................................. 19 Changes in supply and demand ..................................................................................................... 21 Demand after introducing ERGONANO ................................................................................... 21 Price elasticity ............................................................................................................................... 22 Conclusion ......................................................................................................................................... 23 Appendix ........................................................................................................................................... 24 Final forecasting ............................................................................................................................ 24 Errors in diameters ........................................................................................................................ 25 Red chair production ..................................................................................................................... 26 White chair production .................................................................................................................. 27 Production plan .............................................................................................................................. 28 New production plan ..................................................................................................................... 29 MRP ............................................................................................................................................... 30 Work stations ................................................................................................................................. 32 Bibliography ...................................................................................................................................... 33
Page 3

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Table of Figures
Table 1: Naive methods ....................................................................................................................... 9 Table 2: Average forecasting............................................................................................................... 9 Table 3: Calculation of errors ............................................................................................................ 10 Table 4: The final forecast 2012/2013............................................................................................... 10 Table 5: Final error calculations ........................................................................................................ 11 Table 6: Supply Chain ....................................................................................................................... 15 Table 7: Map...................................................................................................................................... 16 Table 8: Taxes ................................................................................................................................... 18

Page 4

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Introduction
Project Background
KOMERGO is Danish company which sells office and canteen furniture. It is a well-known brand in Denmark for its high-quality. The companys most profitable product is COMFORT chair, which is mainly used in canteens and class rooms, therefore main customers for this product are various educational institutions, which together represent 87% of sales of COMFORT chair. It is produced in three colors: red, black and white. In the last 4 years black was the most popular, with 70% of market share, white was the least popular with 10% only. KOMERGO has the only one supplier for COMFORT chairs screws and metal legs KM Metal. This company was the origin of KOMERGO, since the owner of KM Metal came up with the idea that he wants to start his own production of furniture and to become the main seller of office chairs in Denmark. The extruder plastic chair frame is a product made in KOMERGO at GEOFORM company (located in Grarup, Denmark), which KOMERGO took over quite long ago. Even though, in 1996 KOMERGO took over a large German competitors company situated in Cologne, it still has one big competitor, which produces chairs, called COLOGNE. These chairs are cheaper and have more annual sales. Competitor analysis is one of the weaknesses of KOMERGO, since it is not thoroughly analyzed and evaluated. The master production schedule is made according to the forecast from the last 12 months. KOMERGO is about to introduce a new chair using nanotechnology. The chair, ERGONANO, will be priced similar the current chairs sold.

Specification of Purpose
The purpose is to analyze the company, give better explanation and address suggestions regarding improvement and development to KOMERGO regarding four major areas.

Problem Formulation
The four areas that that will be analyzed in greater depth are marketing, planning, forecasting and economics. Marketing What would KOMERGOs SWOT look like? How will introducing the new chair relate to the mission of KOMERGO?

Page 5

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Planning What is KOMERGO`s production strategy? How to improve the quality control? What possible improvements can be made for the inventory or packing of chairs? What methods can be used to improve ordering? What is the available production plan? (demand & MRP calculations) How would the supply chain be evaluated? How could the supply chain be improved?

Forecasting What are more dependable methods of forecasting?

Economics What form of competition is prevailing in the Danish furniture market? How will the new tax on plastic affect the supply and demand of KOMERGO? How will the graph look like? Which are some of the fixed and variable costs of developing the new product? What would the cost of producing ERGONANO be and the best selling price? What might have caused changes in the demand and supply for KOMERGO after the study of Toyota`s production system? How will the graph look like? How will integrating a new chair affect the actual demand? What is the price elasticity of the new chair?

Delimitation
The following project will not cover: Marketing strategy Logistics/Transport Financial analysis Research and development Actual opinions of customers

Page 6

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Marketing
SWOT Analysis
To have a better view of any kind of company, some observations have to be made. Usually it is done form the marketing point of view. One way to do the analysis is to look at the strenghts and weaknesses inside the company and to observe the opportunities and threats externally. Such analysis is called SWOT. It brings awareness of the weaknesses in the firm and the areas that should be focused on with the mission of KOMERGO as a leader in quality and ergonomics.
Strengths Weaknesses

Well-known brand Won prestigious awards Agreement with Pakketrans Knowledge in ergonomics Upcoming nano chair Hand finished chairs Inovations- nanotechnology Ergonomics

Danish furniture market is not well analysed Phoned customer orders Unstable demand KOMERGO doesnt know reasons Long lead and delivery time Nave forecasting Decreased quality (quality control) Lack of optimal components from supplier
Threats

Opportunities

Local educational institutions tend to be the main buyers of COMFORT chair

Increasing competition Tax increase on plastic Competitors sell more of similar product Threat of new entrants Threat of substitutes

Having such overview helps to turn weaknesses and threats into strengths and opportunities. It is very important step before starting improving some areas and solving both internal and external problems. Most important points of this SWOT will be analysed in more detail further in this project.

Page 7

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Introduction of the new product


KOMERGO is introducing the new chair, called ERGONANO. This chair is based on ergonomics and nanotechnologies. The latter one is the science behind very small things and covers the understanding of physics, chemistry, biology and technology of nanometre-scale objects. At the moment the most profitable product of KOMERGO is COMFORT chair, which costs 3500DKK per set, which consists of 4 chairs. ERGONANO price is expected to be between 3000DKK and 3500DKK per set, which consists of 4 chairs as well. So, the price can be the same or even lower than the present best-selling product. That may result in a decrease of the demand for COMFORT chairs and in high demand of the new product, because ERGONANO chair is referred as the competitor. Back in the days, when the company was just being established, the owner had a vision of becoming Denmarks leading office chair manufacturer, which would be famous for its quality and ergonomics. COMFORT chairs were not a very successful product when the primary goal is taken into consideration. During the customer satisfaction evaluation, the quality was evaluated rated 3 in a scale from 1 to 5 (1 being the worst and 5 being the best). In KOMERGOs case, not only does nanotechnology play a role in design, but it also able to make the chairs stronger. By introducing nanotechnology to their production they represent and support the future technology and generations. This will improve the long-term image to both the internal and external market. This would affect the quality level in a good way and it would be a big step towards their main mission of becoming high-quality chairs manufacturers.

Forecasting
Methods
It is known from the given information that KOMERGO uses last year sales for Master production schedule data. This can be interpreted as nave forecasting. Another fact indicating nave forecasting method is the already given forecast for the present upcoming period (2012/2013). This cannot be very reliable, since the new product is going to be introduced and there are some fluctuations in the demand. Consequently, some new methods have to be taken into consideration. It might be a good idea to combine three methods: qualitative which is based on intuition, nave and moving average. These three methods were chosen after doing error calculations for each quantitative method and looking at the graphs.

Page 8

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

At first, two nave methods (nave with trend and simple nave) were graphically analysed:

Nave methods
3000 2500 2000 1500 1000 500 0 -500 0 2 4 6 8 10 12 14 Yt Nave with Trend Y^t Simple nave forecasting

Table 1: Naive methods

From the diagram it is seen that nave with trend method was too much fluctuating and very far from the results from last year sales. So, it can be concluded that this method should not be used in this case. In comparison, simple nave method looks more like the actual demand, but the decrease in the demand is not shown. After that the average methods (simple, moving averages) were graphically analysed:

Average forecasting
1600 1400 1200 1000 800 600 0 2 4 6 8 10 12 14 Demand Yt Simple averaging t Moving average t LAG=2 Moving Average t LAG=3 Moving Average t LAG=4 Moving Average t LAG=5

Table 2: Average forecasting

It can be seen that the simple average is too stable in comparison to the actual demand, so it might be risky to follow such forecast results. Moving average has few options here the LAG period can

Page 9

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

be chosen different to see more results. The diagram suggests that the bigger LAG number is, the more unreliable demand is. The reason for that may be that only 12 months of actual sales are known. To conclude, this graphs moving average (LAG=2) could be the most reliable if few numbers were changed, so where the actual demand is really high, new forecast would not be below average and vice versa. The next step is to analyse the errors: Simple nave MAD 158,875 MSE 31524,88 RMSE 177,5525 MAPE 0,155162 MPE -0,01175
Table 3: Calculation of errors

16% -1%

Moving average (LAG=2) MAD 241,8125 MSE 134775,7 RMSE 367,1181 MAPE 0,25211 25% MPE -0,06747 -7%

It can be interpreted that both of them are not very reliable and previously it was decided to use qualitative forecasting method as well. After taken a decrease in the COMFORT chair price by 10%, new taxes on plastic and introduction of new chair into consideration, it was decided that the demand for COMFORT chair should decrease by approximately 60%, since ERGONANO chair is viewed as the competitor for an old chair.

Forecast 2012/2013
1400 1200 Quantity in sets 1000 800 600 400 200 0 Months from March (2012) to February (2013)
Table 4: The final forecast 2012/2013

Production

Forecast

Page 10

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Final forecasting MAD 129,9 MSE 27442,9 RMSE 165,659 MAPE 0,132775 MPE -0,02484
Table 5: Final error calculations

Both graph and error table show that the reliability of forecasting was significantly increased, although it is always a risk. More calculations can be found in the appendix. 13% -2%

Planning
Production Strategy
The production strategy for the last two years is not known. So, it is assumed that KOMERGO should use level production strategy and order and produce the same amount of assembly parts each month, so it should be the amount required to make 1000 chair sets per month. Nevertheless, the introduction of the new chair should be taken into consideration. It is planned be released into market at the beginning of 2013. The possibility to buy ERGONANO chairs is supposed to decrease the demand for COMFORT chairs, so the forecasting should be changed a little. It is known that KOMERGO is thinking about decreasing the COMFORT chairs price by 10% and that would affect the demand for January and February. Not only that would change the demand, but also the new Danish law of increasing taxes on plastic. KOMERGO might use the level production strategy in the future as well. It may be a good idea to have two production lines one for the black chair sets, which demand is 70% and is always quite high, and the other one for white and red chair sets, which together only make 30% of the whole COMFORT chair sets demand. The first production line should follow the level production strategy except for the first two months of 2013 the quantity produced should be reduced. Each month until January, 1000 chair sets should be made, and from February the production should be reduced to 400. So, it can look like a hybrid

Page 11

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

production strategy:

Production of black chairs 2012/2013


1200 1000 Quantity in sets 800 600 400 200 0 Mar Apr May Jun Jul Aug Sep Okt Nov Dec Jan Feb Months
Table 1 1: Production of black chairs 2012/2013

Production

280

The second production line could be done in a different way. A solution for ordering and producing to set the safety stock and the order point. Calculations of (sigma) can be seen in the appendix. system of white and red chair sets might be to follow periodic review system. The important thing is

In the formulas below, the acronym SS represents Safety Stock and DDLT stands for Demand during the lead time. Safety factor is determined according to the desired service level. This can be seen in the table: =

=
Table 1 2: Service Level

Page 12

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

The ordering and production graph should look like this:

OQ=200; 100

75; 31 47;24

4; 2 days
Table 1 3: Periodic review strategy

The production graph looks the same for both colours red and white, but it has different numbers. Numbers contributed to the production of red chair sets are marked in red font colour and numbers related to white chairs are left in black font colour. Although, in the last two months the quantity produced should be reduced. The reason for dividing one production line in to two lines is to get the higher efficiency. Producing black chairs constantly is more important than producing the other two constantly. Their demand is much lower; therefore there would be less risk if KOMERGO ordered the batch size when the order point was reached.

Production plan and Lead Time


Currently KOMERGO has an extremely long production time for the comfort chairs, despite the fact they had traveled to Japan to learn about JIT, TQM and Lean methods in the supply chain. As the production plan operates now it takes 188.2 hours or over 25 working days to meet the forecast for comfort chairs to pass through all 8 stations, assuming there are enough stations to prevent bottlenecks. All of the production is located in the same facility of Geoform, where there 3 days of non-productive work between stations; 1 work day, (7.4 hours) for Transport, one day for queue and a day for waiting till the next station. There is also non-productive time while the changes overs are being completed. The entire inventory in the non productive stage is creating large cost for KOMERGO. Due to the large amounts of inventory that is in a non-productive stages creates high costs quickly add up. The only way to cut costs is to cut the transport time (Arnold, et al., 2008).
Page 13

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Having more inventory in a productive stage will ass value. That is exactly where KOMERGO must look into to cut costs, speeding up the lead time for production. A key advantage to speeding up the production of comfort chairs is that all the production is done at the same warehouse in Geoform. Looking closer at the production will assist KOMERGO in eliminating wastes in transport, defects, waiting, unnecessary inventory and motions, overproductions and inappropriate processing. Looking into the 7 wastes will show how to improve and optimize their supply chain. (Harrison & Hoek, 2008) The production facility will be organized by division of labor to increase the dexterity of production. Further more the layout will be assemble in a fluent manor to prevent unnecessary waste of movement. KOMERGO produces all of the comfort chairs in the same factory at Geoform. Therefor there is no reason for the 3 days of non-productive timeit is a waste of unnecessary inventory and transport. Shorting the non-productive time to a max of 30 minutes for transporting half finish chairs to of non-productive activity between stations A, B, and Cthe stations dedicated to forming the plastic seat. Along with just under 30 minutes to stock the finished, boxed chairs at the end of the day. The non-productive times are not adding value to the chairs. Limiting the non-productive/nonvalue activities by cutting the transport time to a total of 2 hours and lower the levels of half finished inventory will result in better returns. The other change that will take place is station D will be run simultaneously with station C. On top of that the change over times for station F, G will also coincide with the previous station, except for the change of with station A. The daily change overs at all stations are kept to better monitor the quality of chairs and prevent defects and or notice defects before they take place. These few changes will shorten the production time drastically for comfort chairs by 180.2 working hours. Along with the shorter lead time KOMERGO has minimized the 7 wastes to better optimize their supply chain.

Page 14

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

The evaluation and improvement of supply chain


The current supply chain for KOMERGO is shown below. The material flow goes as followed: 1. KM Metal in Haderslev produces and delivers all screws, metal-frames and legs to Geoform/Grarup which produces plastic seats and assembles the product. 2. Knobs are delivered by the German supplier. 3. Finished goods go to Hammelev and Munich warehouse where they are sold 50/50 to end customers and furniture dealers. 4. Transportation is made by a Danish transportation company, PAKKETRANS.

KOMERGO has taken over a competitor located in Cologne/Germany but they are still separated and hence see themselves in competition with each other. The production in Cologne is supplied with knobs from a local German supplier.

Table 6: Supply Chain

Page 15

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Main focus is on KOMERGO and the company consists of three different departments in Denmark. They are located as shown below: B = Hammelev Haderslev A = Grarup

Table 7: Map

The longest distance (Grarup to Hammelev and with Haderslev in the middle) is 14.6 km. This situates the departments very close to each other and results in fast respond if unexpected demand or failure occurs. It is not drastically necessary nor should it be the first idea to move departments together to help shorten the lead time. With a few changes in the supply chain, KOMERGO will be able to communicate and move faster. The current supply chain can be evaluated as strong and exceptional, but a few improvements can be made to ensure faster and greater independent material flow. As the departments are situated so close, there is no need for PAKKETRANS. If it was possible to move all departments together into one building of course they should do that, but that is so easy to write on paper and more or less impossible to do in real life. Therefore the solutions provided will be more realistic. The costs for PAKKETRANS would include the following: time to order, gas, carrier salary, salary for the company etc. It is assumed that there is no contract between KOMERGO and PAKKETRANS and hence it is easy for KOMERGO to quit their agreement that is what they should do. By quitting their agreement they will save a lot of transportation cost. The first move is to acquire one or more trucks depending on how much they need to move and how fast. In any case, the distance between the 3 departments is very small so one, or perhaps two, big trucks would be suitable. As the financial crisis is still present, the cost for trucks (cars and trucks in general) has dropped drastically and as it will be used for transportation within the company, KOMERGO will save further 25% (taxes). This will result in much more independency and control of the transportation, not to mention the costs KOMERGO will save. The only problem is driver license which
Page 16

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

KOMERGO will have to sponsor for one or more of their employees (except if an employee or employees already have driver license for trucks). Conclusion is that KOMERGO should still keep their current supply chain but will have to resign their agreement with PAKKETRANS.

Ordering
Currently KOMERGO accepts ordering by phone only. By doing this they insure that only serious customers will be willing to order their products. This can be seen from a good point of view from both KOMERGOs and customers side: By ordering via phone the customers can ask for a good deal and be able to know what KOMERGO can offer. KOMERGO can attract customers to call by doing the classical move for example on their website Call us and we will make a good deal just for you. KOMERGOs products are high quality office products (read: not simple chairs for a living room) and therefore they accept ordering by phone only. Their customers are not regular households but school, workplaces etc. who order large quantities/sets of chairs at once. It may take the interest away if the purpose of the buy is a few chairs for a household because KOMERGO doesnt own a physical store and online ordering is not possible. But KOMERGOs target group is not the above mentioned households but schools, workplaces etc. so it is very limited how many customers they lose, if any, by using ordering by phone only. Therefore the conclusion is that they should keep receiving their ordering from customers by phone only. Taking into consideration all the solutions and advices given in this report it would result in too many changes. All departments are being adjusted etc. KOMERGO can reevaluate it in approx. one year when they do a follow up on all the changes in the company.

Page 17

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Economical Part
Form of competition - Monopolistic competition
Reports show that the capacity and number of producers on the furniture market is relatively larger than the limited amount of furniture required, so the competition between producers is very intensive, especially on a price/quality dimension. Within Denmark the competition can be seen as a monopolistic competition due to the fact that there are many firms in the market of office furniture which sell basically the same products, but differentiated. The product differentiation is the main fact that distinguishes the monopolistic competition of the perfect competition. The market in Denmark is highly competitive also because of the focus on design and development which prevails in the Danish industry. Introducing new technologies or methods of production, paying attention to design, details and quality definitely influences the potential customers. The element of differentiation lowers the degree of substituting the product between rivals and the result is a downward sloping demand line for each firm.

Taxes
The Danish culture is well known by its sustainability and eco-friendly preferences, so the tax on plastic placed by the government will force KOMERGO on improving its way of production. On the other hand taxes on a material such as plastic disable the company to produce as fast for the same cost. Because of this, the supply shifts to the right in correlation with the size and impact of the tax. In the same time the price rises and quantity demanded falls.

Table 8: Taxes

Costs of production
Costs are defined as expenses faced by a company in its process to supply goods or services to the customers. Depending on the type of business and its purpose the decisions taken in consideration when calculating the cost of production will be focused either on the short run or long run.
Page 18

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

The long run is a period of time during which all factors of production vary. In order to set the cost of production for KOMERGO short run will be considered. Short run is that period when one factor of production is fixed. Some fixed costs (FC) for KOMERGO would be rent, salaries, utility costs, insurance; generally is assumed that the capital is fixed. Variable costs (VC) within the chair production for KOMERGO are the materials/ parts (metal frame, rubber knob, screws, rubber holder), labour, utilities, delivery costs, commissions, energy; all of them depending on the production level. In the end the total cost of production will be calculated as follows: Production Cost/Total Costs = FC + VC Production Cost /unit = (FC+VC) / nr. of units From the information provided in the text: VC/unit = 678 Regarding to FC it is impossible to actually calculate them as long as the information provided is incomplete, but the contribution margin will be utilised. The contribution margin (CM) is the fraction of sales that contributes to the offset of fixed costs. CM/ unit = P VC/unit CM = TR TVC CM = (P VC/unit) x Q CM = (3 500 678) x 19 200 = 54 182 400 CM/set = 2 822 is the proportion of revenues that are left to cover FC and profit CM/unit/chair = 2 822/4= 705,5

Price strategy
Setting the price depends on what are the goals of the company. The best price is determined by: maximisation of the amount of profit, maximisation of market share or maximisation of the total revenue. In order to determine the best selling price between the previously determined price level (between 3 000 3 500 per set) it must be mentioned that probably KOMERGO already used the cost-plus pricing strategy. To decide the best possible price depending on these level requirements two possibilities will be taken into account. 3 000DKK 3 500DKK

Page 19

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Because the market of office furniture has many firms selling similar products, KOMERGO`s output is quite small compared to the total quantity available, so its pricing decision goes unnoticed. Therefore, KOMERGO is free to act independently, maximizing profit or minimizing loss at the point where marginal revenue equals the marginal cost.
I. P = 3 000

Qd = 32 500 5P Qd = 32 500 15 000= 31 000 CM/set = 3 000 (678x4) = 288 CM/set x Units Sold = Product`s contribution to Profit 288 x 31 000 = 8 928 000
II. P = 3 500

Qd = 31 000 CM/set = 3 500 (678 x 4) = 788 CM/set x Units Sold = Product`s contribution to Profit 788 x 31 000 = 24 428 000 Long run

Comparing the two Product`s contribution to profit it is obvious that setting the maximum price (3500) would be better for KOMERGO in order to cover both fixed costs and profit 24 428 000> 8 928 000

Most probably in the long run the situation of KOMERGO`s new chair will tend to change as more products alike will enter the market in order to gain the above mentioned economic profit. The firms won`t sell the exact same product, but similar products which means an increase in the number of close substitutes will occur. This situation will drive ERGONANO `s demand curve to shift downwards until it will reach an equilibrium point where any changes in price would lead to losses. In the end the profit will be normal, where P =ATC when MR=MC. Taking into consideration the observations mentioned above KOMERGO should apply the maxim cost-plus for ERGONANO, setting the price at 3 500DKK, maximizing its profit in the short run. A better option would be to take advantage of the liberty the company has on setting the price and be more strategic. The law of demand states that as a price of a product falls ,more will be demanded. In this case KOMERGO should slightly lower the price of ERGONANO from 3 500DKK to 3 400DKK in order to sell it cheaper than the old COMFORT chair. In this way KOMERGO will bring on the market of office furniture an affordable and improved chair which has the quality of nanotechnology incorporated. P = 3 400 Qd = 31 000 CM/set = 3 400 (678x4) = 688 CM/set x Units Sold = Product`s contribution to Profit 688 x 31 000 = 21 328 000
Page 20

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Setting the final price at 3 400DKK is a good idea which will influence the potential customers into buying a better quality product at an affordable price, the nanotechnology differentiating the new chair from the old ones. Also setting a low price for a new product will attract a large amount of buyers and market share. This might result in high sales volume leading to falling costs that will allow KOMERGO to cut prices even further.

Changes in supply and demand


Studying and following the example of Toyota it relates to technological improvements within the company, so also to methods of transforming inputs into outputs. Generally improvements in technology will reduc e the costs of production and make sales more profitable tending to increase the supply. Production costs are directly related to supply, therefore the demand will remain unchanged. Changes in supply or shifts in supply occur when one of the determinants except price changes. An improvement in technology leads to a shift to the right of the supply. Price

Demand after introducing ERGONANO


In this monopolistic situation the introduction of a new product by KOMERGO will reduce the price received and quantity sold of existing products, in this case the COMFORT and

Page 21

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

COLOGNE chairs.

Demand for COMFORT shifts to the left due to the introduction of a new improved product.

Price elasticity
Measuring elasticity or the responsiveness of demand to a change in price

Item Comfort ERGONANO

Price 3 500 3 400

Quantity 19 200 15 500

Ed = (15 500 19 200)/(3 500 3 400) % = 0,37 < 1 ,inelastic demand This means that the demand for ERGONANO chair responds proportionately to a smaller change in price.

Page 22

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Conclusion
Despite the fact that KOMERGO is a leader in the market of office furniture, the input of the company can be improved further more. After analyzing the situation it was concluded that KOMERGO must develop its production planning mostly as a matter of total time spent, but also quality level. In the same time suggestions were given to improve the supply chain. The situation of the company and its sales was very favourable for the previous period. Introducing a new product such as ERGONANO would definitely change the actual sales, considering that customers will be more interested in acquiring the new chair rather than the old COMFORT one. The relevant data was analyzed and developed in order to give a better understanding of both the current situation and expected events within KOMERGO at the launch of their new product.

Page 23

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Appendix
Final forecasting
time t Demand Yt Nave forecast t Moving Average LAG=2 Total (Qualitative) Black (70%) Red (20%) White (10%) Production Date

1 1291 2 629 3 1021 4 912 5 728 6 1575 7 1232 8 1460 9 690 10 1051 11 883 12 976 Average 1037,333 MAD MSE RMSE MAPE MPE

1190 720 1130 820 820 1310 1110 1160 890 950 880 900 990

955 925 975 820 1065 1210 1135 1025 920 915 994,5 MAD MSE RMSE MAPE MPE

1190 833 720 504 955 668,5 925 647,5 975 682,5 1310 917 1065 745,5 1210 847 890 623 1025 717,5 352 246,4 360 252 914,75 640,325 241,8125 Moving 134775,7 Average 367,1181 LAG=2 0,25211 25% -0,06747 -7%

238 119 144 72 191 95,5 185 92,5 195 97,5 262 131 213 106,5 242 121 178 89 205 102,5 70,4 35,2 72 36 182,95 91,475 MAD MSE RMSE MAPE MPE

1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 400 400

03.2012 04.2012 05.2012 06.2012 07.2012 08.2012 09.2012 10.2012 11.2012 12.2012 01.2013 02.2013

158,875 31524,88 177,5525 Nave 0,155162 16% -0,01175 -1%

129,9 27442,9 165,659 Total 0,132775 13% -0,02484 -2%

Forecast 2012/2013
1400 1200 Quantity in sets 1000 800 600 400 200 0 Months from March (2012) to February (2013) Forecast Production

Page 24

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Errors in diameters
Day 1 2 3 4 5 6 7 8 9 10 11 Diameter 7,07 6,95 6,96 7,02 7,04 7,06 6,94 7 7,04 7,03 7,06 Mean 7 7 7 7 7 7 7 7 7 7 7 Maximum 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 Minimum 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 9 7,04 10 11 12 13 14 15 16 17 18 19 20 7,03 7,06 6,98 6,94 7,03 7,07 7,09 6,98 7,02 7 7,03 7 7 7 7 7 7 7 7 7 7 7 7 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 7,05 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95 6,95

KOMERGO maintains the claim that the metal legs have a diameter of 7 mm 0,05 mm is the probability of the wrong 35% diameter

7.1 7.08 7.06 7.04 7.02 7 6.98 6.96 6.94 6.92 6.9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Mean Maximum deviation Minimum deviation Diameter

Page 25

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Red chair production


time t Demand Yt Forecast t Deviation Yt - t Squared deviation Production

1 258,2 2 125,8 3 204,2 4 182,4 5 145,6 6 315 7 246,4 8 292 9 138 10 210,2 11 176,6 12 195,2 average 207,4667

238 144 191 185 195 262 213 242 178 205 70,4 72 182,95

-20,2 18,2 -13,2 2,6 49,4 -53 -33,4 -50 40 -5,2 -106,2 -123,2 total total/t sigma 99,86 3 86 90 1,28 37

20,2 18,2 13,2 2,6 49,4 53 33,4 50 40 5,2 106,2 123,2 285,2 28,52 28,52 99 2,33 66 85 1,04 30

200 200 200 200 200 200 200 200 200 200 100 100

It's the past

SS=sigma*SF OP=DDLT+SS LT= 4 DDLT= 28 OQ 200 OP 75

Service level % SF Safety stock Service level % SF Safety stock

99,99 4 114 94 1,56 44

98 2,05 58 80 0,84 24

97 1,88 54 75 0,67 19

96 1,75 50 50 0 0

95 1,65 47

Page 26

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

White chair production


time t Demand Yt Forecast t Deviation Yt - t Numerical deviation Production

1 129,1 2 62,9 3 102,1 4 91,2 5 72,8 6 157,5 7 123,2 8 146 9 69 10 105,1 11 88,3 12 97,6 average 103,7333

119 72 95,5 92,5 97,5 131 106,5 121 89 102,5 35,2 36 91,475

10,1 -9,1 6,6 -1,3 -24,7 26,5 16,7 25 -20 2,6 53,1 61,6 total total/t sigma 99,86 3 43 90 1,28 18

10,1 9,1 6,6 1,3 24,7 26,5 16,7 25 20 2,6 53,1 61,6 142,6 14,26 14,26 99 2,33 33 85 1,04 15

100 100 100 100 100 100 100 100 100 100 50 50

It's the past

SS=sigma*SF OP=DDLT+SS LT= 2 DDLT= 7 OQ= 100 OP= 31

Service level% SF Safety stock Service level% SF Safety stock

99,99 4 57 94 1,56 22

98 2,05 29 80 0,84 12

97 1,88 27 75 0,67 10

96 1,75 25 50 0 0

95 1,65 24

Page 27

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Production plan

Page 28

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

New production plan

Page 29

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

MRP

Page 30

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Page 31

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Work stations

Page 32

Group 2:
Anamaria Petrea (131886) Gabriele Cilciute (167447) Martin Nielsen (145184) Alison Smith (168165)

26.03.2012

Bibliography
Anon., u.d. How Nanotechnology Works. [Online] Available at: http://www.howstuffworks.com/nanotechnology.htm [Senest hentet eller vist den 26 March 2012]. Anon., u.d. NANOYOU film. [Online] Available at: http://nanoyou.eu/en/component/content/article/3-audiovisual-materials/79-nanoyoufilm-nanotechnology-education-resources-video.html?directory=83&Itemid=8 [Senest hentet eller vist den 26 March 2012]. Arnold, J. R. T., Chapman, S. N. & Clive, L. M., 2008. Introduction to Materials Management. 6th Edition red. s.l.:Prentice Hall. Harrison, A. & Hoek, R. v., 2008. Logistics Management and Strategy: Competing through the supply chain. 3rd Edition red. s.l.:Pearson Education. Prentice Hall. Hollensen, S., 2010. Marketing Management: A relationship approach. 2nd Edition red. s.l.:Financial Times. Prentice Hall. Sloman, J. & Garratt, D., 2010. Essentials of Economics. 5th red. s.l.:Prentice Hall. Whalley, A., 2010. Strategic Marketing. s.l.:Andrew Whalley & Ventus Publishing ApS.

Page 33