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OSCM Assignment 6 - Reducing Waste vs. Price Increase

In a competitive marketing environment for consumer products, manufacturers are not allowed the luxury of raising selling prices to increase profits. This environment makes it difficult to increase sales unit volume without increasing very costly marketing expenses. Without price increases and sales volume increases, it is the job of top management decision makers to find other ways to increase profitability – they turn to Continuous Improvement.

Background:

We manufacture and distribute W&Ws, candy coated chocolate spheroids, in assorted colors. We plan and schedule 1200 cases per 8 hours.   Breaking down our standard cost of sales for our product, W&Ws, packaged in 3.75 ounce bags, 24 bags to a box, we find:

Labor:

88 hourly workers; $15.00 per hour, 8 hours per day, 5 days per week, 50 weeks per year, no overtime.

24 salaried managers @ $39,000 per year

Ingredients:

Chocolate; 2.0 ounces per bag, @ $9.99 per pound

Hard candy coating; 1.75 ounces per bag @ $6.55 per pound

Caffeine; 1 grams per bag; priced @ $300 per kilogram.

Packaging: One 3.75 ounce bag @ $.005, and one shipping case (each case contains 24 bags) @ $.120.

Overhead per 8 hour shift: $5600

Variances: Yesterday’s Production Variance Reports show we overused hourly labor by 3.8%; candy bags by 4.9%; chocolate by 4.9% and candy coating by 4.9%. Caffeine’s reported usage was unfavorable by 11%. Actual production was 1200 cases of W&Ws.

Margin: We currently have a 35% gross margin (gross selling price minus standard cost of sales).

Your assignments:

  1. Calculate the standard cost for one (1) 3.75 ounce bag of W&Ws (100% yield, no waste).

  1. Calculate the standard cost for 1200 cases (one day’s production).
  1. Calculate the sales dollar value for one (1) day’s production (1200 cases) and the margin dollars from those sales (standards).
  1. What is the dollar value of all the variances listed above?
  1. If we can reduce the material variances by 20%, assuming these variances for all 250 days of operation, how much waste will we save in one (1) year?
  1. How many dollars of sales are needed to yield the same margin dollars as the 20% variance reductions?
  1. The easy part for Management is calculating the costs, variances, margins, etc. You can get “bean counters” to do that for you, with a little practice. The hard part is to put into place an action plan to reduce all forms of waste.

Based upon everything you read in this problem, prepare your step by step action plan for reducing waste and expenses. Tell me what things you questioned when analyzing the W&W cost structure. What do you think is happening out on the factory floor? Be specific and provide your critical thinking process. There are no incorrect assumptions, just some better than others.

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