Case Study Covolo Diving Gear Part 2 June 15, 2006

Case Study Covolo Diving Gear Part 2june 15th 2006 It Had Been Tw

Case Study Covolo Diving Gear, Part 2 June 15th, 2006– It had been two weeks since their contentious semi-annual planning meeting, and the senior staff for Covolo Diving Gear were getting ready to start their first monthly S&OP meeting. Gina Covolo, CEO, got the ball rolling: “I know it’s been a busy two weeks for all of you, and I appreciate you working extra time to get ready for this meeting. Production is already set for the next two months, so we’re going to start by planning for this September through the following August. I’ve had Patricia from marketing develop a sales forecast for these twelve months, and I’ve also had David from manufacturing estimate manufacturing costs and labor requirements, as well as capacity in the plant.

Mary from HR was also good enough to come up with some estimates of how much it costs to hire and train new workers, as well as the cost of laying off folks. Finally, Jack from purchasing was able to get the accounting folks to estimate the cost of holding a gauge set in inventory for a month. So let’s see what we’ve got.” Mary passed out the following information to all of the attendees: Month Sales Forecast September 30,000 gauge sets October 31,500 November 35,000 December 37,000 January 34,000 February 18,000 March 17,500 April 27,000 May 38,000 June 40,000 July 42,000 August 40,000. Manufacturing costs per gauge set: $74.50. Holding cost: $8 per gauge set, per month. Average labor hours required per gauge set: 0.25 hours. Labor hours available per employee, per month: 160. Plant capacity: 35,000 gauge sets per month. Cost to hire and train a new employee: $1,250. Cost to lay off an employee: $500.

Questions:

1. Develop a level production plan for Covolo Diving Gear. What are the advantages and disadvantages of this plan? Could Covolo implement a pure chase plan, given the current capacity? Why or why not? If sales continue to grow, what are the implications for production capacity at Covolo?

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Paper For Above instruction

The case study of Covolo Diving Gear illustrates the application of production planning strategies within a manufacturing environment facing fluctuating demand. Developing an effective production plan is crucial to balance operational efficiency, inventory costs, and capacity constraints. This paper proposes a level production plan, assesses its advantages and disadvantages, explores the feasibility of a chase strategy under current capacity, and discusses future implications stemming from ongoing sales growth.

Development of a Level Production Plan

A level production plan involves maintaining a steady production rate across the planning horizon, regardless of fluctuating demand levels. Based on the given data, Covolo Diving Gear's annual forecast totals 377,500 units, averaging approximately 31,458 units per month (sum of monthly forecasts divided by 12 months). To implement a level plan, the company would produce approximately 31,500 gauge sets each month, aligning with the average demand.

This approach requires setting a consistent production rate of 31,500 units, utilizing the plant capacity of 35,000 units per month. The surplus capacity can be used to build inventory during months with lower demand or to accommodate potential demand increases. Inventory levels accumulate during months where production exceeds demand and are depleted during months where demand surpasses production, resulting in a smoothing of production activities and inventory fluctuations.

To understand the cost implications, the inventory holding cost at $8 per gauge set per month and production costs of $74.50 per unit are considered. The consistent production rate minimizes variation in labor scheduling, simplifies operational planning, and stabilizes workforce levels, avoiding costly hiring and layoffs.

Advantages and Disadvantages of the Level Production Plan

Advantages

• Workforce Stability: Maintains a consistent workforce size, reducing hiring and layoff costs, and ensuring employee morale and productivity are stable.
• Operational Efficiency: Simplifies scheduling, reduces equipment wear and tear, and facilitates better use of machinery and labor.
• Inventory Buffering: Produces surplus during low-demand months, creating inventory to meet higher demands later, improving customer service levels.

Disadvantages

• High Inventory Costs: Excess production during low-demand periods leads to increased inventory holding costs, which can accumulate significantly over time.
• Demand Mismatch Risks: If demand is unexpectedly low, excess inventory can become obsolete or costly to store.
• Potential Cash Flow Issues: Tying up capital in inventory can strain financial resources, especially if sales do not match projections.

Feasibility of a Pure Chase Strategy

A chase demand strategy involves aligning production output precisely with demand fluctuations, minimizing inventory holdings. Given Covolo's current capacity of 35,000 units per month, implementing a pure chase plan is feasible only if demand remains within this limit. Most months' forecasts are below this capacity, with the exception of peak months like July and August, which demand 42,000 and 40,000 units respectively.

During demand peaks exceeding 35,000 units, Covolo cannot solely rely on its current capacity unless overtime, external procurement, or additional shifts are considered. For months with demand below 35,000, a chase strategy would mean adjusting workforce size through hiring or layoffs accordingly. However, frequent hiring and layoffs introduce additional costs and operational challenges, which may offset the benefits of inventory reduction.

Moreover, the variability in demand and the associated lead time for hiring or laying off personnel complicate the implementation of an effective chase plan. Thus, while feasible for most months, a pure chase strategy would need to incorporate capacity adjustments, such as overtime or temporary labor, during peak months.

Implications of Continued Sales Growth

If sales continue to grow beyond current projections, Covolo Diving Gear will encounter capacity constraints. The existing plant capacity of 35,000 units per month limits the ability to meet increased demand without expansion. This would necessitate investments in additional machinery, labor force, or process improvements to increase capacity.

Failure to expand capacity could lead to lost sales opportunities, customer dissatisfaction, and increased backlog, undermining the company's competitive position. Strategic planning must therefore anticipate this growth, factoring in capacity upgrades or alternative production strategies like outsourcing or shift extensions.

Furthermore, continual growth necessitates revisiting the cost structure, particularly labor and inventory costs, as increased production could elevate operating expenses. Balancing capacity expansion with cost efficiencies will be critical for sustaining growth and profitability.

Conclusion

In conclusion, a level production plan offers stability and operational efficiencies but comes with higher inventory costs, making it suitable when demand is relatively predictable. A pure chase plan is partially feasible given current capacity but limited during peak demand months unless capacity is expanded. As sales grow, Covolo must strategically enhance capacity and optimize operational strategies to meet increased demand, ensuring competitive advantage and financial sustainability.

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