USING OPERATIONS TO CREATE VALUE
CHAPTER
23
wat nicometal forces could be at work that wa
Want thould considor?
What are the possible core competences of Wild West
what weaknesses should it avoid or mitigate?
1. You are designing a grocery delivery business. Viu the In
met your company will offer staples and frozen foods in a
large metropolitan atend then deliver them within a cus
tomer detined window of time. You plan to partner with ID
major od stores in the area. What should be your competi
live priorities and what capabilities do you want to develop in
your core and support processes?
Problems
The OM Explorer and POM for Windows software is avail
ble to all crudents nising the lit edition of this textbook. Go
to betp://www.pearsonhighered.com/krajewski to download
hire computer packages. If you purchased Myomlab, you also
have access to Active Models software and significant help in do-
ing the following problems. Check with your instructor on how
best to use these resources. In many cases, the instructor wants
you to understand how to do the calculations by hand. At the
leam, the software provides a check on your calculations. When
calculations are particularly complex and the goal is interpreting
the results in making decision, the software entirely replaces the
manual calculations,
Addressing the Trends and Challenges in Operations Management
1. (Refer to Solved Problem 1.) Coach Boum Toulouse led the a. To achieve a 10 percent multifactor productivity improve-
mig Red Herrings to several disappointing football seasons
Only better recruiting will return the Big Red Herrings to
ment by reducing materials costs only, by what percent-
age must these costs be reduced?
winning form. Because of the current state of the program.
Boehring University fans are unlikely to support increases
b. To achieve a 10 percent multifactor productivity improve
in the S192 season ticket price. Improved recruitment will
ment by reducing labor costs only, by what percentage
increase overhead costs to $30,000 per class section from the
must these costs be reduced?
current $25,000 per class section. The university's budget
C. To achieve a 10 percent multifactor productivity improve-
plan is to cover recruitment costs by increasing the average
ment by reducing overhead costs only, by what percent
class site to 75 students. Labor costs will increase to $6,500 per
age
these costs be reduced?
credit course. Material costs will be about $25 per student
4. At Symtecks, the output of a specific process is valued at $100
for each 3 credit course, Tuition will be $200 per semester
per unit. The cost of labor is $50 per hour including benefits.
credit which is supplemented by state support of $100 per
The accounting department provided the following informa-
semester credit
tion about the process for the past four weeks:
What is the multifactor productivity ratio? Compared to
the result obtained in Solved Problem 1, did productivity
Week 1 Week 2 Week 3 Week 4
increase or decrease for the course process?
Units Produced 1.124 1,310 1,092 981
b. If instructors work an average of 20 hours per week for
Labor ($)
12,735 14,842 10,603 9,526
16 weeks for each 3-credit class of 75 students, what is the
labor productivity ratio?
Material ($) 21,041 24,523 20,442 18,364
Suds and Duds Laundry washed and pressed the following
Overhead ($) 8,992 10,480 8,736 7,848
numbers of dress shirts per week
Week
Work Crew Total Hours Shirts
a. Use the multifactor productivity ratio to see whether re-
cent process improvements had any effect and, if so, whe
1 Sud and Dud
24
68
the effect was noticeable.
2 Surt and Jud
46
130
b. Has labor productivity changed? Use the labor productiv-
ity ratio to support your answer.
3 Sud, Dud, and Jud
62
152
Alyssa's Custom Cakes currently sells 5 birthday, 2 wedding
Sud, Dud, and Jud
51
125
and 3 specialty cakes each month for $50, 5150, and 100
each, respectively. The cost of labor is $50 per hour includin
5 Dud and Jud
45
131
benefits. It takes 90 minutes to produce a birthday cake,
240 minutes to produce a wedding cake, and 60 minutes
3. Calculate the labor productivity ratio for each week.
to produce a specialty cake. Alyssa's current multifactor
6. Explain the labor productivity pattern exhibited by the
productivity ratio is 1.25.
data
a. Use the multifactor productivity ratio provided to calcu-
White Tiger Electronics produces CD players using an
late the average cost of the cakes produced.
automated assembly line process. The standard cost of CD b. Calculate Alyssa's labor productivity ratio in dollars per
players is $150 per unit (labor, $30; materials, $70; and over-
hour for each type of cake.
head. 550). The sales price is $300 per unit.
4
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
PROCESS BETA
PROCESS ALPHA
B
A
B
A
Product
60
30
50
Output (units
$1,400
$1,000
$2,000
$1.200
Labor ($
$3,000
$1,400
$3,500
$2,500
Materials
a. Which process, Alpha or Beta, is more productive?
b. What conclusions can you draw from your analysis?
c. Based solely on the labor productivity ratio, which cake
should Alyssa try to sell the most?
d. Based on your answer in part (a), is there a type of cake
Alyssa should stop selling?
6. The Big Black Bird Company (BBBC) has a large order for
special plastic-lined military uniforms to be used in an urgent
military operation. Working the normal two shifts of 40 hours
each per week, the BBBC production process usually produces
2,500 uniforms per week at a standard cost of $120 each. Sev-
enty employees work the first shift and 30 employees work the
second. The contract price is $200 per uniform. Because of the
urgent need, BBBC is authorized to use around-the-clock pro-
duction, 6 days per week. When each of the two shifts works
72 hours per week, production increases to 4,000 uniforms
per week but at a cost of $144 each.
a. Did the multifactor productivity ratio increase, decrease,
or remain the same? If it changed, by what percentage did
it change?
b. Did the labor productivity ratio increase, decrease, or
remain the same? If it changed, by what percentage did it
change?
c. Did weekly profits increase, decrease, or remain the
same?
9. The Morning Brew Coffee Shop sells Regular, Cappuccino,
and Vienna blends of coffee. The shop's current daily labor
cost is $320, the equipment cost is $125, and the overhead
cost is $225. Daily demands, along with selling price and ma.
terial costs per beverage, are given below.
Vienna
Coffee
Cappuccino
Regular Coffee
350
100
150
Beverages sold
$2.00
$3.00
$4.00
Price per
beverage
Material ($)
$0.50
$0.75
$1.25
7. Mack's guitar fabrication shop produces low-cost, highly du-
rable guitars for beginners. Typically, out of the 100 guitars that
begin production each month, only 80 percent are considered
good enough to sell. The other 20 percent are scrapped due to
quality problems that are identified after they have completed
the production process. Each guitar sells for $250. Because
some of the production process is automated, each guitar only
requires 10 labor hours. Each employee works an average
160 hours per month. Labor is paid at $10/hour, materials cost
is $40/guitar, and overhead is 54.000.
Harald Luckerbauer, the manager at Morning Brew Cof-
fee Shop, would like to understand how adding Eiskaffee (a
German coffee beverage of chilled coffee, milk, sweetener,
and vanilla ice cream) will alter the shop's productivity. His
market research shows that Elskaffee will bring in new cus-
tomers and not cannibalize current demand. Assuming that
the new equipment is purchased before Eiskaffee is added
to
the menu, Harald has
developed new average daily demand
and cost projections. The new equipment cost is $200, and
the overhead cost is $350. Modified daily demands, as well
as selling price and material costs per beverage for the new
product line, are given below.
Regular
Vienna
Coffee Can Coffee Eiskaffee
350
150 75
Beverages sold
a. Calculate the labor and multifactor productivity ratios.
b. After some study, the operations manager Darren Funk
recommends three options to improve the company's
multifactor productivity: (1) increase the sales price by
10 percent, (2) improve quality so that only 10 percent
are defective, or (3) reduce labor, material, and overhead
costs by 10 percent. Which option has the greatest impact
on the multifactor productivity measure?
8. Mariah Enterprises makes a variety of consumer electronic
products. Its camera manufacturing plant is considering
choosing between two different processes, named Alpha
and Beta, which can be used to make two component parts
A and B. To make the correct decision, the managers would
like to compare the labor and multifactor productivity of
process Alpha with that of process Beta. The value of process
output for component A and B are $175 and $140 per unit,
respectively. The corresponding overhead costs are $6,000
and $5,000, respectively.
Price per beverage
$2.00
$3.00
$4.00
$5.00
Material $)
$0.50
557
$1.25
$1.50
a. Calculate the change in labor and multifactor productivity
if Eiskaffee is added to the menu.
b. If everything else remains unchanged, how many units of
Eiskaffee would have to be sold to ensure that the multi-
factor productivity increases from its current level?
401
to $6,500 per
Hal costs will be about $25 per student
3-credit
4.
semester credit
for each 3-credit course. Tuition will be $200 per semester
credit, which is supplemented by state support of $100 per
a. What is the multifactor productivity ratio? Compared to
the result obtained in Solved Problem 1, did productivity
increase or decrease for the course process?
b. If instructors work an average of 20 hours per week for
16 weeks for each 3-credit class of 75 students, what is the
labor productivity ratio?
Suds and Duds Laundry washed and pressed the following
numbers of dress shirts per week.
2.
Week
Work Crew
Total Hours
Shirts
1
Sud and Dud
24
68
2
Sud and Jud
46
130
3
3
Sud, Dud, and Jud
62
152
4
Sud, Dud, and Jud
51
125
5
Dud and Jud
45
131
a. Calculate the labor productivity ratio for each week.
b. Explain the labor productivity pattern exhibited by the
data.
3. White Tiger Electronics produces CD players using an
automated assembly line process. The standard cost of CD
players is $150 per urit labor, $30; materials, $70; and over-
head, $50). The sales price is $300 per unit.
28
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
manufacturing and distribution presences there. As you can imagine,
means operations managers must think about how to grow the current supply
chain beyond the boundaries of existing domestic and International orders
additional expansion is to occur.
enough energy to completely run the plant as well as the headquarters build
ing nearby. The 850 million colored pencils produced each year only use
reforested wood, with one tree planted for every tree harvested. Sourcing
for paraffin wax used in crayons recently moved from Louisiana to western
Pennsylvania, saving 5,000 barrels of oil annually related to wax transporta
tion. All plastic components are made with recycled plastics. And any excess
wax from the production of crayons is reintroduced into the manufacturing
process so no waste is produced,
The company is aggressively pursuing new markets outside the United
States China's market of children ages 0-14 is larger than all the other
global markets combined with more than half the world's child population
Yet only 14 percent of the company's total sales come from international
markets. So, particular attention is being devoted to growing the company's
priorities in Table 1.3
QUESTIONS
1. Map Crayola's five pillars of operational leadership to the competitive
2. Create an assessment of Crayola's competitive priorities as it relates to
their Asian expansion plans
3. Which of the competitive priorities might present the biggest challenge
to Crayola as it expands internationally?
CASE
Chad's Creative Concepts
Chad's Creative Concepts designs and manufactures wood furniture
Founded by Chad Thomas on the banks of Lake Erie in Sandusky, Ohio, the
company began by producing custom-made wooden furniture for vacation
cabins located along the coast of Lake Erie and on nearby Kelly's Island and
Bass Island. Being an outdoors" type himself, Thomas originally wanted to
bring a bit of the outdoors" inside. Chad's Creative Concepts developed a
solid reputation for creative designs and high-quality workmanship. Sales
eventually encompassed the entire Great Lakes region. Along with growth
came additional opportunities
Traditionally, the company focused entirely on custom-made furniture,
with the customer specifying the kind of wood from which the piece would be
made. As the company's reputation grew and sales increased, the sales force
began selling some of the more popular pieces to retail furniture outlets. This
move into retail outlets led Chad's Creative Concepts into the production of a
more standard line of furniture Buyers of this line were much more price sen-
sitive and imposed more stringent delivery requirements than did clients for
the custom line. Custom-designed furniture, however, continued to dominate
sales, accounting for 60 percent of volume and 75 percent of dollar sales
Currently, the company operates a single manufacturing process in Sandusky
where both custom furniture and standard furniture are manufactured. The
equipment is mainly general purpose in nature to provide the flexibility needed
for producing custom pleces of furniture. The layout puts together saws in one
section of the facility, lathes in another, and so on. The quality of the finishod
product reflects the quality of the wood chosen and the craftsmanship of
dividual workers. Both custom and standard tumiture compete for processing
time on the same equipment by the same craftspeople
During the past few months, sales of the standard line steadily
creased, leading to more regular scheduling of this product line. However
when scheduling trade-offs had to be made, custom furniture was always
given priority because of its higher sales and profit margins. Thus, scheduled
lots of standard furniture pieces were left sitting around the plant in various
stages of completion
As he reviews the progress of Chad's Creative Concepts, Thomasis
pleased to note that the company has grown. Sales of custom furniture re
main strong and sales of standard pleces are steadily increasing. However,
finance and accounting indicate that profits are not what they should be
Costs associated with the standard line are rising. Dollars are being tied up in
Inventory, both in raw materials and work in process Expensive public ware-
house space has to be rented to accommodate the inventory volume. Thomas
also is concerned with increased lead times for both custom and standard
orders, which are causing longer promised delivery times. Capacity is being
pushed, and no space is left in the plant for expansion. Thomas begins a
careful assessment of the overall impact that the new standard line is having
on his manufacturing process
EESTIONS
1. Wildtynes of decisions must Chad Thomas make daily for his com-
contion to run effectively Over the long run?
2 How to cover allect operations when they began to sell
eu?
Woman to ucini standard fumiture affected the com-
har
Van Gaas Thomas have done differently to avoid some of the
Teshe now foces?
Source: This case was prepared by Dr. Brooke Saladin, Wake Forest University as a basis for classroom discussion Copyright © Brooke Saladin Reprinted by permission.
62
152
51
125
5
131
or each week.
-xhibited by the
las labor productivity changed? Use the labor productiv
ity ratio to support your answer.
5. Alyssa's Custom Cakes currently sells 5 birthday, 2 wedding,
and 3 specialty cakes each month for $50, $150, and $100
each, respectively. The cost of labor is $50 per hour including
benefits. It takes 90 minutes to produce a birthday cake,
240 minutes to produce a wedding cake, and 60 minutes
to produce a specialty cake. Alyssa's current multifactor
productivity ratio is 1.25.
a. Use the multifactor productivity ratio provided to calcu-
late the average cost of the cakes produced.
b. Calculate Alyssa's labor productivity ratio in dollars per
hour for each type of cake.
's using an
lard cost of CD
5, $70; and over-
orders, which are cause
pushed, and no space is left in the plant for expa
careful assessment of the overall impact that the new standard line is having
on his manufacturing process.
single me
Decision
A decisic
decision
pieces to retail furniture outlets. This
we Concepts into the production of a
this line were much more price-sen-
y requirements than did clients for
Fe, however, continued to dominate
be and 75 percent of dollar sales.
anufacturing process in Sandusky,
furniture are manufactured. The
re to provide the flexibility needed
layout puts together saws in one
so on. The quality of the finished
en and the craftsmanship of in-
QUESTIONS
1. What types of decisions must Chad Thomas make daily for his com-
pany's operations to run effectively? Over the long run?
2. How did sales and marketing affect operations when they began to sell
standard pieces to retail outlets?
3. How has the move to producing standard furniture affected the com-
pany's financial structure?
umiture compete for processing
espeople.
che standard line steadily in-
of this product line. However,
Break-E
To evaluate a
determiningt
quantity is th
break-even a
at which two
4. What might Chad Thomas have done differently to avoid some of the
problems he now faces?
En, Wake Forest University, as a basis for classroom discussion. Copyright © Brooke Saladin. Reprinted by permission.
LEARNIN
28
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
manufacturing and distribution presences there. As you can imagine,
means operations managers must think about how to grow the current supply
chain beyond the boundaries of existing domestic and International orders
additional expansion is to occur.
enough energy to completely run the plant as well as the headquarters build
ing nearby. The 850 million colored pencils produced each year only use
reforested wood, with one tree planted for every tree harvested. Sourcing
for paraffin wax used in crayons recently moved from Louisiana to western
Pennsylvania, saving 5,000 barrels of oil annually related to wax transporta
tion. All plastic components are made with recycled plastics. And any excess
wax from the production of crayons is reintroduced into the manufacturing
process so no waste is produced,
The company is aggressively pursuing new markets outside the United
States China's market of children ages 0-14 is larger than all the other
global markets combined with more than half the world's child population
Yet only 14 percent of the company's total sales come from international
markets. So, particular attention is being devoted to growing the company's
priorities in Table 1.3
QUESTIONS
1. Map Crayola's five pillars of operational leadership to the competitive
2. Create an assessment of Crayola's competitive priorities as it relates to
their Asian expansion plans
3. Which of the competitive priorities might present the biggest challenge
to Crayola as it expands internationally?
CASE
Chad's Creative Concepts
Chad's Creative Concepts designs and manufactures wood furniture
Founded by Chad Thomas on the banks of Lake Erie in Sandusky, Ohio, the
company began by producing custom-made wooden furniture for vacation
cabins located along the coast of Lake Erie and on nearby Kelly's Island and
Bass Island. Being an outdoors" type himself, Thomas originally wanted to
bring a bit of the outdoors" inside. Chad's Creative Concepts developed a
solid reputation for creative designs and high-quality workmanship. Sales
eventually encompassed the entire Great Lakes region. Along with growth
came additional opportunities
Traditionally, the company focused entirely on custom-made furniture,
with the customer specifying the kind of wood from which the piece would be
made. As the company's reputation grew and sales increased, the sales force
began selling some of the more popular pieces to retail furniture outlets. This
move into retail outlets led Chad's Creative Concepts into the production of a
more standard line of furniture Buyers of this line were much more price sen-
sitive and imposed more stringent delivery requirements than did clients for
the custom line. Custom-designed furniture, however, continued to dominate
sales, accounting for 60 percent of volume and 75 percent of dollar sales
Currently, the company operates a single manufacturing process in Sandusky
where both custom furniture and standard furniture are manufactured. The
equipment is mainly general purpose in nature to provide the flexibility needed
for producing custom pleces of furniture. The layout puts together saws in one
section of the facility, lathes in another, and so on. The quality of the finishod
product reflects the quality of the wood chosen and the craftsmanship of
dividual workers. Both custom and standard tumiture compete for processing
time on the same equipment by the same craftspeople
During the past few months, sales of the standard line steadily
creased, leading to more regular scheduling of this product line. However
when scheduling trade-offs had to be made, custom furniture was always
given priority because of its higher sales and profit margins. Thus, scheduled
lots of standard furniture pieces were left sitting around the plant in various
stages of completion
As he reviews the progress of Chad's Creative Concepts, Thomasis
pleased to note that the company has grown. Sales of custom furniture re
main strong and sales of standard pleces are steadily increasing. However,
finance and accounting indicate that profits are not what they should be
Costs associated with the standard line are rising. Dollars are being tied up in
Inventory, both in raw materials and work in process Expensive public ware-
house space has to be rented to accommodate the inventory volume. Thomas
also is concerned with increased lead times for both custom and standard
orders, which are causing longer promised delivery times. Capacity is being
pushed, and no space is left in the plant for expansion. Thomas begins a
careful assessment of the overall impact that the new standard line is having
on his manufacturing process
EESTIONS
1. Wildtynes of decisions must Chad Thomas make daily for his com-
contion to run effectively Over the long run?
2 How to cover allect operations when they began to sell
eu?
Woman to ucini standard fumiture affected the com-
har
Van Gaas Thomas have done differently to avoid some of the
Teshe now foces?
Source: This case was prepared by Dr. Brooke Saladin, Wake Forest University as a basis for classroom discussion Copyright © Brooke Saladin Reprinted by permission.
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
PROCESS BETA
PROCESS ALPHA
B
A
B
A
Product
60
30
50
Output (units
$1,400
$1,000
$2,000
$1.200
Labor ($
$3,000
$1,400
$3,500
$2,500
Materials
a. Which process, Alpha or Beta, is more productive?
b. What conclusions can you draw from your analysis?
c. Based solely on the labor productivity ratio, which cake
should Alyssa try to sell the most?
d. Based on your answer in part (a), is there a type of cake
Alyssa should stop selling?
6. The Big Black Bird Company (BBBC) has a large order for
special plastic-lined military uniforms to be used in an urgent
military operation. Working the normal two shifts of 40 hours
each per week, the BBBC production process usually produces
2,500 uniforms per week at a standard cost of $120 each. Sev-
enty employees work the first shift and 30 employees work the
second. The contract price is $200 per uniform. Because of the
urgent need, BBBC is authorized to use around-the-clock pro-
duction, 6 days per week. When each of the two shifts works
72 hours per week, production increases to 4,000 uniforms
per week but at a cost of $144 each.
a. Did the multifactor productivity ratio increase, decrease,
or remain the same? If it changed, by what percentage did
it change?
b. Did the labor productivity ratio increase, decrease, or
remain the same? If it changed, by what percentage did it
change?
c. Did weekly profits increase, decrease, or remain the
same?
9. The Morning Brew Coffee Shop sells Regular, Cappuccino,
and Vienna blends of coffee. The shop's current daily labor
cost is $320, the equipment cost is $125, and the overhead
cost is $225. Daily demands, along with selling price and ma.
terial costs per beverage, are given below.
Vienna
Coffee
Cappuccino
Regular Coffee
350
100
150
Beverages sold
$2.00
$3.00
$4.00
Price per
beverage
Material ($)
$0.50
$0.75
$1.25
7. Mack's guitar fabrication shop produces low-cost, highly du-
rable guitars for beginners. Typically, out of the 100 guitars that
begin production each month, only 80 percent are considered
good enough to sell. The other 20 percent are scrapped due to
quality problems that are identified after they have completed
the production process. Each guitar sells for $250. Because
some of the production process is automated, each guitar only
requires 10 labor hours. Each employee works an average
160 hours per month. Labor is paid at $10/hour, materials cost
is $40/guitar, and overhead is 54.000.
Harald Luckerbauer, the manager at Morning Brew Cof-
fee Shop, would like to understand how adding Eiskaffee (a
German coffee beverage of chilled coffee, milk, sweetener,
and vanilla ice cream) will alter the shop's productivity. His
market research shows that Elskaffee will bring in new cus-
tomers and not cannibalize current demand. Assuming that
the new equipment is purchased before Eiskaffee is added
to
the menu, Harald has
developed new average daily demand
and cost projections. The new equipment cost is $200, and
the overhead cost is $350. Modified daily demands, as well
as selling price and material costs per beverage for the new
product line, are given below.
Regular
Vienna
Coffee Can Coffee Eiskaffee
350
150 75
Beverages sold
a. Calculate the labor and multifactor productivity ratios.
b. After some study, the operations manager Darren Funk
recommends three options to improve the company's
multifactor productivity: (1) increase the sales price by
10 percent, (2) improve quality so that only 10 percent
are defective, or (3) reduce labor, material, and overhead
costs by 10 percent. Which option has the greatest impact
on the multifactor productivity measure?
8. Mariah Enterprises makes a variety of consumer electronic
products. Its camera manufacturing plant is considering
choosing between two different processes, named Alpha
and Beta, which can be used to make two component parts
A and B. To make the correct decision, the managers would
like to compare the labor and multifactor productivity of
process Alpha with that of process Beta. The value of process
output for component A and B are $175 and $140 per unit,
respectively. The corresponding overhead costs are $6,000
and $5,000, respectively.
Price per beverage
$2.00
$3.00
$4.00
$5.00
Material $)
$0.50
557
$1.25
$1.50
a. Calculate the change in labor and multifactor productivity
if Eiskaffee is added to the menu.
b. If everything else remains unchanged, how many units of
Eiskaffee would have to be sold to ensure that the multi-
factor productivity increases from its current level?
401
USING OPERATIONS TO CREATE VALUE
CHAPTER
23
wat nicometal forces could be at work that wa
Want thould considor?
What are the possible core competences of Wild West
what weaknesses should it avoid or mitigate?
1. You are designing a grocery delivery business. Viu the In
met your company will offer staples and frozen foods in a
large metropolitan atend then deliver them within a cus
tomer detined window of time. You plan to partner with ID
major od stores in the area. What should be your competi
live priorities and what capabilities do you want to develop in
your core and support processes?
Problems
The OM Explorer and POM for Windows software is avail
ble to all crudents nising the lit edition of this textbook. Go
to betp://www.pearsonhighered.com/krajewski to download
hire computer packages. If you purchased Myomlab, you also
have access to Active Models software and significant help in do-
ing the following problems. Check with your instructor on how
best to use these resources. In many cases, the instructor wants
you to understand how to do the calculations by hand. At the
leam, the software provides a check on your calculations. When
calculations are particularly complex and the goal is interpreting
the results in making decision, the software entirely replaces the
manual calculations,
Addressing the Trends and Challenges in Operations Management
1. (Refer to Solved Problem 1.) Coach Boum Toulouse led the a. To achieve a 10 percent multifactor productivity improve-
mig Red Herrings to several disappointing football seasons
Only better recruiting will return the Big Red Herrings to
ment by reducing materials costs only, by what percent-
age must these costs be reduced?
winning form. Because of the current state of the program.
Boehring University fans are unlikely to support increases
b. To achieve a 10 percent multifactor productivity improve
in the S192 season ticket price. Improved recruitment will
ment by reducing labor costs only, by what percentage
increase overhead costs to $30,000 per class section from the
must these costs be reduced?
current $25,000 per class section. The university's budget
C. To achieve a 10 percent multifactor productivity improve-
plan is to cover recruitment costs by increasing the average
ment by reducing overhead costs only, by what percent
class site to 75 students. Labor costs will increase to $6,500 per
age
these costs be reduced?
credit course. Material costs will be about $25 per student
4. At Symtecks, the output of a specific process is valued at $100
for each 3 credit course, Tuition will be $200 per semester
per unit. The cost of labor is $50 per hour including benefits.
credit which is supplemented by state support of $100 per
The accounting department provided the following informa-
semester credit
tion about the process for the past four weeks:
What is the multifactor productivity ratio? Compared to
the result obtained in Solved Problem 1, did productivity
Week 1 Week 2 Week 3 Week 4
increase or decrease for the course process?
Units Produced 1.124 1,310 1,092 981
b. If instructors work an average of 20 hours per week for
Labor ($)
12,735 14,842 10,603 9,526
16 weeks for each 3-credit class of 75 students, what is the
labor productivity ratio?
Material ($) 21,041 24,523 20,442 18,364
Suds and Duds Laundry washed and pressed the following
Overhead ($) 8,992 10,480 8,736 7,848
numbers of dress shirts per week
Week
Work Crew Total Hours Shirts
a. Use the multifactor productivity ratio to see whether re-
cent process improvements had any effect and, if so, whe
1 Sud and Dud
24
68
the effect was noticeable.
2 Surt and Jud
46
130
b. Has labor productivity changed? Use the labor productiv-
ity ratio to support your answer.
3 Sud, Dud, and Jud
62
152
Alyssa's Custom Cakes currently sells 5 birthday, 2 wedding
Sud, Dud, and Jud
51
125
and 3 specialty cakes each month for $50, 5150, and 100
each, respectively. The cost of labor is $50 per hour includin
5 Dud and Jud
45
131
benefits. It takes 90 minutes to produce a birthday cake,
240 minutes to produce a wedding cake, and 60 minutes
3. Calculate the labor productivity ratio for each week.
to produce a specialty cake. Alyssa's current multifactor
6. Explain the labor productivity pattern exhibited by the
productivity ratio is 1.25.
data
a. Use the multifactor productivity ratio provided to calcu-
White Tiger Electronics produces CD players using an
late the average cost of the cakes produced.
automated assembly line process. The standard cost of CD b. Calculate Alyssa's labor productivity ratio in dollars per
players is $150 per unit (labor, $30; materials, $70; and over-
hour for each type of cake.
head. 550). The sales price is $300 per unit.
4
USING OPERATIONS TO CREATE VALUE
CHAPTER
23
wat nicometal forces could be at work that wa
Want thould considor?
What are the possible core competences of Wild West
what weaknesses should it avoid or mitigate?
1. You are designing a grocery delivery business. Viu the In
met your company will offer staples and frozen foods in a
large metropolitan atend then deliver them within a cus
tomer detined window of time. You plan to partner with ID
major od stores in the area. What should be your competi
live priorities and what capabilities do you want to develop in
your core and support processes?
Problems
The OM Explorer and POM for Windows software is avail
ble to all crudents nising the lit edition of this textbook. Go
to betp://www.pearsonhighered.com/krajewski to download
hire computer packages. If you purchased Myomlab, you also
have access to Active Models software and significant help in do-
ing the following problems. Check with your instructor on how
best to use these resources. In many cases, the instructor wants
you to understand how to do the calculations by hand. At the
leam, the software provides a check on your calculations. When
calculations are particularly complex and the goal is interpreting
the results in making decision, the software entirely replaces the
manual calculations,
Addressing the Trends and Challenges in Operations Management
1. (Refer to Solved Problem 1.) Coach Boum Toulouse led the a. To achieve a 10 percent multifactor productivity improve-
mig Red Herrings to several disappointing football seasons
Only better recruiting will return the Big Red Herrings to
ment by reducing materials costs only, by what percent-
age must these costs be reduced?
winning form. Because of the current state of the program.
Boehring University fans are unlikely to support increases
b. To achieve a 10 percent multifactor productivity improve
in the S192 season ticket price. Improved recruitment will
ment by reducing labor costs only, by what percentage
increase overhead costs to $30,000 per class section from the
must these costs be reduced?
current $25,000 per class section. The university's budget
C. To achieve a 10 percent multifactor productivity improve-
plan is to cover recruitment costs by increasing the average
ment by reducing overhead costs only, by what percent
class site to 75 students. Labor costs will increase to $6,500 per
age
these costs be reduced?
credit course. Material costs will be about $25 per student
4. At Symtecks, the output of a specific process is valued at $100
for each 3 credit course, Tuition will be $200 per semester
per unit. The cost of labor is $50 per hour including benefits.
credit which is supplemented by state support of $100 per
The accounting department provided the following informa-
semester credit
tion about the process for the past four weeks:
What is the multifactor productivity ratio? Compared to
the result obtained in Solved Problem 1, did productivity
Week 1 Week 2 Week 3 Week 4
increase or decrease for the course process?
Units Produced 1.124 1,310 1,092 981
b. If instructors work an average of 20 hours per week for
Labor ($)
12,735 14,842 10,603 9,526
16 weeks for each 3-credit class of 75 students, what is the
labor productivity ratio?
Material ($) 21,041 24,523 20,442 18,364
Suds and Duds Laundry washed and pressed the following
Overhead ($) 8,992 10,480 8,736 7,848
numbers of dress shirts per week
Week
Work Crew Total Hours Shirts
a. Use the multifactor productivity ratio to see whether re-
cent process improvements had any effect and, if so, whe
1 Sud and Dud
24
68
the effect was noticeable.
2 Surt and Jud
46
130
b. Has labor productivity changed? Use the labor productiv-
ity ratio to support your answer.
3 Sud, Dud, and Jud
62
152
Alyssa's Custom Cakes currently sells 5 birthday, 2 wedding
Sud, Dud, and Jud
51
125
and 3 specialty cakes each month for $50, 5150, and 100
each, respectively. The cost of labor is $50 per hour includin
5 Dud and Jud
45
131
benefits. It takes 90 minutes to produce a birthday cake,
240 minutes to produce a wedding cake, and 60 minutes
3. Calculate the labor productivity ratio for each week.
to produce a specialty cake. Alyssa's current multifactor
6. Explain the labor productivity pattern exhibited by the
productivity ratio is 1.25.
data
a. Use the multifactor productivity ratio provided to calcu-
White Tiger Electronics produces CD players using an
late the average cost of the cakes produced.
automated assembly line process. The standard cost of CD b. Calculate Alyssa's labor productivity ratio in dollars per
players is $150 per unit (labor, $30; materials, $70; and over-
hour for each type of cake.
head. 550). The sales price is $300 per unit.
4
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
PROCESS BETA
PROCESS ALPHA
B
A
B
A
Product
60
30
50
Output (units
$1,400
$1,000
$2,000
$1.200
Labor ($
$3,000
$1,400
$3,500
$2,500
Materials
a. Which process, Alpha or Beta, is more productive?
b. What conclusions can you draw from your analysis?
c. Based solely on the labor productivity ratio, which cake
should Alyssa try to sell the most?
d. Based on your answer in part (a), is there a type of cake
Alyssa should stop selling?
6. The Big Black Bird Company (BBBC) has a large order for
special plastic-lined military uniforms to be used in an urgent
military operation. Working the normal two shifts of 40 hours
each per week, the BBBC production process usually produces
2,500 uniforms per week at a standard cost of $120 each. Sev-
enty employees work the first shift and 30 employees work the
second. The contract price is $200 per uniform. Because of the
urgent need, BBBC is authorized to use around-the-clock pro-
duction, 6 days per week. When each of the two shifts works
72 hours per week, production increases to 4,000 uniforms
per week but at a cost of $144 each.
a. Did the multifactor productivity ratio increase, decrease,
or remain the same? If it changed, by what percentage did
it change?
b. Did the labor productivity ratio increase, decrease, or
remain the same? If it changed, by what percentage did it
change?
c. Did weekly profits increase, decrease, or remain the
same?
9. The Morning Brew Coffee Shop sells Regular, Cappuccino,
and Vienna blends of coffee. The shop's current daily labor
cost is $320, the equipment cost is $125, and the overhead
cost is $225. Daily demands, along with selling price and ma.
terial costs per beverage, are given below.
Vienna
Coffee
Cappuccino
Regular Coffee
350
100
150
Beverages sold
$2.00
$3.00
$4.00
Price per
beverage
Material ($)
$0.50
$0.75
$1.25
7. Mack's guitar fabrication shop produces low-cost, highly du-
rable guitars for beginners. Typically, out of the 100 guitars that
begin production each month, only 80 percent are considered
good enough to sell. The other 20 percent are scrapped due to
quality problems that are identified after they have completed
the production process. Each guitar sells for $250. Because
some of the production process is automated, each guitar only
requires 10 labor hours. Each employee works an average
160 hours per month. Labor is paid at $10/hour, materials cost
is $40/guitar, and overhead is 54.000.
Harald Luckerbauer, the manager at Morning Brew Cof-
fee Shop, would like to understand how adding Eiskaffee (a
German coffee beverage of chilled coffee, milk, sweetener,
and vanilla ice cream) will alter the shop's productivity. His
market research shows that Elskaffee will bring in new cus-
tomers and not cannibalize current demand. Assuming that
the new equipment is purchased before Eiskaffee is added
to
the menu, Harald has
developed new average daily demand
and cost projections. The new equipment cost is $200, and
the overhead cost is $350. Modified daily demands, as well
as selling price and material costs per beverage for the new
product line, are given below.
Regular
Vienna
Coffee Can Coffee Eiskaffee
350
150 75
Beverages sold
a. Calculate the labor and multifactor productivity ratios.
b. After some study, the operations manager Darren Funk
recommends three options to improve the company's
multifactor productivity: (1) increase the sales price by
10 percent, (2) improve quality so that only 10 percent
are defective, or (3) reduce labor, material, and overhead
costs by 10 percent. Which option has the greatest impact
on the multifactor productivity measure?
8. Mariah Enterprises makes a variety of consumer electronic
products. Its camera manufacturing plant is considering
choosing between two different processes, named Alpha
and Beta, which can be used to make two component parts
A and B. To make the correct decision, the managers would
like to compare the labor and multifactor productivity of
process Alpha with that of process Beta. The value of process
output for component A and B are $175 and $140 per unit,
respectively. The corresponding overhead costs are $6,000
and $5,000, respectively.
Price per beverage
$2.00
$3.00
$4.00
$5.00
Material $)
$0.50
557
$1.25
$1.50
a. Calculate the change in labor and multifactor productivity
if Eiskaffee is added to the menu.
b. If everything else remains unchanged, how many units of
Eiskaffee would have to be sold to ensure that the multi-
factor productivity increases from its current level?
401
28
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
manufacturing and distribution presences there. As you can imagine,
means operations managers must think about how to grow the current supply
chain beyond the boundaries of existing domestic and International orders
additional expansion is to occur.
enough energy to completely run the plant as well as the headquarters build
ing nearby. The 850 million colored pencils produced each year only use
reforested wood, with one tree planted for every tree harvested. Sourcing
for paraffin wax used in crayons recently moved from Louisiana to western
Pennsylvania, saving 5,000 barrels of oil annually related to wax transporta
tion. All plastic components are made with recycled plastics. And any excess
wax from the production of crayons is reintroduced into the manufacturing
process so no waste is produced,
The company is aggressively pursuing new markets outside the United
States China's market of children ages 0-14 is larger than all the other
global markets combined with more than half the world's child population
Yet only 14 percent of the company's total sales come from international
markets. So, particular attention is being devoted to growing the company's
priorities in Table 1.3
QUESTIONS
1. Map Crayola's five pillars of operational leadership to the competitive
2. Create an assessment of Crayola's competitive priorities as it relates to
their Asian expansion plans
3. Which of the competitive priorities might present the biggest challenge
to Crayola as it expands internationally?
CASE
Chad's Creative Concepts
Chad's Creative Concepts designs and manufactures wood furniture
Founded by Chad Thomas on the banks of Lake Erie in Sandusky, Ohio, the
company began by producing custom-made wooden furniture for vacation
cabins located along the coast of Lake Erie and on nearby Kelly's Island and
Bass Island. Being an outdoors" type himself, Thomas originally wanted to
bring a bit of the outdoors" inside. Chad's Creative Concepts developed a
solid reputation for creative designs and high-quality workmanship. Sales
eventually encompassed the entire Great Lakes region. Along with growth
came additional opportunities
Traditionally, the company focused entirely on custom-made furniture,
with the customer specifying the kind of wood from which the piece would be
made. As the company's reputation grew and sales increased, the sales force
began selling some of the more popular pieces to retail furniture outlets. This
move into retail outlets led Chad's Creative Concepts into the production of a
more standard line of furniture Buyers of this line were much more price sen-
sitive and imposed more stringent delivery requirements than did clients for
the custom line. Custom-designed furniture, however, continued to dominate
sales, accounting for 60 percent of volume and 75 percent of dollar sales
Currently, the company operates a single manufacturing process in Sandusky
where both custom furniture and standard furniture are manufactured. The
equipment is mainly general purpose in nature to provide the flexibility needed
for producing custom pleces of furniture. The layout puts together saws in one
section of the facility, lathes in another, and so on. The quality of the finishod
product reflects the quality of the wood chosen and the craftsmanship of
dividual workers. Both custom and standard tumiture compete for processing
time on the same equipment by the same craftspeople
During the past few months, sales of the standard line steadily
creased, leading to more regular scheduling of this product line. However
when scheduling trade-offs had to be made, custom furniture was always
given priority because of its higher sales and profit margins. Thus, scheduled
lots of standard furniture pieces were left sitting around the plant in various
stages of completion
As he reviews the progress of Chad's Creative Concepts, Thomasis
pleased to note that the company has grown. Sales of custom furniture re
main strong and sales of standard pleces are steadily increasing. However,
finance and accounting indicate that profits are not what they should be
Costs associated with the standard line are rising. Dollars are being tied up in
Inventory, both in raw materials and work in process Expensive public ware-
house space has to be rented to accommodate the inventory volume. Thomas
also is concerned with increased lead times for both custom and standard
orders, which are causing longer promised delivery times. Capacity is being
pushed, and no space is left in the plant for expansion. Thomas begins a
careful assessment of the overall impact that the new standard line is having
on his manufacturing process
EESTIONS
1. Wildtynes of decisions must Chad Thomas make daily for his com-
contion to run effectively Over the long run?
2 How to cover allect operations when they began to sell
eu?
Woman to ucini standard fumiture affected the com-
har
Van Gaas Thomas have done differently to avoid some of the
Teshe now foces?
Source: This case was prepared by Dr. Brooke Saladin, Wake Forest University as a basis for classroom discussion Copyright © Brooke Saladin Reprinted by permission.
orders, which are cause
pushed, and no space is left in the plant for expa
careful assessment of the overall impact that the new standard line is having
on his manufacturing process.
single me
Decision
A decisic
decision
pieces to retail furniture outlets. This
we Concepts into the production of a
this line were much more price-sen-
y requirements than did clients for
Fe, however, continued to dominate
be and 75 percent of dollar sales.
anufacturing process in Sandusky,
furniture are manufactured. The
re to provide the flexibility needed
layout puts together saws in one
so on. The quality of the finished
en and the craftsmanship of in-
QUESTIONS
1. What types of decisions must Chad Thomas make daily for his com-
pany's operations to run effectively? Over the long run?
2. How did sales and marketing affect operations when they began to sell
standard pieces to retail outlets?
3. How has the move to producing standard furniture affected the com-
pany's financial structure?
umiture compete for processing
espeople.
che standard line steadily in-
of this product line. However,
Break-E
To evaluate a
determiningt
quantity is th
break-even a
at which two
4. What might Chad Thomas have done differently to avoid some of the
problems he now faces?
En, Wake Forest University, as a basis for classroom discussion. Copyright © Brooke Saladin. Reprinted by permission.
LEARNIN
USING OPERATIONS TO CREATE VALUE
CHAPTER
23
wat nicometal forces could be at work that wa
Want thould considor?
What are the possible core competences of Wild West
what weaknesses should it avoid or mitigate?
1. You are designing a grocery delivery business. Viu the In
met your company will offer staples and frozen foods in a
large metropolitan atend then deliver them within a cus
tomer detined window of time. You plan to partner with ID
major od stores in the area. What should be your competi
live priorities and what capabilities do you want to develop in
your core and support processes?
Problems
The OM Explorer and POM for Windows software is avail
ble to all crudents nising the lit edition of this textbook. Go
to betp://www.pearsonhighered.com/krajewski to download
hire computer packages. If you purchased Myomlab, you also
have access to Active Models software and significant help in do-
ing the following problems. Check with your instructor on how
best to use these resources. In many cases, the instructor wants
you to understand how to do the calculations by hand. At the
leam, the software provides a check on your calculations. When
calculations are particularly complex and the goal is interpreting
the results in making decision, the software entirely replaces the
manual calculations,
Addressing the Trends and Challenges in Operations Management
1. (Refer to Solved Problem 1.) Coach Boum Toulouse led the a. To achieve a 10 percent multifactor productivity improve-
mig Red Herrings to several disappointing football seasons
Only better recruiting will return the Big Red Herrings to
ment by reducing materials costs only, by what percent-
age must these costs be reduced?
winning form. Because of the current state of the program.
Boehring University fans are unlikely to support increases
b. To achieve a 10 percent multifactor productivity improve
in the S192 season ticket price. Improved recruitment will
ment by reducing labor costs only, by what percentage
increase overhead costs to $30,000 per class section from the
must these costs be reduced?
current $25,000 per class section. The university's budget
C. To achieve a 10 percent multifactor productivity improve-
plan is to cover recruitment costs by increasing the average
ment by reducing overhead costs only, by what percent
class site to 75 students. Labor costs will increase to $6,500 per
age
these costs be reduced?
credit course. Material costs will be about $25 per student
4. At Symtecks, the output of a specific process is valued at $100
for each 3 credit course, Tuition will be $200 per semester
per unit. The cost of labor is $50 per hour including benefits.
credit which is supplemented by state support of $100 per
The accounting department provided the following informa-
semester credit
tion about the process for the past four weeks:
What is the multifactor productivity ratio? Compared to
the result obtained in Solved Problem 1, did productivity
Week 1 Week 2 Week 3 Week 4
increase or decrease for the course process?
Units Produced 1.124 1,310 1,092 981
b. If instructors work an average of 20 hours per week for
Labor ($)
12,735 14,842 10,603 9,526
16 weeks for each 3-credit class of 75 students, what is the
labor productivity ratio?
Material ($) 21,041 24,523 20,442 18,364
Suds and Duds Laundry washed and pressed the following
Overhead ($) 8,992 10,480 8,736 7,848
numbers of dress shirts per week
Week
Work Crew Total Hours Shirts
a. Use the multifactor productivity ratio to see whether re-
cent process improvements had any effect and, if so, whe
1 Sud and Dud
24
68
the effect was noticeable.
2 Surt and Jud
46
130
b. Has labor productivity changed? Use the labor productiv-
ity ratio to support your answer.
3 Sud, Dud, and Jud
62
152
Alyssa's Custom Cakes currently sells 5 birthday, 2 wedding
Sud, Dud, and Jud
51
125
and 3 specialty cakes each month for $50, 5150, and 100
each, respectively. The cost of labor is $50 per hour includin
5 Dud and Jud
45
131
benefits. It takes 90 minutes to produce a birthday cake,
240 minutes to produce a wedding cake, and 60 minutes
3. Calculate the labor productivity ratio for each week.
to produce a specialty cake. Alyssa's current multifactor
6. Explain the labor productivity pattern exhibited by the
productivity ratio is 1.25.
data
a. Use the multifactor productivity ratio provided to calcu-
White Tiger Electronics produces CD players using an
late the average cost of the cakes produced.
automated assembly line process. The standard cost of CD b. Calculate Alyssa's labor productivity ratio in dollars per
players is $150 per unit (labor, $30; materials, $70; and over-
hour for each type of cake.
head. 550). The sales price is $300 per unit.
4
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
PROCESS BETA
PROCESS ALPHA
B
A
A
B
60
30
50
Product
Output (units
Labor ($
$1,000
$2,000
$1.200
$1,400
$3,000
$1,400
$3,500
$2,500
Materials
a. Which process, Alpha or Beta, is more productive?
b. What conclusions can you draw from your analysis?
9. The Morning Brew Coffee Shop sells Regular, Cappuccino,
and Vienna blends of coffee. The shop's current daily labor
cost is $320, the equipment cost is $125, and the overhead
cost is $225. Daily demands, along with selling price and ma.
terial costs per beverage, are given below.
Cappuccino
Vienna
Coffee
Regular Coffee
350
100
150
Beverages sold
$2.00
$3.00
$4.00
Price per
beverage
Material ($)
$0.50
$0.75
$1.25
c. Based solely on the labor productivity ratio, which cake
should Alyssa try to sell the most?
d. Based on your answer in part (a), is there a type of cake
Alyssa should stop selling?
6. The Big Black Bird Company (BBBC) has a large order for
special plastic-lined military uniforms to be used in an urgent
military operation. Working the normal two shifts of 40 hours
each per week, the BBBC production process usually produces
2,500 uniforms per week at a standard cost of $120 each. Sev-
enty employees work the first shift and 30 employees work the
second. The contract price is $200 per uniform. Because of the
urgent need, BBBC is authorized to use around-the-clock pro-
duction, 6 days per week. When each of the two shifts works
72 hours per week, production increases to 4,000 uniforms
per week but at a cost of $144 each.
a. Did the multifactor productivity ratio increase, decrease,
or remain the same? If it changed, by what percentage did
it change?
b. Did the labor productivity ratio increase, decrease, or
remain the same? If it changed, by what percentage did it
change?
c. Did weekly profits increase, decrease, or remain the
same?
7. Mack's guitar fabrication shop produces low-cost, highly du-
rable guitars for beginners. Typically, out of the 100 guitars that
begin production each month, only 80 percent are considered
good enough to sell. The other 20 percent are scrapped due to
quality problems that are identified after they have completed
the production process. Each guitar sells for $250. Because
some of the production process is automated, each guitar only
requires 10 labor hours. Each employee works an average
160 hours per month. Labor is paid at $10/hour, materials cost
is $40/guitar, and overhead is 54.000.
a. Calculate the labor and multifactor productivity ratios.
b. After some study, the operations manager Darren Funk
recommends three options to improve the company's
multifactor productivity: (1) increase the sales price by
10 percent, (2) improve quality so that only 10 percent
are defective, or (3) reduce labor, material, and overhead
costs by 10 percent. Which option has the greatest impact
on the multifactor productivity measure?
8. Mariah Enterprises makes a variety of consumer electronic
products. Its camera manufacturing plant is considering
choosing between two different processes, named Alpha
and Beta, which can be used to make two component parts
A and B. To make the correct decision, the managers would
like to compare the labor and multifactor productivity of
process Alpha with that of process Beta. The value of process
output for component A and B are $175 and $140 per unit,
respectively. The corresponding overhead costs are $6,000
and $5,000, respectively.
Harald Luckerbauer, the manager at Morning Brew Cof-
fee Shop, would like to understand how adding Eiskaffee (a
German coffee beverage of chilled coffee, milk, sweetener,
and vanilla ice cream) will alter the shop's productivity. His
market research shows that Elskaffee will bring in new cus-
tomers and not cannibalize current demand. Assuming that
the new equipment is purchased before Eiskaffee is added
to
the menu, Harald has
developed new average daily demand
and cost projections. The new equipment cost is $200, and
the overhead cost is $350. Modified daily demands, as well
as selling price and material costs per beverage for the new
product line, are given below.
Beverages sold
Price per beverage
Material $)
Regular
Vienna
Coffee Can Coffee Eiskaffee
350
150 75
$2.00 $3.00
$4.00
$5.00
$0.50 557 $1.25 $1.50
a. Calculate the change in labor and multifactor productivity
if Eiskaffee is added to the menu.
b. If everything else remains unchanged, how many units of
Eiskaffee would have to be sold to ensure that the multi-
factor productivity increases from its current level?
401
28
CHAPTER 1
USING OPERATIONS TO CREATE VALUE
manufacturing and distribution presences there. As you can imagine,
means operations managers must think about how to grow the current supply
chain beyond the boundaries of existing domestic and International orders
additional expansion is to occur.
enough energy to completely run the plant as well as the headquarters build
ing nearby. The 850 million colored pencils produced each year only use
reforested wood, with one tree planted for every tree harvested. Sourcing
for paraffin wax used in crayons recently moved from Louisiana to western
Pennsylvania, saving 5,000 barrels of oil annually related to wax transporta
tion. All plastic components are made with recycled plastics. And any excess
wax from the production of crayons is reintroduced into the manufacturing
process so no waste is produced,
The company is aggressively pursuing new markets outside the United
States China's market of children ages 0-14 is larger than all the other
global markets combined with more than half the world's child population
Yet only 14 percent of the company's total sales come from international
markets. So, particular attention is being devoted to growing the company's
priorities in Table 1.3
QUESTIONS
1. Map Crayola's five pillars of operational leadership to the competitive
2. Create an assessment of Crayola's competitive priorities as it relates to
their Asian expansion plans
3. Which of the competitive priorities might present the biggest challenge
to Crayola as it expands internationally?
CASE
Chad's Creative Concepts
Chad's Creative Concepts designs and manufactures wood furniture
Founded by Chad Thomas on the banks of Lake Erie in Sandusky, Ohio, the
company began by producing custom-made wooden furniture for vacation
cabins located along the coast of Lake Erie and on nearby Kelly's Island and
Bass Island. Being an outdoors" type himself, Thomas originally wanted to
bring a bit of the outdoors" inside. Chad's Creative Concepts developed a
solid reputation for creative designs and high-quality workmanship. Sales
eventually encompassed the entire Great Lakes region. Along with growth
came additional opportunities
Traditionally, the company focused entirely on custom-made furniture,
with the customer specifying the kind of wood from which the piece would be
made. As the company's reputation grew and sales increased, the sales force
began selling some of the more popular pieces to retail furniture outlets. This
move into retail outlets led Chad's Creative Concepts into the production of a
more standard line of furniture Buyers of this line were much more price sen-
sitive and imposed more stringent delivery requirements than did clients for
the custom line. Custom-designed furniture, however, continued to dominate
sales, accounting for 60 percent of volume and 75 percent of dollar sales
Currently, the company operates a single manufacturing process in Sandusky
where both custom furniture and standard furniture are manufactured. The
equipment is mainly general purpose in nature to provide the flexibility needed
for producing custom pleces of furniture. The layout puts together saws in one
section of the facility, lathes in another, and so on. The quality of the finishod
product reflects the quality of the wood chosen and the craftsmanship of
dividual workers. Both custom and standard tumiture compete for processing
time on the same equipment by the same craftspeople
During the past few months, sales of the standard line steadily
creased, leading to more regular scheduling of this product line. However
when scheduling trade-offs had to be made, custom furniture was always
given priority because of its higher sales and profit margins. Thus, scheduled
lots of standard furniture pieces were left sitting around the plant in various
stages of completion
As he reviews the progress of Chad's Creative Concepts, Thomasis
pleased to note that the company has grown. Sales of custom furniture re
main strong and sales of standard pleces are steadily increasing. However,
finance and accounting indicate that profits are not what they should be
Costs associated with the standard line are rising. Dollars are being tied up in
Inventory, both in raw materials and work in process Expensive public ware-
house space has to be rented to accommodate the inventory volume. Thomas
also is concerned with increased lead times for both custom and standard
orders, which are causing longer promised delivery times. Capacity is being
pushed, and no space is left in the plant for expansion. Thomas begins a
careful assessment of the overall impact that the new standard line is having
on his manufacturing process
EESTIONS
1. Wildtynes of decisions must Chad Thomas make daily for his com-
contion to run effectively Over the long run?
2 How to cover allect operations when they began to sell
eu?
Woman to ucini standard fumiture affected the com-
har
Van Gaas Thomas have done differently to avoid some of the
Teshe now foces?
Source: This case was prepared by Dr. Brooke Saladin, Wake Forest University as a basis for classroom discussion Copyright © Brooke Saladin Reprinted by permission.
orders, which are cause
pushed, and no space is left in the plant for expa
careful assessment of the overall impact that the new standard line is having
on his manufacturing process.
single me
Decision
A decisic
decision
pieces to retail furniture outlets. This
we Concepts into the production of a
this line were much more price-sen-
y requirements than did clients for
Fe, however, continued to dominate
be and 75 percent of dollar sales.
anufacturing process in Sandusky,
furniture are manufactured. The
re to provide the flexibility needed
layout puts together saws in one
so on. The quality of the finished
en and the craftsmanship of in-
QUESTIONS
1. What types of decisions must Chad Thomas make daily for his com-
pany's operations to run effectively? Over the long run?
2. How did sales and marketing affect operations when they began to sell
standard pieces to retail outlets?
3. How has the move to producing standard furniture affected the com-
pany's financial structure?
umiture compete for processing
espeople.
che standard line steadily in-
of this product line. However,
Break-E
To evaluate a
determiningt
quantity is th
break-even a
at which two
4. What might Chad Thomas have done differently to avoid some of the
problems he now faces?
En, Wake Forest University, as a basis for classroom discussion. Copyright © Brooke Saladin. Reprinted by permission.
LEARNIN
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