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The problem currently faced by Classics Cabinets Pty Ltd can be termed as plenty. Their product is positioned at the growth phase of the life cycle because orders from both the sectors like custom as well builder are growing enormously. But along with that, like every growing company, it also faces the challenges associated with the growth.
Incidentally, here the challenge is not on sales, but on effective utilization of the resources, optimum and rational utility of the machines and meeting the deadlines in supply, overall profits etc, where the essay focuses.
Content: Production and Operation Management - "Production and operations management (POM) is the management of an organization's production system" (Workshop on Production Management 2006).
Since the production system converts the inputs into outputs, the process of conversion has become the most pivotal activity (ibid).
The poor planning in scheduling the production programme, inefficient co-ordination and control normally make a negative impact on the whole systems of production and its capabilities. As a result, these systems get underutilized and the organizations become less effective in competing with successful companies (ibid). To ensure smooth and efficient operation, industrial production is processed with effective planning, implementation and control. Production Management revolves around Five "M"s. Ie Men/ Women, Machine, Methods, Materials, and Money.
The organization has to update and empower the workforce to accept the new challenges in the optimization of the production by leveraging the best combination of methods / process.
"The process in the above diagram is referred to as the "Conversion Process. There are different methods of handling the conversion or production process - Job, Batch, Flow and Group" (ibid).
Challenges in Production Management - "The most crucial investment for the future is the understanding and flexibility provided by the technological options for business success" (http://www.themanager.org)
Faster and continuously changing Economy, Changing pace of Production Process and ongoing innovations in Technologies, world as the market, etc pose higher challenges to the corporate to decide wisely while planning for higher capital investments.
The current production systems and processes used by Classic Cabinets (a technical analysis).
Though Classic Cabinets has grown much, attributing to the quality of the finished product and craftsmanship, they are yet to prioritising a production plan for custom based Kitchen and specific builder requirement.
Along with the custom made kitchens, The company also have engaged into a number of low volume contracts from the builders to supply small and specific builders ensuring high quality and standardised kitchen cabinets. Because of this, Classic Cabinets adopted the strategy of batch manufacturing method of production for builders and mass production for custom made kitchens.
Though the company has leveraged in acquiring handful of contracts for specific designs and regular , usual models, they haven't designed a plan for optimising the machine usage and man power usuage with minimal breakdowns. Initially, machines were simultaneously utilised for manufacturing both the custom and builders kitchen cab requirements, later when the orders began to rush in, this strategy lead to the stretching of delivery deadlines, unnecessary accumulation of raw materials etc. This further pushed up the operating expenses and began to affect the profits.
The effect of the new builders' kitchen line on Classic Cabinets' operations (problem definition)
Though, the new builders' kitchen line had made a remarkable effect on the quantity of orders, later, it had adversely effected the overall production and operation management.
Initially the builders orders supported the machines to operate successfully, later, the same machines with man power without any further expansions began to crumble. This made a dent in the commitment in maintaining the supply deadlines. More over, raw materials were purchased and stocked in bulk. This, coupled with the delay in supplies affected the profits negatively. Since the same machines were used to manufacture the orders from Builders, the delivery schedule began to stretch. This lead to the delay in the cash flows from market.
Since builders succeeded in price negotiations, the net profit realized from this segment became too low as compared with the profits made from custom supplies. The stringent quality standards imposed by builders forced the company to resort to higher inventory of highly paid stocks. Since no effective warehouse management system was followed, the factory has finally become a dumping centre. This coupled with unfinished products forced the company to acquire another warehouse with high rent. Instead of supporting the bottom lines of profits, the builders' orders actually became a threat to the overall operational viability and profits to the company.
The daily operational decisions that Chinh Chu has to make under the current operating conditions to maintain effective production (day-to-day operational issues).
Chinh has to concentrate in four important areas to rationalize the production. First, she has to prioritize which ratio of Custom kitchen cabs vis-a vis builders order would be helpful to sustain in long term, Secondly the financial implications, third the inventory and the fourth is the reduction of delivery time.
Prioritizing the production ratio of Customised kitchen cabinet Vs Builders:
Though orders from both segments grown together, with limited production capacity of the machines, she has to find the best ratio or look for additional investments in machine and skilled men. While the second option involves hefty capital investments, she has to better opt for first one, temporarily.
The profits are better in the customised segment than the builders. But builders too did belong to the growing segment which can't be overlooked totally. Hence the best option is to schedule the day for the customised kitchen cabs and engage additional workers for night for Builders needs. She can accept the orders based on this plan.
If this plan doesn't seem viable, she may subcontract the basic work with stringent benchmarks in quality. This will help her to the optimum utilization of the machines and men without any breakages. Moreover, this will considerably reduce the lead time in supplies too where she can take this as an advantage in the price negotiations next time. The rush to locate further space for storage can also be avoided.
For Managing the inventory and warehouse, she must carefully implement an inventory management system.
Inventory Management: "INVENTORY is defined as the blocked Working Capital of an organization in the form of materials"( Indian Institute of Material Management).
The inventory should be maintained judiciously by taking care the market needs and normal fluctuations in demand and supply. Escalating price variation of the raw materials should also be considered while planning the buffer stocks (ibid).
" The Inventory Management system provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers " (ibid).
The recent technological changes, accessibility across the globe for creating market demand and exploring greater opportunities, the growth of global sourcing , etc made the companies to relook on the their approach to Inventory Management and the process for Inventory Control . It must consider the important factors like Company's goal, sales tgts, and production and operation planning, along with Material needed (ibid).
Inventory control or Stock Control mainly aims to minimize the total cost of inventory. As Arsham (n.d.) points out, the three main factors in inventory control process are The cost of stocks in hand, The cost of placing fresh order, and third is the cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand though this is tough to measure.
The ABC Classification As per this, items are grouped together based on the annual sales volume to locate the smaller number of items which will have higher contribution on sales volume. These items are the most prioritized to control for better inventory management (ibid).
Reorder Point: The Reorder point R in the inventory level will decide when an order should be placed. R = D.L, D = demand rate (demand rate period (day, week, etc), and L = lead time Safety Stock: Inventory available with the company between the time when an order is placed and stock is supplied. Safety Stock is kept to avoid shortages (ibid).
Two accounting practices generally followed in Inventory Management are FIFO and LIFO. While FIFO means First come, First Out means the oldest inventory is sold first, LIFO means last comes first out.
" This would be a typical stocking method for items that have no 'sell-by' date associated with them, or at least one that is in the distant future, such as canned goods " (Harmon, 2011).
While FIFO means First come, First Out means the oldest inventory is sold first, LIFO means last comes first out.
" Perishable items such as milk and eggs are restocked from the back, so that the old items are pushed to the front and are the first selected by shoppers; this is a FIFO restocking method " (ibid). As Murray (n.d.) states, by using the FIFO Method, at the end of the year, the inventory will be having the most recently produced goods and vice versa with LIFO.
If the cost of item is found increasing, LIFO will help in the assumption of cost flows.
Warehousing is the place where the goods are being stocked (Warehousing).
Warehouse Management System (WMS) according to Piasecki (2011), is the one, to channelize the movement of goods or materials within a warehouse.
" The role of WMS is expanding to including light manufacturing, transportation management, order management, and complete accounting systems " (ibid).
Key Benefits of WMS: - The implementation of a WMS will help to maintain the needed stocks in inventory apart from reducing unnecessary labor related expenses. This also offers better service to the customer by reducing cycle times (ibid).
By implementing WMS, a reduction in inventory with an enhanced storage capacity may happen. "The predominant factors that control inventory levels are lot sizing, lead times, and demand variability" (ibid)
Since the implementation of WMS is an additional layer of technology, there is an additional overhead too.This may also invite additional problems too. Yet, in the era of intense competition and wafer thin margins, implementation of an effective WMS does usher the corporate ability to provide better service to the customers to remain highly competitive (ibid).
The effect the move to producing builders' kitchens might have on the company's financial structure. (Broader organisational issues caused by operational problems).
This has a long term binding on the overall functions of the company. The strict, stringent and highly price sensitive builders had given less flexibility in design. The growth of orders from builders resulted into the accumulation of huge stock of raw materials and blockage of money. Further, this began affecting the supplies of not only builders' category but to the better profit supported custom category too. Further stretching in supplies of finished product will affect the orders from the main line - Customised Kitchen Cabinets. This will force the clients to look for competitors products too.
The overall liquidity status of the firm also slips to danger due to increased investment in inventory of raw materials, unfinished products etc.. Moreover, the speed of cash flow from market gets adversely affected due to the stretched delivery schedules. The operating expenses were further escalated with the acquirement of extra space with higher rental.
For any company, in the growth, this is the most crucial point which either makes the success or breaks the sustainability. The higher usage of same machines and men, with same process of production to cater the enhanced orders will lead to the breakdown of machines and men. This will affect the overall craftsmanship and quality. Machine breakages will lead to higher investments in capital, which is risk in fast changing phase of technology. Company will be forced to relook the process of production or any sort of technological changes with higher investments in capital and in enhancing the skills of the labour with wages. This may lead to additional burden of sourcing fund.
Unless the company prefer for right mix of Custom orders with Builders, it can't sustain in the market for long time. They should be prepared to implement a well designed turnaround strategy if things go haywire.