Paul Downs Cabinetmakers

Paul Downs started making furniture in 1986 in a small shop in Manayunk, Pennsylvania.
(Over the years, his business outgrew four shops and is now operating in a 33,000-square-
foot facility in Bridgeport, Pennsylvania. The company focuses on high-end, residential
furniture. Paul Downs' production facil ity includes machines and other wood-processing
equipment valued at about $450,000. There is an annual depreciation associated with the
machines (reflecting the duration of their useful life) of $80,000. Rents for the showroom and
the factory amount to roughly $ 150,000 per year. Other indirect costs for the company are
about $ 100,000 per year for marketing related expenses, $ 1 80,000 for management and
administration, and $60,000 for a highly skilled worker in charge of finishing furniture and
conducting a quality inspection.

The company has two major types of inventory. There is about $20,000 tied up in raw
Materials. This is wood that is purchased from supplliers in large order quantities. When
purchasing wood, Paul Downs needs to pay his suppliers roughly one month in advance of
receiving the shipment. There is also about $50,000 of work-in-process inventory. This
corresponds to furniture that is in the process of being completed. Furniture production,
especially in the high-end segment, is a very manual process and requires a highly skilled
workforce. Paul employs 12 cabinetmakers many of whom have been with his company for
more than a decade. The cabinetmakers work about 220 days in a year (on average about
eight hours per day). The typical wage rate for a cabinetmaker is $20 per hour.

To finish a typical piece of furniture, a worker needs about 40 hours. This corresponds to our
previous concept of an activity time. The work is organized in work cells. Instead of having
the cabinetmakers specialize in one aspect of furniture making (e.g., cutting, sanding, or
polishing), a cabinetmaker handles a job from beginning to end. Of their overall number of
hours worked, cabinetmakers spend about 15 percent of their time building fixtures and
setting up machines. Given the modern production equipment, a good part of this includes
programming computer controlled machines. Since the cabinetmakers are organized in work
cells, it would be too expensive to equip each cell with all wood-working equipment; instead,
the cabinetmakers share the most expensive tools. This leads to an occasional delay if
multiple cabinetmakers need access to the same unit of equipment at the same time.
Consequently, cabinetmakers spend about 1 0 percent of their time waiting for a particular
resource to become available.

From a design perspective, a typical piece of furniture requires about 30 kg of wood. In

addition to this wood, about 25 percent additional wood is needed to account for scrap losses,
primarily in the cutting steps of a job. Wood costs about $10 per kg. Purchasing high-end
furniture is not cheap-customers pay about $3, 000 for a dining table. Typically, customers
are expected to pay 50 percent of the price as a down payment. They then receive their
furniture about three months later. This delay reflects the custom nature of the end product as
well as the fact that Paul Downs's facility at the moment is fully utilized, that is, there is more
demand than what can be processed by the factory.