Unit three Written Assignment

Lisa King

MT435 Operations Management

Kaplan University

May 5, 2012

Introduction

The consulting firm KU has been asked to bid on a consulting job with Albatross Anchor. This paper will examine, evaluate and propose a revamping of the operations systems for the company. We will begin by performing a process analysis and strategy and evaluate the performance of the current system that is in place. This will be the starting point for which the rest of the analysis and proposal will be based upon. This paper will cover the cost of production, economies of scale, and costs of materials, speed, and technology and will conduct a cost analysis for the current production. The purpose is to determine how to make the company more productive and competitive and enable positive work flow through realigning the design of the manufacturing processes. The company is operating on twelve acres of land that are landlocked. This indicates that there are only two ways for shipping and receiving-railway and truck. The company currently has all of its operations in the same building however since expanding to include the two different designs it must shut down for thirty six hours each time it must produce a different design. This results in lost time and profits. This paper will examine the cost of the shutdown, inefficiencies in the design of the building and devise a strategy that will increase productivity and efficiency and decrease down time.

Question One
The company is antiquated and the technology is obsolete. The administrative building is housed within the same confines of the production facility. Shipping and receiving as well as the storage of completed and raw materials are all located within the building however they are not positioned well for efficiency. Each of these issues adds to the overall problem with the company. In order for the company to maintain a competitive edge they must embark on a much needed overhaul of the company beginning with the cost of production. Cost Let us examine the cost of production. The cost of production can defined as the cost of producing the finished merchandise or goods (Warren, 2007). The company is currently producing two types of anchors; bell and snag hooks. These anchors are produced in the same facility with different manufacturing needs for each anchor. This causes a delay in production and lost revenue. While the company charges the same amount as their competitors for each unit their profit margins can be “as much as thirty five percent less because of their inefficiencies” (Albatross Case Study, n.d.). Albatross currently spends eight dollars per pound for the mushroom/bell anchors and eleven dollars per pound for the snag hook anchors (Case Study, n.d.). While the cost is constant profits are not. This is due in major part, to the amount of down time that is needed to switch the two processes each time a new order comes in that may be above its current inventory level. When producing a large order, there can be three to four weeks of waiting for the customer to receive the order. This can lead to the customer seeking other remedies for their immediate needs causing a loss of revenue to the company. Economies of Scale in material purchasing
Economies of scale are defined as the ability to produce higher levels of output with less cost per unit of production (Russell & Taylor, 2011). The concept is to produce more merchandise with less cost. At present, the company purchases materials that are stored at the rear of the facility furthest from the receiving dock. This necessitates the materials to be moved twice before production even begins. The materials must be moved from the receiving area into the raw products area and moved again, flowing through the production area again, before production can begin. This is a waste of valuable time and manpower. The object is to ensure that the facility is designed for the best flow possible. The process needs to be improved upon to speed up production and reduce cost and turnover time. Since items can only be received by rail because of weight limitations, the raw products storage should be located either in the front where receiving is located or the rail line can be lengthened to accommodate off-loading into the area that currently houses the storage of the products. The lack of coordination between the shipping, receiving and storages areas produces a disjointing for production and causes wasted time and resources. This results in the cost of production rising. KU consulting would suggest a way to improve communication and function between the described departments and thus improve the economies of scale. The layout of the facility is crucial to the success of the company. Cost of Raw Materials Sitting Idle in the Warehouse
As with any company, raw materials’ sitting idle means that money is being lost. Since the company began producing a second type of anchor in 1989, they have neither improved nor automated their system and it has been left as if it were still operating with only one batch production. Albatross has also decided not to make their product available directly to customers. This could result in lost revenue for the company. Longevity with its current suppliers can be an added bonus for the company, however since the materials are not being utilized they may be losing negotiating power because of the limited amount of supplies that are needed for production. Reduced production and lag time mean fewer profits and more overhead for the company. In order to avoid large quantities of inventory just sitting, the company needs to implement an inventory control system. This minimizes the cost of having the materials waiting to be used for an uncertain amount of time to the company having enough materials at their disposal when necessary. With the correct inventory system is established this makes the company more efficient and reduces costs. The purpose of the design of the system is to ensure that materials are being monitored and tracked and inventory is kept at the necessary levels. Part of managing a facility correctly is control. Without the proper controls in place, revenue is wasted and valuable resources are lost. Cost of Finished Goods Sitting Idle in the Warehouse Albatross Anchors seems to fall in the middle of two processes. Batch production is the low volume production of customized products and mass production which produces a high volume for the mass market (Russell & Taylor, 2011). The company produces a select product however it can be produced on a massive scale given the appropriate lead time. Once the goods have been produced it is then necessary to move them forward to awaiting customers. Once again, since the company will not sell to the public directly, they are limiting the purchase of goods that are based solely on orders that another company provides. The operation should consider opening a third market option such as internet sales or a small retail shop located near the administrative offices of the soon to be overhauled facility. This would reduce the cost of goods being wasted as it sits waiting for orders and pushes them into another revenue generating venue. The cost of production has already been had once the goods are a finished product and sitting idle increases the costs for the company because the money invested has not been returned in the form of profits. Speed of manufacturing process from order to finished product When examining the inefficiencies of Albatross Anchor, there is a glaring disparity that must be considered. The company requires a full thirty six hours to change from one production capability to the other. This is a major flaw that hampers the speed of production. If customers cannot receive orders quickly they may vie for the next option of immediate gratification. The faster the company can produce the types of anchors the more revenue it will be able to generate. Not only is revenue lost with each thirty six hour delay, the company is wasting its most valuable asset, human resources. The process is not automated which necessitates personnel to manually change the production floor each time a large order for the other type of hook is processed. This waste is one factor that can drive up the cost of production and lower the profit margin considerably. Consider for a moment that a large order comes in for a snag anchor that the customer needs with seventy two hours and the facility is currently running the mushroom anchor machine. Rather than having the ability to simple push the switch and convert to the appropriate production machinery within a matter of minutes or hours, the facility must finish the current batch, shut the facility down and take thirty six more hours to complete the changeover. This could result in the order not being completed on time and lost revenue not only from the current order but future orders from the customer as a retained client. Efficiency is a vital portion of the entire planning process. The ability to change quickly and continue operations will be on the forefront of the proposal for KU Consulting. Flexibility in filling orders There is limited flexibility in filling orders for the company currently. Once again the advent of automation can address this issue. The time frame that it takes to convert to the other assembly process is an unacceptable delay in today’s marketplace. Suppose for example, the customer has given an order to have six hundred snag hook anchors to be delivered within two weeks. At the end of production the company has accomplished the task with three days to spare. They contact the customer and inform them that their order is complete and ready for delivery. The customer decides at that point that they would like an additional order for the mushroom anchors to be delivered at the same time that the snag hooks are delivered and they will allow time for the anchors to be made just as long as they are delivered on the original date of the contract. This would be a serious issue for the company without the much needed automated technology that will be discussed in the next process. The company is once again facing a loss of revenue because of its antiquated building and systems. Technology The success or failure of any company can begin or end with technology. An effective computer program can increase the overall efficiency of a company dramatically. Research into the auto industry has Rexroth as one of the leaders in the automotive field. This company supplies automated process machinery and lists the quality and standardization as one of the key elements of process control (2011). The ability to speed the process and flow of production as well as to maintain the standard of quality will increase revenue and customer loyalty. Albatross needs to implement automated systems into the production flow. These controls of quality and speed will assist with the increase of revenue as well as provide for flexibility of production. The company could also create a perpetual inventory method. This is where every purchase and sale of merchandise is recorded automatically in an inventory account (Warren, 2007). Capacity and facilities The current facilities are poorly designed. With the shipping and receiving departments located adjacent to one another across the building and all storage facilities located in the rear of the plant, this flow slows incoming and outgoing times considerably. The receiving area for the raw materials should be located in the same area as the storage of raw materials. The shipping area should be located in the same area, if not the same space, as the finished goods storage. The design of the plant needs to be revamped to allow a continuous flow of the merchandise that will not be impeded by the production floor itself. This coupled with an inventory control system, automated machine technology and computerized office systems should reduce any inefficiency that the company is now experiencing.

Service to customers Currently, Albatross Anchors does not maintain a customer service department. Since the company only deals with third party suppliers and OEM manufacturers there is no significant customer contact. The supply chain leaves the company out of customer interaction. The proposal would include having a retail store adjacent to the administrative offices as another way of generating revenue. The customer could buy directly and the profit margin would increase simply because there is no shipping involved with the transaction. This would also decrease finished goods sitting idle waiting for them to be sold. This adds no or minimal additional overhead or staffing and the store could operate the same hours as the factory causing no increase in personnel or security.

Question Two
There are many ways that mushroom/bell anchors may be manufactured. Albatross Anchor is considering two new manufacturing processes (Process A and Process B) to reduce costs. For each process the following fixed costs and variable costs are identified below:
|Anchor and Process |Process A |Process B |
|Sale price per anchor |$45.00 |$45.00 |
|Total Fixed cost |$ 650,000.00 |$950,000.00 |
|Variable cost per anchor |$ 36.00 |$ 29.99 |

Based on the information in the table above complete the table below:

|Anchor and Process |Process A |Process B |
|(a) Fixed costs per anchor | | |
|(b) The total number of anchors to attain | | |
|break–even point for Process A and Process B | | |

(c) Based on your calculations which Process (A or B) that you would recommend for adoption (you can select only one).

This process makes the most sense because the breakeven point is the least. In trying to stay competitive, the company must choose the right strategy that produces the most profit and has the lowest breakeven point.

Conclusion

Overall, the company needs to automate its production facilities, improve its manufacturing flow and reduce the inefficiency that is causing the profit margin to be decreased. By automating its facilities, it can exercise inventory control, reduce the lag time between machine conversions and create a better shipping and receiving flow to ensure maximum profits within the confines that it is currently operating. By standardizing the quality of the products produced and expanding to create a direct customer base, the company has an opportunity for greater growth and development and a chance to explore untapped markets.

References

Russell, R. & Taylor III, B. (2011). Operations Management: Creating Value along the Supply Chain 7th edition. Wiley & Sons.

N.A. (2012). Economics of large scale production. Retrieved from May 8, 2012 http://economicsconcepts.com/economies_of_large_scale_production.html

N.A. (2011). Automated technology in the automotive industry. Retrieved May 7, 2012 from http://www.boschrexroth.com/corporate/sub_websites/industries/automotive/en/_content/_download/_brochures/RE09924_automotive_main_brochure.pdf

Warren, C. (2007). Survey of Accounting. Mason, OH. Cengage Learning.