I was asked to determine which method for Shuzworld to consider when manufacturing its sneaker. The options are to recondition equipment, the Shanghai plant will acquire new equipment, or manufacturing will be outsourced to China. Reconditioning existing equipment presents a fixed cost of $50,000. For every 1,000 sneakers, there was a $1,000 variable cost. Purchasing new equipment has a $200,000 fixed cost and $500 variable costs for every 1,000 sneakers made. Outsourcing does not have any fixed costs and has a $3,000 variable cost per 1,000 sneakers produced. Reconditioning the equipment is the most appropriate for volumes from 26-300 shoes. Purchasing new equipment was appropriate for a volume of more than 300 shoes. Outsourcing was only beneficial for volume under 25 shoes. I used the cost-volume analysis to determine the most appropriate method. This analysis method allowed us to find the technique that will allow for revenue with a certain amount of volume, at a certain cost.
The breakeven point for recondition versus purchasing new was with 300 units and $350,000. The breakeven point for recondition vs outsourcing was with 25 units and $75,000. The breakeven point for purchasing new vs outsourcing was with 80 units and $240,000. My recommendation is for Shuzworld to purchase new equipment. The fixed cost for this would be $200,000, but the variable cost is only $500 for every 1,000 sneakers. This will allow Shuzworld to save money on future productions, with a lower variable cost than the other two methods. The next task required the production of a sales volume forecast. The future forecast is as follows: $12,861.10 for period 10, $125,544.40 for period 11, $139,227.80 for period 12, $132,911.10 for period 13, $136,594.40 for period 14, $140,277.80 for period 15, $143,961.10 for period 16, $147,644.40 for period 17, $151,327.80 for period 18, $155,011.10 for period 19, $158,694.40 for period 20, and $162,377.80 for period 21.
This shows the continuous growth in revenue for the company in the next 11 periods. The least squares tool gave the following forecast results. The bias was -0.001. There was a mean absolute deviation of 4183.951. with a mean squared error of 23,356,180. There was a standard error of 5479.907. The mean absolute percent error was 3.945%. The regression line is Demand (y)=85027.78 +3683.333(Time(x)). The correlation coefficient is 0.891, with a coefficient of determination of 0.795. The exponential smoothing with trend method gave the following results. The bias was 5061.433. The mean absolute deviation was 5785.458. The mean squared error was 57418420. The standard error was 8749.737. The mean absolute percent error was 5.253%. According to both methods, the least squares method gave more accurate results. The percent error was also lower in this method (3.945% instead of the 5.253% with exponential smoothing). The usage of control charts will be beneficial for Shuzworld.
These charts provide a graphical model to keep production variations separate. One of the types of variations are natural, meaning they occurred by chance. These occurances are considered under control as long as they limit production on a small basis. Assignable variations include things like equipment failure or employee issues that can be assigned to a certain person or item. These will also cause a decline in production or quality. A control chart can be implemented by sampling several shoes off of the production line and checking them for quality and any other factors that may have affected production. Bench marks can be created by documenting these results over a certain period of time. Corrections can be made whenever the bench marks are viewed to be out of control. An upper control limit of 10.375 and a lower control limit of 9.625 was set for the Sole Height Samples.
Two samples found to be above the limits set were 10.8 inches and 10.6 inches. These are considered to be out of control and would be investigated to see if corrections need to be implemented. The other 14 sample points are within the limits set, and would be considered natural variations. The other control chart provided was for the Eyeletting Fraction Defective. An upper control limit was set to be 0.125 and the lower control limit was set as 0. There was two sample points that were above the upper control limit (0.127 with operator 13 and 0.14 with operator 20). These would be assignable variations, since they occurred with specific operators and could be monitored accordingly. The other 18 sample points were natural variations, since they occurred withing the limits set. Shuzworld must monitor production quality and productivity in order to remain a profitable company. Utilizing these control charts enables them to monitor this productivity and identify areas that will need some corrective actions.
Heizer, J., & Render, B. (2011). Operations Management (10 ed.). Prentice Hall.