OPERATIONS MANAGEMENT 4A (OPM7X01)

(ASSESSMENT 2)

PROGRAMME : ADVANCED DIPLOMA

SUBJECT : OPERATIONS MANAGEMENT 4A

CODE : OPM7X01

DUE DATE : 15/05/2020

TOTAL MARKS : 100

EXAMINER : DR. NDALA YVES MULONGO., PhD

EXTERNAL MODERATOR : PROF KEM RAMDASS

NUMBER OF PAGES : 6 PAGES

_______________________________________________________________

INSTRUCTIONS TO CANDIDATES:
ü Answer ALL questions.
ü THIS IS AN OPENED BOOK ASSESSMENT.
ü Write neatly and legibly
ü NOTE: Marks will be awarded for theoretical knowledge, application of
the theory and use of relevant examples.
ü The general University of Johannesburg policies, procedures and rules
pertaining to written assessments apply to this assessment.

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 OPERATIONS MANAGEMENT 4A (OPM7X01)

QUESTION [25]

In November 1999, Mat Frankel was promoted to the post of Operations Manager of the
company’s European Disk Drive Division, located just outside Dublin. An American, he had
been given the job for two reasons. First, the parent company in the USA was concerned at the
poor record of the Dublin plant in terms of meeting production targets which, it was felt, he
could improve. Second, the whole of the European operation was about to reorganise. The
reorganisation would take away each division’s sales and marketing function and centralise
them into a Marketing Division. It was hoped that this new division would rationalise
distribution, reduce overall stock investment and improve the quality of sales forecasts. Each
manufacturing division would then sell to the sales division at cost, plus a small percentage.
The Marketing Division would take responsibility for all finished goods stocks. This form of
organisation had been used by the US company for some years and it particularly wanted an
American Operations Manager during the changeover period. Previously, Mat had been the
Production Controller of an equivalent plant in the USA. His experiences there had developed
his ideas on how operations should be run. At his first management meeting in December 1999
he addressed his new team.

‘The main problem with running a plant like this, especially in the computer business, is that
there is such a lot that we don’t know. Of course, we never know what sales are going to be.
Sure, we have forecasts, but I suspect that our forecasters do little more than guess. And who
can blame them? With so much technical innovation, who knows what lies around the corner?
But it is not only external unknowns that are the problem. We are not even sure of the true cost
of our actions. For example, what is the real cost of holding inventory? A million dollars worth
of inventory can halve in value overnight if the technology changes. At other times, its value
can actually increase if there is a shortage in the market. Nor do we have any real idea of the
true cost of lost sales if we run out of inventory, or the cost to our reputation if we fail to meet
delivery dates.

‘I know what you might say. “How can we find out true costs when we are continually changing
schedules because the forecasts are changing?” Well, while I have some sympathy with that,
we cannot always blame other people. I know better forecasts would help us significantly, but
we must also put more effort into both planning to cope with inaccurate forecasts and being
able to respond flexibly when we need to. Also, what is the use of complaining when it is the

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 OPERATIONS MANAGEMENT 4A (OPM7X01)

very nature of management to cope with some fundamental tensions? Different parts of the
business have always wanted different things. The finance people are concerned with
minimising inventory levels so that they can cut our levels of working capital. Marketing are
only concerned with having plenty of product to sell at any time. In operations, we like to
minimise our own costs by minimising any disruption to our production plans. But from now
on we are going to take a lead. We are going to plan the production levels for our factory in
such a way as to give everybody what they want. From now on we schedule in such a way as
to minimise our own costs, give marketing the goods they want when they want them, and keep
inventory levels at a minimum. I know that’s one hell of a task, but if we don’t do it, no one
else can.’

Marketing considerations

Mandexor Memory produced and sold three basic ranges of disk drive, modified only slightly
for different markets. The first range of products was known as the ‘Consumer’ range. These
products were relatively small disk drives which were sold into the consumer market as added
memory products. Some were intended for external use while others were mounted internally.
Also, both external and internal drives were made with different storage capacities. However,
there was a very high degree of parts commonality between the different types and every model
within the range could be manufactured on the same production line, without modification. The
products in the second range, known as the ‘PC Drive’ range, were large disk drives sold to
personal computer manufacturers for assembly into their products. Again, these came in
different sizes and with slightly different specifications, but had a very high degree of similarity
and parts commonality. The third range was known as the ‘Professional’ range. These were
stand-alone drives of very high capacity mounted within their own enclosures and sold to a
wide range of professional information technology (IT) users.

The Consumer product range was sold primarily through large computer retailers, both physical
retailers and Internet retailers. More recently, Mandexor had started selling direct to the public
through its own Internet site. As yet, this only accounted for three to four per cent of total
Consumer range sales. The PC Drives were sold to computer manufacturers under short and
medium-term contracts. Typically, a computer manufacturer would place an order for several
thousands drives of various types to be delivered on specified dates. Usually this contract
allowed the PC manufacturer to vary quantities and delivery times at relatively short notice

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without compensation. Although there was considerable price competition in this market,
Mandexor realised good margins on its PC range. This was because it had an excellent
reputation for the quality and reliability of its products. The top-end PC manufacturers were
willing to pay slightly more for Mandexor drives because of their proven reliability. The
Professional range of disk drives was sold through a variety of channels. Some were sold
directly through the company’s Internet site, some to the larger computer manufacturers for
installation as part of their own systems, but most were sold through specialist IT systems
suppliers.

Mandexor sold disk drive products from stock all over the world; because of this market
fluctuations were, to some extent, smoothed out. However, forecasting was notoriously
difficult for three reasons. First, computer sales as a whole were dependent on overall economic
growth. While this had been strong in most markets throughout the late 1990s, regional
economic downturns could still impact on Mandexor’s sales. Second, technology was
continually shifting both in terms of disk drives themselves and in other aspects of computing.
Although technology changes had not had any major impact on the company for several years,
press speculation surrounding technology change could cause fluctuations in the supply chain.
Third, there was market seasonality in disk drive sales. This was a result of the Christmas gift
market and, more significantly, financial year end points. Typically, the August low point was
around 60 per cent of the December peak.. Also, every quarter a four-quarter forecast was made
and occasionally a 12 month forecast was made. At the monthly sales/production meeting,
these forecasts were used to agree a month- by-month production plan with the Operations
Manager.

Manufacturing considerations

Manufacturing at the plant consisted of parts fabrication and assembly. Parts fabrication
operations included metal shaping and forming which were done in batches on various
machines. Unusually, Mandexor also produced some of their ‘disk media’. This was the coated
surface on which information was stored. The reason for this was partly historical, but was also
justified in terms of keeping close to the technical developments in the media-coating process.
Assembly operations were line-based, with the lines carefully balanced using standard times.
More and more assembly and inspection jobs were being automated as cost reduction

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 OPERATIONS MANAGEMENT 4A (OPM7X01)

opportunities became evident. Mat Frankel had said his plant now had a five-day capacity of
about 16 500 drives per week.

After the monthly sales/production meeting, the Plant Manager would translate the production
plan into its ‘standard hours’ equivalent. This was the unit of pro- duction which enabled
production to be aggregated and the loading on the plant calculated. The standard hours for
each product was derived from the number of direct labour hours needed to manufacture it, and
incorporated various allowances. Thus the monthly forecast for each product type was
multiplied by its standard hour equivalent and summed to obtain the factory loading.

Normally the model mix produced consisted of about two Consumer range products to three
PC range products to one Professional range product. The standard hours content of the
Consumer range products was 80 per cent of the content of the PC range products; the
Professional range products was 120 per cent of the standard hours content of the PC range
products. If mix changes occurred, assembly lines could be rearranged. Operators were
transferred among the three production lines with only marginal loss of efficiency – about half
the assembly personnel had been employed for at least four years, and they had developed a
versatility in working on the different models. Many parts were inter- changeable among the
models and parts were made in job lots so that product mix changes did not significantly affect
labour loads in the parts machining and pro- cessing departments. Because of this and the recent
stability of the product mix, manufacturing personnel usually described output in terms of ‘unit
drives’ rather than ‘standard hours’.

Manufacturing considerations

Manufacturing at the plant consisted of parts fabrication and assembly. Parts fabrication
operations included metal shaping and forming which were done in batches on various
machines. Unusually, Mandexor also produced some of their ‘disk media’. This was the coated
surface on which information was stored. The reason for this was partly historical, but was also
justified in terms of keeping close to the technical developments in the media-coating process.
Assembly operations were line-based, with the lines carefully balanced using standard times.
More and more assembly and inspection jobs were being automated as cost reduction
opportunities became evident. Mat Frankel had said his plant now had a five-day capacity of
about 16 500 drives per week.

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 OPERATIONS MANAGEMENT 4A (OPM7X01)

After the monthly sales/production meeting, the Plant Manager would translate the production
plan into its ‘standard hours’ equivalent. This was the unit of pro- duction which enabled
production to be aggregated and the loading on the plant calculated. The standard hours for
each product was derived from the number of direct labour hours needed to manufacture it, and
incorporated various allowances. Thus the monthly forecast for each product type was
multiplied by its standard hour equivalent and summed to obtain the factory loading.

Normally the model mix produced consisted of about two Consumer range products to three
PC range products to one Professional range product. The standard hours content of the
Consumer range products was 80 per cent of the content of the PC range products; the
Professional range products was 120 per cent of the standard hours content of the PC range
products. If mix changes occurred, assembly lines could be rearranged. Operators were
transferred among the three production lines with only marginal loss of efficiency – about half
the assembly personnel had been employed for at least four years, and they had developed a
versatility in working on the different models. Many parts were inter- changeable among the
models and parts were made in job lots so that product mix changes did not significantly affect
labour loads in the parts machining and pro- cessing departments. Because of this and the recent
stability of the product mix, manufacturing personnel usually described output in terms of ‘unit
drives’ rather than ‘standard hours’.

Fixing the production programme

January 2000 saw the Sales Division formed and Mat’s first production budget meeting. This
was the meeting at which the guidelines would be agreed between Production and Sales for
production volumes over the coming year, and a preliminary overall production plan pencilled
in. Mat rather shocked the meeting by making what some regarded as a ‘delaying’ proposal. I
am firmly convinced that we could save considerable amount of money by examining our
production schedules. I propose that we set up a small working party to examine the costs
involved in adopting a number of strategies, namely:

Ø keeping production levels constant and absorbing demand fluctuations by varying

finished goods stocks
Ø using overtime on an extensive basis in peak periods and allowing underutilisation of
labour during slack periods
Ø hiringanextrashiftforpeakproductionandlayingthemofflaterintheyear,ifnecessary
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 OPERATIONS MANAGEMENT 4A (OPM7X01)

Ø subcontracting out some of our parts fabrication over to assembly.’

Rather reluctantly, the meeting agreed to postpone any decisions for two weeks while the
working party examined Mat’s alternative ‘strategies’.

The working party

The working party met five days later and consisted of one representative from each of
Production Control, Accounts, Sales and Marketing, and Distribution (now in the Marketing
Division). They had two documents for consideration – a sales forecast for 2000 and some brief
information prepared by the Accounts Department concerning each strategy. In addition, the
production control representative tabled a preliminary analysis of production requirements
based on the 2000 forecast.

The production control representative put his view of the problem:

‘We have to tackle this problem in the right order. First we need to look at the actual level of
output that will be needed over the year, then we can decide how, ideally, we might like to
meet this output requirement. Lastly we need to have some idea of how to increase or decrease
output if our forecasts change, and under what circumstances we would break away from the
production plan.’

Questions

1. What level of output will be required each month for the plant to meet its demand? [10]
2. What combination of ‘strategies’ would you recommend in order to meet the production
plan? [10]
3. How might production levels be changed in the light of changes in the forecast demand?
[5]

Good Luck [25]

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