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FACTORY OPERATIONS The Global Business Game. Prof. Nathan Globus Shows You How. Prof. Globus would like to show you how a typical factory works in The Global Business Game along with its associated financial operations .
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FACTORY OPERATIONS The Global Business Game
Prof. Nathan Globus Shows You How • Prof. Globus would like to show you how a typical factory works in The Global Business Game along with its associated financial operations. • He will provide you with an overview of the production processes involved, how labor hours are generated by the plant’s worker-aided production technology and how these hours are billed and factored into the firm’s unit manufacturing costs. • The professor will also deal with the effects of Quality Control efforts on product quality and Warranty work.
Manufacturing Basics • Your firm begins the game with a factory whose size is based on the number of work stations provided in your facility. • This is termed “Base Capacity” and applies to a plant that is labor-intensive. • The factory uses the assembly line method with workers placed at work stations on both sides of the line. • Automated equipment, or Automatons, can be installed at various places along the assembly line. Each Automaton straddles the line and takes up two work station spaces previously dedicated to assembly line workers. In this fashion capital is substituted for labor.
Generating Labor Hours • A factory’s workers, and its two types of Automatons, generate labor hours of their own. • These labor hours are needed for assembling the television sets scheduled for production. • Factories can operate two shifts plus a 25.0% Overtime extension on the end of the second shift. • The following labor hours can be produced by each manufacturing component each quarter:
Nominal Plant Capacity • Different combinations of workers and Automatons produce differing amounts of labor hours. • A plant with a Base Capacity for 70 workers could produce 36,400 labor hours. This is calculated as 70 * 8 * 5 * 13 = 36,400 or 70 workers working eight hours a day for five days a week during a thirteen week quarter. • If two Auto1s were added to this factory four worker spaces would be taken up by the Automatons. This reduces the number of workers manning work stations but increases the plant’s overall nominal capacity because of the Auto1’s productivity.
Nominal Labor Hours • This 70 Base Capacity plant with two Auto1s could produce from its two labor hours sources a total of 38,480 hours on one shift. If the company ran two shifts the total number of hours produced would be something less than 76,960 hours because second shift workers are less productive. Overtime operations would add something less than 9,620 hours.
Actual Labor Hours • The actual labor hours generated per shift can be different from the plant’s nominal labor hour capacity. • The actual hours a factory generates is determined by a number of factors: • The number of scheduled workers who appear for work • The Subassemblies available to complete the production units scheduled • The level of Line Supervision mounted • Line Worker Training budgets • Automaton Technician Training budgets • Line Maintenance
The Primary Labor Hour Determinants • Each country’s labor force differs regarding its work ethic and the degree of worker benefits built into its societal labor practices. • The work ethic is reflected in the amount of absenteeism than can be expected. • Worker benefits entail the number of sick days available and the average number of vacation days awarded. • Prof. Globus must “over schedule” his labor force to insure his factories are fully staffed for the full quarter if that is his objective.
Factory Overstaffing • The professor calculates the average number of days taken up during the quarter by vacations, illnesses and absences. • He has factories in the United States and Thailand so he must deal with the conditions prevailing in those labor markets. • Based on those conditions Prof. Globus estimates the number of labor hours lost to vacations, illness and absenteeism may be the following every quarter for each worker scheduled:
Taking Up the Slack • Let us assume the professor’s Thai and American plants need 44 and 80 respective workers if they are to be fully staffed. • Extra workers must be scheduled. This amounts each quarter to 5 extra workers in Thailand and 8 extra line workers in the United States.
Splitting the Labor Force • Prof. Globus has explained to you so far his factory’s total labor force requirements. The workers, however, are not completely interchangeable regarding their work assignments. • 25” sets are somewhat simpler to assemble. They can be made by less-skilled workers who earn less per hour. These workers cannot make 27” sets. • The firm’s 27” sets are more complex and can be made only by the factory’s higher-skilled and senior 27” set workers. These workers can make both 25” sets and 27” sets. • The Line Foreman’s or Supervisor’s task is to determine, given the production wanted, the overall number of line workers that should be scheduled while assigning the correct type of workers on the assembly line.
Deploying Scheduled Workers • The professor has to keep in mind what his workers can and cannot do. • 25” workers can only make 25” sets. • 27” workers can make both sets. • Automatons create labor hours that supplement or replace both types of workers. • Labor premium rates for second shifts and overtime are more burdensome when associated with 27” sets due to their being more labor intensive. The following illustrates these increasing costs per shift for American workers.
The Capacity/Sales Dilemma • Prof. Globus finds there is a “chicken and the egg” problem here when calculating the number of units to produce. • In the short run the company can only make what the plant can produce. In the long run the plant should be big enough to make what the firm can sell. But, what comes first? • Producing up to capacity is the ideal in both the short-run and the long-run. In this regard you must deal with both strategy and tactics.
Converting Units Into Labor Hours • Each company’s TV sets require both labor and Subassemblies. The number of hours of labor needed by each-sized set are shown below. In this example a run of 8,500 25” TVs and 9,700 27” TVs is being contemplated. The required number of hours, of course, could be obtained by using two shifts and even Overtime if necessary.
Converting Labor Hours Into Units • Given a plant’s particular configuration you could also work backwards to find out how many TVs can be gotten from the Labor Hours available. • This example shows the optimum number of units that could be produced with a plant running one shift with a Base Capacity = 70 having no Automatons. This plant can generate 36,400 labor hours per shift each quarter.
Options Explained • You can be fairly creative about how plant operations are scheduled in both the short-run and long-run. • The output obtained by the three options presented was accomplished as follows: • Option 1-- One-half of the 25” TVs were made by 25” workers and the other one-half were made by 27” workers. Both sides of the assembly line were used to make 25” sets. • Option 2-- All the 27” TVs were made by 27” workers. Both sides of the line made 27” sets. • Option 3-- The assembly line was split and 25” TVs were made by 25” workers and 27” sets were made by 27” workers.
Getting More Flexibility • Because 25” workers cannot make 27” sets certain inflexibilities are built into plant operations. • Automatons make a plant more flexible as they are programmed to make both sets. • The ideal plant would be completely automated. It would have the following virtues: • No workers are needed thus no human Labor Hour costs are generated. • No Line Worker Training should be budgeted. • No Line Supervisors or foremen would be required. • There are, however, certain other costs involved: • Increased Depreciation Expenses on Automatons. • Interest on Automatons purchased if financed with debt. • Possible lower rate-of-return on investment due to higher fixed costs. • Automaton Technician salaries. • Automaton Technician Training budgets.
The Infinitely Flexible Automated Plant • The automated factory has an infinitely flexible Production Possibilities Curve. • Units of 25” TVs are easily substituted for 27” sets and vice versa. • Below you will find the Production Possibilities Curve for a minimum-sized 30 Labor Hour plant. This plant has replaced all workers with 15 Auto2s.
Some Production Scheduling Options • This plant could produce at Point A. This would result in about 600 25” TVs and 780 27” sets per shift. • It might choose Point B. This would yield 1,040 25” sets and 390 27” televisions on one shift. Point A Point B
The Plant’s Wage Bill • The factory’s labor charges are based on the number of types of workers scheduled per shift and the cost of any Overtime hours on each Overtime unit produced.
Calculating Unit Labor Costs • Each television set’s labor expense is obtained by pro-rating each labor type’s wage bill over the number of each sized set produced. • In this example a total of 39,507 25” and 46,581 27” sets were produced during the quarter. Note in this case the intrinsically less expensive 25” sets were more costly. This is probably due to having a number of 25” workers idle during the quarter.
Quality Control Efforts • The physical quality of the TV sets being made is mainly dependent on the quality grades of the Subassemblies used in their construction. • Quality Control is another matter. Sets with high quality components could be assembled poorly or inconsistently. Thus a set with good materials could break down under use due to poor manufacturing processes or poor quality control. • Quality can be controlled within various limits by the following activities: • Making the manufacturing processes more capital intensive with Auto2s more prevalent than Auto1s due to their greater productivity and higher “machining” tolerances. • Training programs for Line Workers and Automaton Technicians. • Closer Line Supervision. • Adequate Plant and Equipment Maintenance. • Budgeted Quality Control efforts. • Quality Control Inspection Programs.
Quality Control Inspection Programs • This program samples sets coming off the factory’s line using destructive testing. • It restricts the number of defective TVs entering the market. • Three different product test sample sizes can be drawn with progressively higher costs and associated higher levels of quality assurance. • A firm’s Quality Control Inspection Program reduces the amount of Warranty Work that has to be performed and increases the product’s perceived quality.
An Inspection Program In Action • As an example of the costs of a Quality Control Inspection Program, assume the following: • Inspection Program B in effect. • Current production of 25,473 25” sets and 36,801 27” sets. • 25” set unit manufacturing cost equals $76.063. • 27” set unit manufacturing cost equals $81.579. Another cost associated with this program is an Opportunity Cost-- the loss of any profits that could have been earned by the 405 sets destroyed through destructive testing.
Inspection Program Benefits • Despite the costs involved there are a number of benefits associated with Quality Control Inspection Programs. They are: • Reduced Warranty Work and Warranty Work charges. • Greatly improved product quality image. • A “hidden” competitive weapon.
Financial Consequences • Prof. Globus would like to summarize his company’s Plant Operations by showing you how his manufacturing decisions for Quarter 2, Year02 “played out” in his firm’s Income Statement, Balance Sheet and Cash Flow model. • He will review the ramifications of the following production-related decisions and assumes all sales orders were filled from the plant’s current production and all production was sold. The respective Actual Prices and Unit Costs for his 25” sets were $103.50 and $77.746 and his 27” sets were $123.50 and $86.301.
