You are the Operations Director for a fashion clothin company. You are especially interested in the latest line of women's vests which are selling like hotcakes. Your task as directed by the management board, is to analyze the operations of this particular line to determine some basic margin and profitability information, as well as to determine what shape you are in with regard to capacity.
The production of vests involves the production of the liner from raw liner material, the production of the outer shell from shell raw material, and their joining together to create the final product. Liner material must be first cut to shape, then sewn together to create its final form. The shell is cut to shape from its raw material, and then sewn to form. The liner and shell are then sewn together. After this, the buttons, snaps, and zippers are sewn onto the vest before passing through a final quality control check at which point we will consider the blazer to be completed.
The company is currently selling 900 vest per month, but demand is expected to increase next year by 20% due to changing consumer taste and the lauch of a new marketing campaign.
The company employs 2 salaried employees. Each is paid a fixed salary of $100,000 per year. The remaining employees are paid based on completed work only, and productivity rates are scaled linearly with the number of employees assigned to a task. It costs the compay $250,000 per year in fixed cost to keeep the lights on, pay the heating bill, etc. Regular employees are pain the standard rate of $20 per hour.
The company works 8 hour days, 5 days a week, 4 weeks per month, and 12 months per year.
Vests sell for $500 each, withthe raw material cost amounting to $200 per vest.
2 regular employees work in the liner cutting department, 4 in the liner sewing department, 3 in the shell cutting, 4 in the shell sewing, 4 in the liner-to-shell sewing department, 5 in the button/snap/zipper department, and 4 in the QC department. It takes an employee 15 minutes to cut the liner, 20 minutes to sew the liner, 15 minutes to cut the shell, 20 minutes to sew the shell, 30 minutes to sew the liner to the shell, 35 minutes to add the buttons/snaps/zippers, and 30 minutes for the QC (all on a per vest basis).
Draw a Process Flow Diagram conforming to the standard PFD convections for this business.
Show the cycle time for each process/task. What is the capacity of each task in the business, and what is the overall capacity of the business? What is the bottleneck? Will you be able to meet the expected increase in demand?
Given the cost, revenue, and demand assumptions, show a per unit profit analysis whose end result is the contribution margin per vest. Also show a yearly analysis whose end result is the operating profit of the business. Contribution margin is in general the amount you make per vest, excluding variable, but not amortized fixed costs. Operating profit in a year will be the amount you make in one year minus all fixed and variable costs from that year.
Given your current production scheme and current profits, what change(s) can you make to your operation to be able to meet the increased demand? What is the new capacity for each stage, and for the business as a whole? Can you now meet the increased demand for next year? What will the contribution margin and operating profit be next year with the increased demand?
How is the business doing?