Solution - Executive Shirt Case

Harvard Business School 9-696-071 Rev. March 11, 1996 Executive Shirt Company Case Analysis-The Executive Shirt Company (Group Project) Part A Calculations

Current Process Mike's Plan Regular Shirts

A) Actual Cycle Time (Min/shirt)

11,760 * 0.5 / (WIP * Cycle Time) / 480 minutes Minutes in a working = 12.25 day

196 * 60 Average WIP * Batch = 11,760 size

D) Production Capacity

Regular Shirts

Custom Shirts

All labor content / one less worker for 2.5 / 5 = 0.5 120 minutes for each category labor content while cutting is for cutting. cutting / 480 2 minutes per shirts worth = still 0.25: With everything cuff / 4 workers 0.25 < labor Cuffs is still the divided by 1, = 0.5 content of cuffs bottleneck at 2 collar is new at 0.5 CT labor content / bottleneck 3 workers at 3.90 CT = 0.67 mins/shirt

B) Manufacturing Lead Time (days)

C) WIP Inventory (shirts)

Regular & Custom Shirts

Ike's Plan

0.5 * 1980 / 480 = 2.06 days

396 * 5 = 1980 shirts

8 hours * 60 8 hours * 60 minutes / 0.5 = mins / 0.5

(9060 * 0.66) / (50 * 3.9) / 480 480 = 12.58 = 0.41 days days 30 units at sewing + 5 60 * 151 sum of units being cut + 15 units avg. WIP = being finished 9,060 shirts = 50 WIP(given in case) 480 / 0.666 =

8 * 60 / 3.9 =

Current Process Mike's Plan

(shirts/day) Minutes available / CT E) Capacity Utilization Actual Produced / What could be produced

Ike's Plan

Regular Shirts

Regular & Custom Shirts

Regular Shirts

960 shirts / day

= 960 shirts/day

720 shirts/day123 shirts/day

10,000 / (960 * (16,000 + 20 days) 2000) / (960 * = 83% 20) = 93.75%

Custom Shirts

123 * 20 days = 2460 monthly 16,000 / (720 * production 20) = 111.11% capacity 2000 / 2460 = 81.25%

(16,000 / 18,000) * 0.25 = 0.2777 + (90 + 30 (120 minutes / (2,000 / 18,000 minutes /8hr * 480 total * 0.5) = 0.2777 60 mins) + 3.9 minutes) + 3.9 = weighted F) Direct Labor + 2 + 0.65 + + 2 + 0.65 + avg. cutting Content (min/shirt) 2.5 + 1.7 + 2.5 + 1.7 + time for regular 0.66 + 1.65 + Time spent cutting + 0.66 + 1.65 + and custom 1.55 + 0.65 + 1.55 + 0.65 + Direct labor for one 1.8 + 1.55 + 25.76 - 0.25 = 1.8 + 1.55 + shirt 1.7 + 1.5 + 25.51 sum of 1.7 + 1.5 + 1.95 + 1.75 standard 1.95 + 1.75 = 25.76 station time = 25.76

0.5 direct labor for cutting + 3.9 + 2 + 0.65 + 2.5 + 1.7 + 0.66 + 1.65 + 1.55 + 0.65 + 1.8 + 1.55 + 1.7 + 1.5 + 1.95 + 1.75 = 25.01

25.51 + 0.2777 = 25.79 (900 * 25.79) / (800 shirts * (65 direct (800 per day * 25.76 Direct workers * 480 25.76) / (64 100 * 26.01 / (Shirts per day * labor content) / minutes 15) * 480) = (16 * 480) Direct labor content / 64*480 available)= 20,608 / 23,520 = 33.87% (Direct labor * = 67.08% 23,211 / 31,200 = 87.62% minutes available) = 74.39% G) Direct Labor Utilization

H) Direct Labor Cost ($/shirt) Direct labor (Salary * hours worked) / shirts produced

64 (6 * 8) / 800 65 ( $6 * 720 shirts / day 16 ($6 * 8 = $3.84 8hours) / 900 = on normal hours) / 100 31200 / 900 salary: 49 * 6 * = 7.68 = $3.47 8 = $2,352 80 remaining shirts * 0.67 = 53.6 minutes

Current Process Mike's Plan Regular Shirts

Regular & Custom Shirts

Ike's Plan Regular Shirts

Custom Shirts

53.6 / 60 * 9 = 8.04 49 * 8.04 = 393.96 Total: (393.96 + 2352) / 800 = 3.43

Explanation 1.

Regular shirt production process without custom shirt fabrication.

a.

Cycle time for each station = total station time / # of workers at station

i.

Cycle time for system = longest station cycle time

ii.

Cuffs station = System CT = 2.0 minutes / 4 workers = 0.5 minutes

b.

Manufacturing Lead Time (MLT) = Cycle Time (CT) * Works in Progress (WIP)

i.

CT = 0.5 minutes

ii.

WIP individual shirts = (196 batches * 60 shirts / batch) = 11,760

iii.

MLT in days = (0.5 * 11,760) / 480 minutes per day = 12.25 days

c.

Total individual shirts as WIP = Sum of average batches * 60 shirts per batch

i.

WIP shirts = 196 batches * 60 shirts per batch = 11,760 shirts as WIP

d.

Production capacity of system at continuous 100% utilization (minutes)

i.

Production capacity = minutes per day / CT of system

ii. Production capacity = 480 / 0.5 = 960 units per day @ continuous 100% utilization e. Production capacity utilization = monthly production / monthly production capacity i. ii.

Current monthly production is 16,000 (given in case) Total monthly capacity = 19,200 (920 per day * 20 days per month)

iii.

Production utilization = 16,000 / 19,200 = 83%

f.

Direct Labor content = sum of time at all stations + time per shirt for cutting

i.

Sum of time at all stations = 25.51 minutes per shirt

ii. A single cutting of 8 patterns on 60 layers of cloth produces (60 * 8) = 480 shirts iii. Total cutting time = (1.5 minutes * 60 layers) + (30 minutes cutting) = 120 minutes iv.

Cutting time per shirt = 120 minutes / 480 shirts = 0.25 minutes per shirt

v. Total labor content (time) per shirt = 25.51 + 0.25 = 25.76 minutes per shirt g.

Direct Labor Utilization = Total used labor time / Total labor time available

i. Total labor time available = 64 workers * 480 minutes per day = 30,720 minutes ii. Total time used = time per shirt * daily production (16,000 per month / 20 days) iii.

Total time used = 25.76 minutes * 800 shirts per day = 20,608 minutes

iv. Direct Labor Utilization = 20,608 minutes used / 30,720 minutes available = 67.08% h. Total Direct Labor Cost per shirt = (# workers * 8 hours per day * $6 per hour) / 800 i. Total Direct labor cost = (64 * 8 * 6) / 800 (total daily production = 16,000 / 20 days) ii.

Total Direct Labor Cost = $3.84 / shirt

2. Mike’s plan for production of regular and custom shirts using existing facilities with the addition of a new cutting machine and one worker. a. System CT remains unchanged = 0.5 (the cuffs station still has the longest station CT) b.

Manufacturing Lead Time (MLT) = Cycle Time (CT) * Works in Progress (WIP)

i.

CT = 0.5 minutes

ii.

WIP individual shirts = (396 batches * 5 shirts / batch) = 1,980

iii.

MLT in days = (0.5 * 1,980) / 480 minutes per day = 2.06 days

c.

Total individual shirts as WIP = Sum of average batches * 5 shirts per batch

i.

WIP shirts = 396 batches * 5 shirts per batch = 1,980 shirts as WIP

d.

Production capacity of system at continuous 100% utilization (minutes)

i.

Production capacity = minutes per day / CT of system

ii. Production capacity = 480 / 0.5 = 960 units per day @ continuous 100% utilization e. Production capacity utilization = monthly production / monthly production capacity i. Current monthly production is 16,000 regular + 2000 custom shirts (given in case) ii. iii.

Total monthly capacity = 18,000 (900 per day * 20 days per month) Production utilization = 18,000 / 19,200 = 93.8%

f.

Direct Labor content = sum of time at all stations + time per shirt for cutting

i.

Sum of time at all stations = 25.51 minutes per shirt

ii.

New machine can cut 1 pattern on five layers in 2.5 minutes

ii.Custom cutting time = 5 shirts / 2.5 minutes = 0.5 minutes per custom shirt iii.

Total cutting time = Weighted average of old & new machine cutting times

iii.(16,000 reg / 18000 total) * 0.25 + (2000 / 18000) * 0.5 = 0.278 min/shirt iv. Total labor content (time) per shirt = 25.51 +0.28 = 25.79 minutes per shirt g.

Direct Labor Utilization = Total used labor time / Total labor time available

i. Total labor time available = 65 workers * 480 minutes per day = 31,200 minutes ii. Total time used = time per shirt * daily production (18000 per month / 20 days) iii.

Total time used = 25.79 minutes * 900 shirts per day = 23,211 minutes

iv. Direct Labor Utilization = 23,211 minutes used / 31,200 minutes available = 74.39% h. Total Direct Labor Cost per shirt = (# workers * 8 hours per day * $6 per hour) / 900 i. Total Direct labor cost = (65 * 8 * 6) / 900 (total daily production = 18,000 / 20 days) ii.

Total Direct Labor Cost = $3.47 / shirt

3. Ike’s plan for shifting labor from the regular assembly floor to create a separate assembly line dedicated to custom shirts, thus separating the two streams of production. (A) Regular Shirt Production: a. System CT = 0.67 (the cuffs station still has the longest station CT @ 2.0 min / 3 workers ) b.

Manufacturing Lead Time (MLT) = Cycle Time (CT) * Works in Progress (WIP)

i.

CT = 0.67 minutes

ii.

WIP individual shirts = (151 batches * 60 shirts / batch) = 9,060

iii. MLT in days = (0.67 * 9,060) / 480 minutes per day = 12.58 days (for regular shirts) c.

Total individual shirts as WIP = Sum of average batches * 60 shirts per batch

i.

WIP shirts = 151 batches * 60 shirts per batch = 9,060 shirts as WIP

d.

Production capacity of system at continuous 100% utilization (minutes)

i.

Production capacity = minutes per day / CT of system

ii. Production capacity = 480 / 0.67 = 720 units per day @ continuous 100% utilization e. Production capacity utilization = monthly production / monthly production capacity i.

Current monthly production is 16,000 regular shirts (given in case)

ii.

Total monthly capacity = 14,400 (720 per day * 20 days per month)

iii.

Production utilization = 16,000 / 14,400 = 111%

f.

Direct Labor content = sum of time at all stations + time per shirt for cutting

i.

Sum of time at all stations = 25.51 minutes per shirt

ii. A single cutting of 8 patterns on 60 layers of cloth produces (60 * 8) = 480 shirts iii. Total cutting time = (1.5 minutes * 60 layers) + (30 minutes cutting) = 120 minutes iv.

Cutting time per shirt = 120 minutes / 480shirts = 0.25 minutes per shirt

v. Total labor content (time) per shirt = 25.51 + 0.25 = 25.76 minutes per shirt g.

Direct Labor Utilization = Total used labor time / Total labor time available

i.

New direct labor available = 64 – 15 = 49

ii. Total labor time available = 49 workers * 480 minutes per day = 20,608 minutes iii. Total time used = time per shirt * daily production (16000 per month / 20 days) iv.

Total time used = 25.76 minutes * 800 shirts per day = 23,211 minutes

v. Direct Labor Utilization = 20,608 minutes used / 23,520 minutes available = 87.62% h. Total Direct Labor Cost per shirt = (# workers * 8 hours per day * $6 per hour) / 800 i. Overtime is incurred for all employees in order to reach excess of normal hour production levels (calculated above @ 11% above capacity) ii. Overtime production = daily production – daily capacity = 800 – 720 = 80 shirts ii.OT (minutes) = 80 * CT = 80 * 0.67 = 53.60 extra minutes per worker ii.OT cost = (53.60 / 60) *$6 / hour * number of workers = (53.60 / 60) * 6 * 49 ii.OT cost = $393.96 iii. Total Direct labor cost = (49 * 8 * 6) + 393.96 / 800 (total daily production = 18,000 / 20 days) iv.

Total Direct Labor Cost = $3.43 / regular shirt

(B) Custom shirt production on separate assembly line (15 workers + 1 new hire): a.

Cycle time for each station = total station time / # of workers at station

i.

Cycle time for system = longest station cycle time

ii. Cuffs station = System CT = 3.90 minutes / 1 worker = 3.90 minutes (collar station) b.

Manufacturing Lead Time (MLT) = Cycle Time (CT) * Works in Progress (WIP)

i.

CT = 0.5 minutes

ii. iii. c.

WIP individual shirts = (10 batches * 5 shirts / batch) = 50 shirts MLT in days = (3.90 * 50) / 480 minutes per day = 0.41 days Total individual shirts as WIP = Sum of average batches * 5 shirts per batch

i. WIP shirts = 30 shirts in sewing + 5 shirts in cutting + 15 shirts in finishing = 50 shirts as WIP (given in case) d.

Production capacity of system at continuous 100% utilization (minutes)

i.

Production capacity = minutes per day / CT of system

ii. Production capacity = 480 / 3.90 = 123 units per day @ continuous 100% utilization e. Production capacity utilization = monthly production / monthly production capacity i.

Current monthly production is 2,000 (given in case)

ii. iii.

Total monthly capacity = 2460 (123 per day * 20 days per month) Production utilization = 2000 / 2460 = 81.25%

f.

Direct Labor content = sum of time at all stations + time per shirt for cutting

i.

Sum of time at all stations = 25.51 minutes per shirt

ii.

A single cutting of 1 pattern on 5 layers of cloth produces 5 shirts

iii.

Total cutting time = 2.5 minutes

iv.

Cutting time per shirt = 2.5 minutes / 5 shirts = 0.50 minutes per shirt

v. Total labor content (time) per shirt = 25.51 + 0.50 = 26.01 minutes per shirt g.

Direct Labor Utilization = Total used labor time / Total labor time available

i.

Total labor = 12 sewers + 3 finishers + 1 cutter = 16

ii. Total labor time available = 16 workers * 480 minutes per day = 7680 minutes iii.

Total time used = time per shirt * daily production (2000 per month / 20 days)

iv.

Total time used = 26.01 minutes * 100 shirts per day = 2601 minutes

v. Direct Labor Utilization = 2601 minutes used / 7680 minutes available = 33.87% h. Total Direct Labor Cost per shirt = (# workers * 8 hours per day * $6 per hour) / 200 i. Total Direct labor cost = (16 * 8 * 6) / 200 (total daily production = 2000 / 20 days) ii.

Total Direct Labor Cost = $7.68 / custom shirt

Part B Recommendation to Management

Using the calculations in Part A it is possible to evaluate each of the two proposals in terms of their cost and efficiency. Firstly, to deduce the total cost for the custom shirts each month, the Direct Labour Cost from each plan can be multiplied by 2000 (the desired quantity produced). By doing this we learn that Ike’s total cost for custom shirts is $7.68 x 2000 = $15,360, compared to Mike’s $3.47 x 2000 = $6,940. This results in an $8,420 cost difference in favour of Mike’s plan. Production of regular shirts on the other hand are cheaper using Ike’s process, that is Ike’s labour costs are $3.43 x 16,000 (desired quantity of regular shirts) = $54,880 compared with Mike’s labour costs of $3.47 x 16,000 = $55,520. The difference between the two is only $640, which is fairly insignificant, and leaves the total cost difference between the two plans at $7,780 in favour of Mike.

The great disparity in cost between the two is mainly due to the efficiency of each proposal. Whilst Mike increases the efficiency of both capacity and labour utilization in the factory (absorbing excess capacity and increasing efficiency from 83% to 93.75% as well as improving labour efficiency by 7.31%), Ike over-utilizes capacity in his regular shirt production line and severely under-utilizes capacity in his custom shirts production line. The result of this is that he has to pay the workers on the regular shirt line overtime whilst the workers on the custom shirt line are frequently starved and sitting idle.

Furthermore, when considering the logistics of each production line layout, Mike’s proposal is favourable over Ike’s because it allows for more flexibility. Whilst Mike retains the existing ‘process layout’ in the batch shop process, where similar operations are performed in common functional areas, Ike instead adopts a ‘product layout’ structure, where the operations are located according to the progressive steps involved in making a shirt. Having only one worker completing each production task, as is the case in Ike’s plan, means that if one worker is slowed down for any reason or needs to take a break, then there is no one to pick up the slack. As a result, the whole process is negatively affected. An ideal assembly line should allow workers to trade elements of work and it should be unproblematic to add workers to the line to increase efficiency, however the straight-line layout of Ike’s plan does not satisfy these requirements.

Based upon our analysis, although both processes do essentially satisfy Dwight Collier’s production lead management time conditions, we would recommend that he should trial Mike’s plan. If there does indeed prove to be a market for mid price range custom shirts, then implementing Mike’s proposal is the company’s best shot at making a lucrative profit from this initiative