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Mandexor Memory

In November 2003, 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 2003 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 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 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 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 without compensation. Although there
was a 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. The actual
retail sales for 2003 are given in Appendix 1. Forecasts of the orders for each
range were made every month for the next four-month period. 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

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.

After the monthly sales / production meeting, the Plant Manager would
translate the production plan into its ‘standard hours’ equivalent. This was the
unit of production 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 versatility in working on the different
models. Many parts were interchangeable 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 processing 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’.

The plant was heavily unionised but labour relations had been generally good
for the last few years. The company’s employment record had been good,
with no redundancies and minimum of four weeks’ notice given for any
working practice change or overtime. Wage rates were about average for the
area, but fringe benefits were better than average. The whole plant shut down
for the last two weeks in July and the first week in August.

Fixing the production programme

January 2004 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 penciled 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,

• Keeping production levels constant and absorbing demand fluctuations

by varying finished goods stocks
• Using overtime on an extensive basis in peak periods and allowing
underutilisation of labour during slack periods
• Hiring an extra shift for peak production and laying them off later in the
year, if necessary
• 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 2004 and some brief information prepared
by the Accounts Department concerning each strategy. These two documents
are shown in Appendices 3 and 4. In addition, the production control
representative tabled a preliminary analysis of production requirements based
on the 2004 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 forecast
changes, and under what circumstances we would break away from the
production plan.’

Appendix 1

Actual average weekly orders (rounded) in unit drives 2003

Month Consumer PC Professional Total

Jan 5500 7950 2750 16200
Feb 5190 7560 2650 15400
Mar 5950 8800 3050 17800
Apr 7100 10400 3500 21000
May 5500 8300 2700 16500
Jun 5050 7250 2500 14800
July 4900 7190 2410 14500
Aug 4750 7050 2350 14150
Sept 5050 7550 2550 15150
Oct 5600 7750 2700 16050
Nov 5150 8800 2600 16550
Dec 7550 12150 3800 23500

Appendix 2
Average weekly sales forecast for 2004 in unit drives (as of January 2004)

Month Consumer PC Professional Total

Jan 5960 8940 2980 17880
Feb 6090 9550 3220 18860
Mar 6030 9510 3160 18700
Apr 6540 9770 3290 19600
May 5800 8450 2900 17150
June 5000 7500 2500 15000
July 5000 7500 2500 15000
Aug 5000 7500 2500 15000
Sept 5000 8000 2500 15500
Oct 5500 8200 2800 16500
Nov 5600 8500 2900 17000
Dec 8000 12000 4000 24000
Appendix 3

Preliminary costings
Cost of Stock
Finished goods stocks are no longer a factory item. Previously we have
charged at an annual rate of 20% of factory cost to include warehousing and
handling costs.
Current warehouse capacity is 20,000 drives. Occasionally extra storage
space is rented.

Current union agreements require 4 weeks notice for any overtime. However,
in practice, some weekday overtime can be arranged at short notice. Up to 2
hours a day can be added to an 8 hour weekday shift. Weekday and Saturday
overtime rates are 150% of standard rates. Sunday rates are 200% of
standard rates.

Temporary workers
Recruitment would incur costs but much of ‘personnel’ effort required could
come from existing resources. Productivity of new workers would also be low
but difficult to quantify.

We have put out some work to local subcontractors before – usually simple
parts fabrication work. We generally expect to pay subcontractors between
120% and 125% of our own factory costs.

Appendix 4
2004 Volume planning (all figures in unit drives)

Month Production Sales Average Total Cumulative

Weeks Weeks Weekly Months Demand
demand Demand
Jan 4 4 17880 71520 71520
Feb 3 4 18860 75440 146960
Mar 4 5 18700 93500 240460
Apr 4 4 19600 78400 318860
May 5 5 17150 85750 404610
Jun 4 4 15000 60000 464610
July 3 4 15000 60000 524610
Aug 3 5 15000 75000 599610
Sep 4 4 15500 62000 661610
Oct 5 5 16500 82500 744110
Nov 4 4 17000 68000 812110
Dec 4 4 24000 96000 908110