Operation Management at Stoller USA Incorporated - Case Study Example

Case Study of US Strollers: Introduction: US Stroller deals with issues concerned with high Inventory Costs, low servicing and high overheadcosts, due to which, although Gross profit is 25 % on sales, Net Profits are only 2% on sales. (US Stroller CASE STUDY, P. 2) Thus it is seen that a large amount of revenue is being eroded by storing and inventory costs, leaving the privately owned company, very little by way of net profits and surplus for future usage in times of dire straits. Again the inventory turnover is just 2.4 times per year “A low turnover implies poor sales and, therefore, excess inventory.” (Inventory Turnover). Therefore, it becomes necessary to identify and institutionalize changes that could drastically reduce inventory costs and enhance efficiencies in production methods. This study is designed to examine the available options and choose the best alternative available at the disposal of US Stroller. Background: The Company makes three varieties of Baby strollers and carriages. Regular model is their prime selling model and has been the original product since it established business. Deluxe models could also be used for carrying babies from place to place when they are awake, and this product could also be transformed into moving carriages when the babies are asleep. Shopping or heavy duty strollers combine versatility and security with ample storage space. The three types of strollers/ baby carriages are as follows: serial Product Retail price ($) 1. Regular Model 49 2. Deluxe collapsible Model with sleeping Carriage 99 3. Heavy duty shopping type Model 149 It is seen that in the case of this case study of US Stroller, nearly a majority of raw materials required for making the finished product including wheels, seats and backrests are purchased from outside suppliers. Since this is purchased from outside, it becomes necessary to maintain adequate stocks in order to cater to production needs. This aspect is significant, since, in the event of non-availability of raw materials from outside, this would considerably impact upon production scheduling and consequently, upon actual production. It is also possible that without a well planned and scientifically oriented production/ inventory planning, the risks of high costs of manufacturing are evident and erodes profits of company. Therefore it could be said that the aspects of inventory which are deficit, could be seen in terms of the fact that: 1. There is enough evidence to show that there are cases of idle inventory- items being produced which may not be immediately required. Idle inventories give rise to pilferages, damages, tied up capital and unnecessary lock ups of funds in inventories that could be used more productively for other uses. 2. Again, it is seen that the processing of the product from raw materials to finished carriages are unwieldy and time consuming. It is necessary that process be made simpler, and also that one process need not have to depend on other processes. 3. It is heartening to know that Economic Ordering Quantity (EOQ) has been used in this context of inventories. However, it could be said that EOQ” is defined as the optimal quantity of orders that minimizes total variable costs required to order and hold inventory.” (WU, Sabrina). Economic Ordering Quantity: There are several managerial tools used by conscientious management to tackle the problem of rising inventory costs. Economic Ordering Quantity is just one of these tools that management could use, considering that organisations are often circumspect regarding the quantum of order they need to place to keep moderate, albeit safe levels of consummable stores. The concept and application of EOQ would definitely differ from organisation to organisation, depending on extraneous and internal factors, including demand, lead time, inflationary trends and production targets. To set up rigid systems would be far fetched and a lot would be need to be decided on the merits of each case. It may even be necessary to modify EOQ levels to suit changing corporate scenarios depending upon a spectrum of factors, including availability of funds and opportunity costs. Again different stocks could have different EOQ levels, depending upon a host of factors. For a stroller manufacturing unit, tubes, undercarriages, seats and wheels are essential items and need to be well stocked to take of regular needs as well as exigencies in terms of bulk, special or institutional orders. The safety aspect is critical and paramount and this needs to be considered while placing orders for materials needed to be used in the production process. However for the purpose of this study, it is necessary to consider the hypothetical example of a product manufacturing company Company S operates a stroller manufacturing company. The annual demand for these strollers is, say, 25000 units. Set up costs are $15/order.The inventory and carrying costs for product is $0.50 per year. What should be the quantum of yearly ordering quantity in order to keep safe, albeit economic levels of stocks? The formula for EOQ is Q= √ 2CR PF Or Q = √2 (15) (25000) 0.50 Or, Q = 1225 units. Therefore, to meet current demands, the maximum quantity that could be ordered at one time is 1225 units, and this is its EOQ, or economic ordering quantity for producing strollers. However, it needs to be cautioned that EOQ levels could vary after considering local factors and the merits of each case, especially institutional and bulk orders for which there could be an upward rise in sales, and, in effect on required production levels. Again the need to cater to export markets and internet sales (if available) also needs to be considered. The EOQ may not be acceptable in cases where there are delays in procuring, long lead times and long downtime for production process to be initiated. It takes nearly 5 weeks to reorder from the works site including 1 week of transit. A month’s inventory is being held for providing high machine usage and scheduling. In this case of US Stroller, it could be said that the main problem is not in terms of EOQ, or its application, but the work process and control over inventories which are more important. Option 1: An important aspect with regard to Option 1 is that, the present system of one assembly line would be replaced with 3 different assembly lines, separately catering for 3 product lines- Regular, Deluxe and Shopping Model. Therefore the question of Set-up Time and Change-over would be negated with independent assembly lines catering to 3 different product lines. Table I The cost of yearly Set up Time and Change-over are being posted at follows: Serial Set up time Expenses ($) Per week ($) Per Year ($) Carry over Expenses ($) Per Week ($) Per Year ($) Total ($) 1. Regular Model 165 8,580 165 8,580 17,160 2. Deluxe model 185 9,620 185 9,620 19,240 3. Shopping model 170 8,840 170 8,840 17,680 Total 27,040 27,040 54,080 Therefore, it is seen that the savings in set and change over charges if Option 1 is exercised would be $ 54,080. However, it is seen that the savings are not as obvious as it appears. The changeover would incur additional investments in tools and equipments entailing of $200,000. (US Stroller CASE STUDY, P. 5). At the current rate of interest @8% on $200,000 works out to $16,000 /year which seems an attractive proposition in that there is a net savings of $54,080- 16,000 viz. $38,080/ year. It is seen that regular stroller has been the best-seller for this company and contributes around 50% of the profits, the other two splitting the balance 50% among themselves. Barring unforeseen circumstances that may arise in the future, it is therefore be sagacious to invest maximum in Regular Model Production, and then, other Heavy Duty Shopping and Deluxe models. The ensuing benefits from that could be gained in terms of: 1. There are at present Each Assembly line could be given (1) one Tube Cutting Machine, hence the question of long term tube storage does not arise, since production of each Assembly line would need just that number of tubes necessary for production to be carried on and unnecessary stock holdings could be eliminated. 2. It is seen that, at present, only one wood cutting equipment is present. If this was to be used for all three assembly lines, there would be unproductive and idle times, due to non-availability of wood cutting equipment. In order to avoid such a situation, it would become necessary to invest in two more such equipments so that each assembly line is assured of its own wood cutting equipment when needed. 3. The present dependence of US Stroller on outsourcing raw materials used in production could be alleviated, if not totally eliminated, over a period of time. 4. It is necessary to introduce lean management into this production process in order to avoid the waste of materials in having more items than actually needed, or extra materials that may not be urgently needed in production systems. It is also necessary that only that much of materials be needed that is actually required for production process in Assembly 1, 2 and 3 for the Regular, Deluxe and Heavy Duty models. Coming to the fact of how relevance lean management and kanban would be for these systems, it is first of all to be known that the Toyota Production Systems (TPS) is not just a method, but is a way of life in production centres. Therefore, it is necessary that the entire production strategy and technology has to be replaced on a long term basis, imbibing the various strategies, enunciated by TPS. Therefore, it is not possible to have just a unit of production, or a particular department to have TPS and its lean management aspects like Just-in-time, kaisan, kanban, etc. It has to become a production culture permeating all levels from the CEO down to the shop floor level. Thus, only then when it becomes a management ethos and constant practice at all levels, that the Toyota way of production can become practically feasible in the context of US Stroller and its benefits could be derived. Moreover, it has to introduce on a permanent basis. Toyota Production System: Toyota system is not as easy at it is given to believe. It can only be test implemented in order to determine its operational efficacy; in the event it is implemented on a large scale basis and fails, it would signal curtains for the company, who would have invested heavily on the implementation of this scheme in their factory besides having to change its entire production system to facilitate TPS. Once this has been introduced on a long term basis, it would be difficult to back out, considering both its structural implications and Organizational impact on production. Lean Production System: Slide 2 (provided by customer) Option 2: Under this system, the three products – Regular, Heavy Duty and Deluxe (Collapsible) model are produced in separate cells. The main idea behind this is that a greater degree of control could be exercised, in use of raw materials and tubings, since they are being apportioned to three product lines upon actual requirements. The processing of products is made in different cells and the final throughputs are sent to the Assembly line. It is seen that, unlike Process 1, there are no separate Assembly Lines for the different product and therefore, it is seen that one assembly line has to cater to all the three products. In this respect it is inferior to Process 1, which has independent assembly lines for all products. Again the investments are not very different in that by using this method, there is only a differential saving of $50,000. ($200,000 – $150,000 = $50,000) Process 1 renders savings in terms of set up and changes over; this may also be available to Process 2, since the process has been made into cells, except the aspect of assembly line which is common for all products. It is necessary to mention in this context that the final assembly line constitutes the major and significant aspect of production of strollers. It is in the final assembly line that major work is done and the probability of defective workmanship could be attributed to errors in assembly lines. Therefore, it could be said that the process 2 has only limited scope in the present context although it may be operationally more effective than prevailing one. It is seen that when the final assembling is done, all the needed inputs are either in stores or are in the ordering stage to make up the requirements. It is seen that the assembly room requires all the needed inputs in order to provide the necessary outputs. This is more so, in the case of different product lines which, besides the regular product inputs, also require special material items like carriage accessories, wheels, etc. The main disadvantages with regard to Process 2 would be the fact that since the machines would be dedicated to each product line, there would not be much of flexibility of operations, and thus, bulk orders, or executing a customized made to specifications order, would be difficult to implement, since all the machines are being used for regular production and there is not enough elasticity in the production systems to cater to both regular orders and special orders simultaneously. Therefore, it would become necessary to change the production to suit the more profitable customized order. Which would be the more suitable Option for the Company –US Stroller? In the opinion of the writer, it is seen that Option 1 would be a better choice, since it is a long term option which derives the full benefits of Total Production System, (TPS) including independent Assembly rooms for each product, so that production planning, organizing and executing could be entailed without high inventory systems, and for each of the products Regular, deluxe and shopper models, there could be separate production scheduling and budgeting without having to think in terms of idle time, set up and change over time. Of course, there is a question of additional investments of $ 200,000 but it is seen that this could be recouped in just 4 years. This is because annual savings of $ 54,080 (refer Table1) above are rendered and this could be recouped in 200,000/ 54,080 = 3.69 years, or around 4 years. Even Option 2 has an investment of $150,000 without the advantages of separate Assembly room and the costs savings may not be as much as in the case of Option 1. Moreover, it is seen that Option 1 would be in terms of the full usage of the TPS method, and is also extremely flexible, because machines, although used for different product lines could also be used for other profitable customized orders, without affecting the normal production, since there is spare capacity in terms of machines and equipments. The real benefits of Process 1 are as follows: Full use of Toyota production systems including kaisan, kanban, takt time, etc Three product lines are independent product centres and therefore, costing, profit estimation, budgeting and control mechanisms could be effectively done. Since inventory control is the main problem in US Strollers, this would be effectively controlled under this method and also the inventories would hold only such items in stocks that are actually needed, without wastes or over stocking in stores. Under TPS, it is seen that materials required for each batch of production are found in immediate vicinity of shop floor and therefore, the need for waiting for materials, orders or accessories does not arise. Again, control over inventories signifies that wastes, defectives and process losses are kept to the barest minimum and effective controls are carried out in order to ensure that quality control occurs at each stage of production itself and not at the Quality Control department, which, certainly, is the final authority in these matters. It is seen that there are significant savings in terms of set up costs and changeover costs, which could be totally eliminated in the event of induction of Option 1. Further, once TPS is introduced in a regular manner, it could be seen that overall production and inventory efficiencies could further enhance turnover, profits and overall business efficiencies. Since different product liens are now independent profit centres, a greater degree of responsibility and power delegation could be made. Budgets and plans of actions could be more clearly defined and executed and overall profits of all the three products could be better focused, targeted and achieved. This is not possible under the present system, since common budgeting needs to be done for all products, since they are interchangeable, used in same machines, equipments and production processes. By far, Option 1 is most effective since it has all the advantages of an efficient and manageable production control system, while being flexible and open to bulk and special made to order products, which may not be feasible in the case of Option 2, being fixed machines and regular orders, and the changeover may entail expenses which may not be economically feasible in the long run. The other option of allowing the present system to continue is fraught with risks and economic perils, even in the short run. It is seen that the Net profits are being eroded by high inventory costs which leaves very little room for profit planning for later years. In a competitive market where the market share of US Wheeler is only 40%, its competitors Graco commands 20%, Kolcraft 10% and smaller players command 30%. (US Stroller CASE STUDY, P. 1) It is thus seen that US Stroller is not in a dominant position. It is possible that other players like Graco, Kolcraft and others may introduce state-of-the –art technology and effective sales and inventory to upstage US Stroller and thereby gain a major market share. Therefore it is imperative that US adopt Option 1 in order to safeguard is market share in future years. If status quo is allowed to remain, the inventories would continue to rise in future years, partly due to inflation, and also market pressures, resulting in unsold stocks and unused inventories. This could, in turn, lead to stock piling and unsold products due to loss of demands and outdated production techniques since competitors may bring in cost and pricing advantages, which US Stroller with high costs may not be in a position to offer. A extreme situation may arise by which US Stroller, by not capitalizing on options , may be either forced to wind up operations or sell its business to another competitor. Conclusion: It is seen from this case study that US Stroller needs to discipline its inventory controls and production structure through cost cuttings, adoption of scientific and TPS procedures and also independent profit and production zones for its different product lines. This could not only enhance accountability and better cost allocation, but could also institutionalize cost and profit centres and identify and solve production problems in a more divisive and efficient way. There are plausible reasons to believe that by adopting Option1 the company would be in a much better position to serve the interests of its stakeholders, customers and employees. This is because it renders cost savings that are not practicable in other methods, present or envisaged. Bibliography Inventory Turnover. (2008). [online]. Investopedia. Last accessed 15 September 2008 at: http://www.investopedia.com/terms/i/inventoryturnover.asp WU, Sabrina. (2005). Economic Ordering Quantity. [Online]. Last accessed 15 September 2008 at: http://www.freequality.org/sites/www_freequality_org/Documents/Training/economic_order_quantity.ppt Read More