(40 points)

Q5) Enclosed please find the case “Santo Stilo Hungary.” You are expected to role play the VP for
operations Mr. Fetjo and provide a detailed assessment of the performance of the production line at
the Budapest plant. Your response is expected to touch on all of the relevant issues raised in the
case.

SANTO STILO HUNGARY (A) Abridged

After a long meeting, a longer weekend was ahead of Antonio Fejtö. The final performance review of
the workers at the new Santo Stilo plant in Hungary was up in less than a week. The presentations in
today’s meeting indicated that the workers had not delivered over the last eight weeks as they were
expected to. The HR manager even voiced the option of terminating their contracts for a new batch
of workers despite strong opposition from the representative of the local recruitment office who
found and trained the workers. Now, he had to sort it all out before the meeting on Monday at the
company head quarters in Milan .

Santo Stilo is a furniture company located in Milan, Italy. It offers a relatively narrow selection of
hand-made furniture of its vintage minimalist style. Its two most popular products are a reclining
chair Zamba and multi-functional coffee table Espressa. Both products are made of a seamless block
of carbon fiber reinforced durralite – a patented material produced in Denmark. Some experts
believe that these flat panels of multi-layered saw dust sandwiched between carbon fiber textiles will
revolutionize the wood-based furniture industry. Although it is quite expensive ($135 per m.)
compared to its substitutes, its light weight and durability are the main advantages.

Santo Stilo only caters to the EU market. Since their introductions in early and late 2011, respectively,
the sales of both Zamba and Espressa have been increasing across the entire market. (See Table 1.)
The unit sales prices for 2015 did not change from 2014 and were set at $510 for the Zamba chair
and $425 for the Espressa coffee table.

Up until September 2015, the chair and the coffee table used to be produced only at its Milan plant
on two separate dedicated lines. A dedicated line is a production line on which only a single product
is made. Following a belated capacity expansion decision, the Zamba and Espressa are now being
produced in the outskirts of Budapest, Hungary. The new facility was designed to be thoroughly new
with up-to-date technology and cutting edge machinery. The ultimate objective was to slowly phase
out the production at the Milanese plant and shift all production to Budapest.

The two production lines at Milan operate since the introduction of the products with the old existing
equipment that was modified by its process engineers. The process designers at the plant are
considered to be very skilled and have been able to achieve very low overall defect rates (0.024% in
2014.) All of the workers on the line are skilled artisans with a median work experience of 16.7 years,
11.3 years of which have been with Santo Stilo. (See Table 2.)

The production line at the Budapest factory is a mixed-model line. It has been designed to
accommodate both products which are produced in a cyclical schedule with the given batch sizes. All
of the workers at the Budapest plant were newly hired in early August 2015 and were given a
rigorous job training which involved the technical aspects of how to use the equipment as well as
essential quality management skills.

Antonio Fejtö was assigned as the VP for operations for the Hungarian subsidiary after three years as
assistant manager of the Milanese plant. He has had experience at Milan with the dedicated lines as
well as the third line which was run as a mixed-model line for the remainder of the products in the
portfolio of Santo Stilo. His hungarian family background and fluency in the local language also
contibuted positively for his assignment for this important position.

Dedicated production lines are considered to be the easiest kind to run as they are designed solely
for a single product. The smooth flow of uniform materials along the line is the main objective, and it
is achieved physically through the moving conveyor belt in front of the workstations. The crucial
design aspect, which is ensuring the balancing of the work across workers, dictates a set output rate.
Once the workers get used to the simple tasks they are assigned, the managerial concern is keeping
the high morale and high quality levels that may deteriorate due to fatigue and monotony of the
work. A well-balanced line means that all workers have (almost) equal work to do in a given amount
of time.

A mixed model line is more difficult to design – that is, to balance the work across workers. There will
be more imbalance on such lines inevitably – some workers will more idle time than others.
Management can rotate the workers around to achieve equitable workloads but this necessitates
cross-training workers with additional expenses. Another difficulty that a mixed model line faces is
operational: Since more than one product has to be made on the line, production times of the
products must be scheduled. A commonly used,, easy policy is to use the so-called cyclical schedules.
At the Budapest SStilo plant, the policy typically works as follows.

On Monday morning, the line is set up for producing the Zamba chairs. The model changeover setup
involves configuring the workstations, putting some of the tools and fixtures in place, calibrating the
equipment. The process designers envision this to typically take four hours. After a short pilot run to
ensure that the line is ready for full scale production, Zamba chairs are produced on the line until a
certain number of them) called a batch) have been produced. Then the line is stopped and prepped
for coffee table production. The changeover setup for the Espressa tables is shorter than that of the
chairs and the process designers envision this to typically take three hours. This time, after the pilot
run, a batch of tables is produced. Thus a cycle of production runs is completed. The line is stopped
again and setup for the next cycle of Zamba and Espressa production. The management tries to have
full cycles completed before the weekend breaks, but this has not always been possible in the last
eight weeks. Therefore, overtime had to be scheduled on some days; overtime wages are estimated
as 180% of regular wages. Overtime is also used for rework needed if some of the produced units
contain defects and are not to be scrapped.

The batch sizes for the products is a managerial decision, depending on the costs of actual setup
operations along with that of stopping the line (called the downtime,) of holding finished goods
inventory and demand volume for the planning period. For the last eight weeks, the batch sizes for
the Zamba chairs and Espressa tables have been 130 and 50 units, respectively.

After four weeks, supervisors and the process engineers suggested a modification of how the
production line is to be run. The heating unit and the frame forming press used only for production of
chairs were separated from the line to be as an off-line machine not in synch with the rest of the line.
Also the batch sizes for the heating unit have been reset as 50 units. This allowed the unit to operate
independent of the production schedule of the rest of the line; due to small batches and the setup
times of the heating unit, production of formed panels continued some times while the rest of the
system was used for production of coffee tables. Thus the line was run more like a job-shop but it did
not result in the usual difficulties encountered in job shop settings: The smooth flow of material was
ensured on the rest of the system and de-coupling the heating unit allowed better control of output
quality in this stage of manufacturing. In this new arrangement, six workers (two of whom cross-
trained for other workstations) were dedicated to the heating unit and the form press at all times.
The Budapest facility had hired 29 employees for the line. Twenty two of these workers were cross
trained so that they can work on the production of chairs as well as coffee tables. In addition to the
current layout of the facility, the process engineers had an alternative layout for the line where all 29
workers would be utilized for production of chairs and 20 for production of coffee tables. However,
this design option was not adopted by upper management due to a large fraction of workers being
idle during table production. In the adopted layout, 22 workers were employed on the line during
production of coffee tables; the remaining workers were used in warehousing operations. The recent
modification of the line which took the heating unit and form press offline did not affect the number
of workers employed on the line.

The production statistics for the period of September-November 2015 (eight weeks) for the Milan
and Budapest plants are provided in Tables 3 and 4.

The company had high hopes for the Budapest plant: It would be a new facility with higher
automation levels than its 13 year old Milanese plant, better material flows, specially designed
equipment for the key raw material and lower wages. The workforce was recruited and trained by a
local human resources consulting agency. The workers are on a trial period of three months, at the
end of which, they may be theoretically laid off at no cost provided that their performances were
deemed unsatisfactory. Sstilo had no production experience outside of Italy. The performance of the
lines were the only benchmarks for the plant in Hungary.

The plant was finished on time; labor was recruited and trained on time. The two supervisors were
brought in from Milan temporarily and were entrusted with training the local supervisors who would
be chosen among the new recruits. The production was ramped up to full scale after the first two
weeks of operation. As expected, there were some familiarity problems that resulted in quality
problems and needed to be sorted out. (See Figures 1 and 2.) Both the workers and the supervisors
were new to the entire process. The quality problems encountered for the two products were
different. One of the big difficulties for the Zamba chairs has been the heat treatment unit that
caused the durralite panel to get the shape of the chair. If the temperature was not right, the
material became very brittle. The heat treatment unit was one of the new equipment designed in
Brazil for the plant. After experiencing excessive downtimes during the first week, a team of three
Brazilian engineers were called in to finetune the equipment to investigate and eliminate the quality
problems which arose. For the Espressa tables, the main problem was the rigs’ alignments on the
cutting machines. Any misalignment would case the mills to separate the layers at the edges which
would be noticed only at later stages. The rigs were designed by the process engineers of SStilo for
the new cutting machines. Neither the suprervisors nor the workers had had any experience with the
rigs. One of the complaints of the supervisors has been the need to mount and dismount the rigs
during the model changeovers. The bill of materials for the products indicate that material usages
should be 2.2 m and 1.6 m of durralite for the Zamba and the Espressa.

The workers used the jidoka system on the line, – under which, if there was any quality problem
encountered, any one of the workers had the authority to stop the line and ask for an investigation of
the problem. Such line stoppages were costly but necessary to identify and eliminate the assignable
root causes of the problems and improve the system. Moreover, during such downtimes, some
workers at other workstations used this time to recalibrate their equipment or work on similar local
improvement efforts. Some of the semi finished products could be reworked into good units (at
additional cost) but some defects were irretrievable so that the units needed to be scrapped. The
rework and scrap rates were important measures of quality improvement. The quality problems
encountered and ensuing downtimes resulted in actual production volumes to be different in some
weeks from the effective capacity (scheduled production volume) targets. (See Figure 3.)
At the preliminary review meeting in Hungary, Bela Nagy, the plant manager reported that in some
areas, the plant was much better than the Milan plant. For example, in terms of total energy usage,
the Budapest plant used only 25,281.4 KWhs as opposed to 34358 KWhs. But in other areas, it had
mixed performance figures. A troubling finding was that the average labor productivity (measured as
output per scheduled worker-hour) over the last eight weeks was comparable with their benchmark
figure of 0.19; but, for the Zamba, it was 0.16 – less than half of the benchmark figure of 0.38 at
Milan. The overall conclusion was that workers’ performance was acceptable for the Espressa
production but they were totally inadequate for the Zamba. A more detailed study was obviously
needed if the workers were to be retained.

Antonio Fetjö has always found performance evaluation in operations tricky. He had strong feelings
about his views: Production was a team effort – especially a production line. Except for the obvious
idlers, the performance was the responsibility of the entire line. Labor productivity could not be the
only measure to judge the performance of a production facility. Performance assessment was like a
cubist painting – it had to show all different dimensions at the same time. Moreover, the entire
workforce could not be laid off either. More importantly, performance reviews were not only
snapshot of what it is but also a trailer of what is to come. Problem areas needed to be identified and
a game plan proposed.

He settled in his chair and started his comprehensive review of the last eight weeks’ performance. He
had two objectives: (1) a full analysis of the past to shed light on the future productivity of the plant,
and (2) a plan of action for the issues.
Table 1. Total sales of Zamba and Espressa product lines (in units.)

Year Zamba Espressa

2011 2,345 897
2012 4560 2150
2013 8920 4587
2014 12532 5670
2015* 9023 2986

*The sales in 2015 are only for the first six months.

Table 2. Worker statistics for the Milan and Budapest plants, as of November 2015.

Milan Budapest
Number (total) 45 29
Zamba line 26 29*
Espressa line 19 29*
Work experience
(median yrs, total) 16.7 4.5
Seniority at SStilo
(median yrs, total) 11.3 0.30
Training in 2015
(average, weeks) 0.4 3
Wage ($/hr)
24.50 14.75
*The Budapest plant has a mixed-model single line.

Table 3. Production statistics for September-November 2015 (eight weeks) for the Milan and
Budapest plants.
Milan Budapest
Production (units)
Zamba 2780 910*
Espressa 970 613*

Scheduled production (hours

Zamba 280 196
Espressa 272 100

Overtime (hours)** -- 20

Downtime*** (hours)
Zamba 2 78
Espressa 5 35

*Production figures at Budapest correspond to good/saleable units.

**No breakdown across products is available for the overtime at the Budapest plant.
***Downtime (out of scheduled production time) includes times for model changeover setups,
stoppages for investigations of poor quality problems, maintenance and repair.
Table 4. Budapest production statistics for September-November 2015 (eight weeks).

Scheduled production (total units)

Zamba 935
Espressa 630
Actual production (total units)
Zamba 924
Espressa 624

Production (good units)

Zamba 910
Espressa 613
Weekly production* (good units)
Weeks Zamba Espressa
1 48* 26*
2 92* 54*
3 127 86
4 126 88
5 127 89
6 130 90
7 130 90
8 130 90
Weekly rework (units)
Weeks Zamba Espressa
1 8 6
2 12 11
3 11 11
4 9 8
5 8 7
6 9 4
7 4 4
8 1 1
Weekly material usage** (m)
Weeks Zamba Espressa
1 117.83 49.92
2 217.76 94.66
3 287.23 145.02
4 284.42 142.21
5 283.85 145.44
6 287.72 144.58
7 287.43 144.29
8 287.14 144.14
Energy usage*** (kWhs) 25,281.4

*Production was ramped up to full scale in Week 3.

**Material usage is reported only for the key material used – durralite.
***Energy usage is for the entire period of eight weeks. Cost of energy is estimated at $0.35 per
kWh.
Figure 1. The waste percentage (computed as actual waste in production over planned material
usage) over the period September-November 2015.

4.5

3.5

2.5
Zamba
2 Espressa
1.5

0.5

0
1 2 3 4 5 6 7 8

Figure 2. Scrapped unit counts for Zamba and Espressa for September-November 2015.

4
Zamba
3 Espressa

0
1 2 3 4 5 6 7 8
Figure 3. Actual production volumes measured as percentage of scheduled production for the
period September-November 2015.

101.0
100.0
99.0
98.0
97.0
96.0 Zamba
Espressa
95.0
94.0
93.0
92.0
91.0
1 2 3 4 5 6 7 8