978-0077835439 Lawn King Case

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

1

Synopsis and Purpose

Lawn King is a manufacturer of lawn mowers facing a highly seasonal demand for its products.

At the present time the demand forecast for the coming year has just been increased. This is

Discussion Questions

1. Develop a forecast to use as a basis for S&OP.

2. Develop an S&OP plan by month for fiscal 2015. Consider the use of several different

production strategies. Which strategy do you recommend? Hint: Use of Excel will

The projected increase from FY14 to FY15 is:

Thus a larger increase is being projected than was experienced last year.

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

2

For purposes of analysis we will accept the new forecast of 110,000 units. Although the

projected demand increase is larger than last year’s actual increase, the forecast still appears

reasonable. It may be, however, that marketing is attempting to drive production through a

higher forecast to avoid stockouts. Therefore, we may wish to evaluate a somewhat lower

forecast, as well as the one given in the case.

To construct an S&OP plan we need to forecast aggregate demand by month. This can be

done by assuming the same monthly pattern as last year. From exhibit 4 in the case, the

percentage of annual sales by month can be calculated. These percentages are then multiplied

by the total forecast (110,000) to arrive at monthly demand forecasts. (See Exhibit 1 of the

teaching note.)

While a turnover of 6.7 might be considered good, the inventory level should ideally be

compared to the demand at the end of the year. Since the demand is seasonal, our goal should

be to have 1 or 2 months of inventory at year-end as a safety stock. More inventory is not

necessary, since all models are still in production and we can respond to changing demand

conditions. One month of inventory would amount to 1216 units (the projected demand for

September). Two months of inventory would be 3698 units, the demand for September and

October. By this criterion, a great deal of excess inventory exists. Therefore, we will assume

an 8/31/11 goal of 3700 units (2 months supply) of inventory for the remainder of this analysis.

Adjusting for the inventory change, we have a production requirement of 97,240 units.

Forecast

110,000

Beginning Inventory

– 16,460

Ending Inventory

+ 3,700

Production Required

97,240

There are many alternative strategies to consider. For the sake of simplicity we shall consider

four strategies.

1. Level production

2. Level production with overtime

3. Chase demand

4. Two shifts

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

3

The level production strategy is shown in Exhibit 1 attached. A level of 100 workers is used for

September through February. This level is then phased down to 85 and then to 49 workers at

the end of the year in order to reach an ending inventory of about 3700 units. It is not possible

to use a completely level strategy in this case without significant stockouts or a larger ending

inventory than desired. Thus an arbitrary initial level of 100 workers is selected with a reduction

in work force later in the year. Other levels could also be selected.

The second strategy, shown in Exhibit 2, is a level strategy with overtime. In this case we

choose a level of 85 regular workers through May, and then phased down to 52 workers at the

end of the year to achieve an ending inventory level of 3700 units. Overtime is used in the

months of December through May to meet the peak demands. Other profiles of level production

and overtime could be selected.

Note, the ending inventory in all strategies should be the same in order to insure a comparable

basis of costing. Students often overlook this point and, as a result, arrive at very different cost

estimates.

The third strategy is to chase demand as shown in Exhibit 3. The chase strategy matches

demand in Sept through Feb. Then a maximum of 200 workers in used in March and April while

inventory is worked off and the level of workers is phased down to chase demand and end the

year with 3700 units.

The fourth strategy is a two-shift strategy, shown in Exhibit 4. This strategy starts with a level of

60 workers in Sept through Dec (first shift) and then doubles the level of workers to 120 (second

shift) from Jan through May. The second shift is phased down to arrive at the same ending

inventory as the rest of the strategies.

In order to evaluate these four strategies we will need to make various assumptions about costs

and resources. The first assumption is the nominal production rate of a worker in a month.

Using the data from Exhibit 4 in the case, an average daily production of 373 units is computed

as the following weighted average:

Since there are 260 production days in a year (52 weeks x 5 days per week), the average

monthly production is 8,082 units:

The initial variable work force level is 85 workers (excludes 10 maintenance and 5 office

workers). The production per direct (or variable) worker is therefore:

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

The hiring cost per worker is $800 and the layoff cost is $1500 per worker as given in the case.

To calculate inventory carrying cost, we need to know the cost of producing a unit. Using labor

and material costs for FY10, we arrive at a unit cost of:

This unit cost is multiplied by 2.5% a month carrying cost (30% a year) to arrive at

$3.125 per unit per month

This unit carrying cost is multiplied by the total inventory carried to arrive at the inventory

carrying cost for each month.

The direct labor cost per hour is obtained by taking the direct labor costs from the Profit and

Loss Statement (Exhibit 1 in the case) and dividing by the number of direct workers (85) times

2000 hours per year as follows:

The overtime rate is 150% of direct labor and thus the overtime rate is 150% times $15.30 =

$23.00 per hour.

In order to calculate the costs of each strategy we use the spreadsheet (file named LAWNKING)

for this case on the website for the textbook. The above cost numbers are input into the

spreadsheet for all of the strategies. Then each strategy is evaluated, one at a time, as shown

in Exhibits 1 to 4.

The result of these cost evaluations is as follows:

Strategy 1: Level

$3,414,411

Strategy 2: Level with Overtime

$3,360,109

Strategy 3: Chase

$3,425,407

Strategy 4: Two-Shift

$3,290,880

As noted above, the two-shift strategy has the lowest cost, by about $70,000 per year, over the

level with overtime strategy. The two-shift strategy is the cheapest, because overtime is more

expensive and it is relatively expensive to hire and lay off workers. In a sense the two-shift

strategy does the best job of fitting the demand profile by using regular workers.

The two-shift strategy not only offers cost advantages, but more flexibility and less inventory risk

than the level strategy. The two-shift strategy is therefore preferred to the level strategy,

provided employees can be found to work a second shift for only part of the year.

While the use of level strategy with overtime is more attractive than a pure level strategy, the

flexibility to meet further demand increases is no longer available once overtime is built into the

S&OP. Especially in view of the fact that a large amount of overtime is needed for strategy 2.

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

5

The two-shift strategy is also preferred to the chase strategy because it not only costs less but

requires less personnel turmoil. Hiring and layoff is only done once for the two-shift strategy

rather than frequently throughout the year. The chase strategy also implies that the production

line can be easily speeded up and slowed down, while the two shift strategy provides for a

constant line speed.

I think the above arguments provide a compelling case for the two-shift strategy. Lively

arguments can be constructed, however, because the company can “squeak by” without using a

second shift. Also, the two-shift strategy might not be entirely obvious to some students as an

option that should be evaluated.

Teaching Strategy

This case can be taught using the same order of discussion as the above analysis: forecast,

alternative strategies, costing, and recommendation. The case will take one hour or more to

teach depending on how much analysis is put on the board and how much discussion is

encouraged.

This case provides practice in formulating and evaluating S&OP strategies. Management is

facing a dilemma because the sales manager has pushed the forecast a little beyond a one-shift

operation, unless large amounts of overtime or hiring and layoff are used. The demand here is

also very seasonal so flexibility in addition to cost is an important issue in S&OP planning.

There is also the question of how much inventory to carry at the end of the year.

When assigning the case, the students should be warned not to engage in excessive number

crunching. Students can easily become bogged down in developing one schedule after

another, while not reaching a sound conclusion.

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

EXHIBIT 1 (LEVEL STRATEGY)

FILENAME: LAWNKING

NAME:

KEY

*

SECTION:

*

BASIC INPUT DATA

DATE:

03-Apr

=

MONTHLY PROD. RATE (UNITS/WORKER/MONTH):

95

UNITS

BEGINNING INVENTORY (UNITS):

16460

UNITS

BEGINNING NUMBER OF WORKERS:

85

WORKERS

HIRING COST PER WORKER:

$800

LAYOFF COST PER WORKER:

$1,500

INVENTORY HOLDING COST ($ PER UNIT PER MONTH):

$3.13

INVENTORY SHORTAGE COST (COST/UNIT SHORT) :

$0.00

REGULAR HOURLY WAGE RATE:

$15.30

OVERTIME HOURLY WAGE RATE:

$23.00

HOURS/MONTH:

160

MONTH

SEPT.

OCT.

NOV.

DEC.

JAN.

–

Sales Forecast:

1,216

2,482

4,677

5,970

6,950

Units Produced:

9500

Ending Inventory:

24744

31762

36585

40115

42665

Number of Workers:

100

Overtime Percent:

0%

Total Equivalent

number of workers:

100

(# workers + O.T.)

Reg. Labor Costs:

$244,800

O.T. Labor Costs:

$0

Change in # workers

from last month:

15

0

Hiring Cost:

$12,000

$0

Layoff Cost:

$0

End-Inv. Hold. Cost:

$77,325

$99,256

$114,328

$125,359

$133,328

End-Inv. Short. Cost:

$0

–

MONTHLY TOTAL COST:

$334,125

$344,056

$359,128

$370,159

$378,128

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

7

EXHIBIT 1 (continued)

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

–

10,877

23,185

24,642

15,743

6,598

4,299

3,352

9500

8075

5700

4655

41288

26178

9611

1943

1045

2446

3749

100

85

60

49

0%

100

85

60

49

$244,800

$208,080

$146,880

$119,952

$0

0

–15

0

–25

0

–11

$0

$22,500

$0

$37,500

$0

$16,500

$129,025

$81,806

$30,034

$6,072

$3,266

$7,644

$11,716

$0

–

$373,825

$312,386

$238,114

$214,152

$187,646

$154,524

$148,168

STRATEGY DESCRIPTION & ASSUMPTIONS

=====================

=========

LEVEL STRATEGY

THIS IS A CLASSICAL LEVEL STRATEGY WITH A REDUCTION IN THE LEVEL

TOWARD THE END OF THE PLANNING PERIOD IN ORDER TO ARRIVE AT AN

ENDING INVENTORY OF 3700 UNITS. THE INITIAL WORK FORCE IS

ARBITRARILY SELECTED TO BE 100 WORKERS.

$3,414,411

TOTAL COST OF THIS STRATEGY

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

8

EXHIBIT 2 (OVERTIME)

MONTHS:

SEPT.

OCT.

NOV.

DEC.

JAN.

Sales Forecast:

1,216

2,482

4,677

5,970

6,950

Units Produced:

8075

9206

Ending Inventory:

23319

28912

32310

35546

37801

Number of Workers:

85

Overtime Percent:

0%

14%

Total Equivalent

number of workers:

85

96.9

(# workers + O.T.)

Reg. Labor Costs:

$208,080

O.T. Labor Costs:

$0

$43,792

Change in # workers

from last month:

0

Hiring Cost:

$0

Layoff Cost:

$0

End-Inv. Hold. Cost:

$72,872

$90,350

$100,969

$111,080

$118,128

End-Inv. Short. Cost:

$0

–

MONTHLY TOTAL COST:

$280,952

$298,430

$309,049

$362,952

$370,000

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

–

10,877

23,185

24,642

15,743

6,598

4,299

3,352

9206

7125

5700

4940

36130

22150

6714

176

703

2104

3692

85

75

60

52

14%

0%

96.9

75

60

52

$208,080

$183,600

$146,880

$127,296

$43,792

$0

0

–10

–15

–8

$0

$15,000

$22,500

$12,000

$112,905

$69,219

$20,980

$550

$2,197

$6,575

$11,538

$0

–

$364,777

$321,091

$272,852

$252,422

$200,797

$175,955

$150,834

STRATEGY DESCRIPTION & ASSUMPTIONS

LEVEL WITH OVERTIME

THIS IS A LEVEL STRATEGY WITH OVERTIME USED TO AVOID STOCKOUTS.

SOME WORKERS ARE LAID OFF AT THE END OF THE PLANNING PERIOD TO

ACHIEVE AN ENDING INVENTORY OF 3700 UNITS.

$3,360,109

TOTAL COST OF THIS STRATEGY

LAWN KING, INC.:Sales and Operations Planning

Teaching Notes

EXHIBIT 3 (CHASE STRATEGY)

SEPT.

OCT.

NOV.

DEC.

JAN.

Sales Forecast:

1,216

2,482

4,677

5,970

6,950

Units Produced:

1235

2470

4655

5985

6935

Ending Inventory:

16479

16467

16445

16460

16445

Number of Workers:

13

26

49

63

73

Overtime Percent:

0%

Total Equivalent

number of workers:

13

26

49

63

73

(# workers + O.T.)

Reg. Labor Costs:

$31,824

$63,648

$119,952

$154,224

$178,704

O.T. Labor Costs:

$0

Change in # workers

from last month:

–72

13

23

14

10

Hiring Cost:

$0

$10,400

$18,400

$11,200

$8,000

Layoff Cost:

$108,000

$0

End-Inv. Hold. Cost:

$51,497

$51,459

$51,391

$51,438

$51,391

End-Inv. Short. Cost:

$0

–

MONTHLY TOTAL COST:

$191,321

$125,507

$189,743

$216,862

$238,095

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

–

10,877

23,185

24,642

15,743

6,598

4,299

3,352

10830

19000

13300

6650

3800

3325

16398

12213

6571

4128

4180

3681

3654

114

200

140

70

40

35

0%

114

200

140

70

40

35

$279,072

$489,600

$342,720

$171,360

$97,920

$85,680

$0

41

86

0

–60

–70

–30

–5

$32,800

$68,800

$0

$90,000

$105,000

$45,000

$7,500

$51,244

$38,166

$20,534

$12,900

$13,063

$11,503

$11,419

$0

–

$363,116

$596,566

$510,134

$445,620

$289,423

$154,423

$104,599

STRATEGY DESCRIPTION & ASSUMPTIONS

CHASE STRATEGY

THIS IS A CLASSIC CHASE STRATEGY. MAXIMUM WORK FORCE IS LIMITED

ARBITRARILY TO 200 WORKERS WHICH REDUCES THE INVENTORY IN PEAK

PERIODS TO ACHIEVE AN ENDING INVENTORY OF 3700 UNITS.

$3,425,407

TOTAL COST OF THIS STRATEGY

Teaching Notes

10

EXHIBIT 4 (TWO-SHIFT STRATEGY)

SEPT.

OCT.

NOV.

DEC.

JAN.

–

Sales Forecast:

1,216

2,482

4,677

5,970

6,950

Units Produced:

5700

11400

Ending Inventory:

20944

24162

25185

24915

29365

Number of Workers:

60

120

Overtime Percent:

0%

Total Equivalent

number of workers:

60

120

(# workers + O.T.)

Reg. Labor Costs:

$146,880

$293,760

O.T. Labor Costs:

$0

Change in # workers

from last month:

–25

0

60

Hiring Cost:

$0

$48,000

Layoff Cost:

$37,500

$0

End-Inv. Hold. Cost:

$65,450

$75,506

$78,703

$77,859

$91,766

End-Inv. Short. Cost:

$0

–

MONTHLY TOTAL COST:

$249,830

$222,386

$225,583

$224,739

$433,526

FEB.

MAR.

APR.

MAY

JUNE

JULY

AUG.

–

10,877

23,185

24,642

15,743

6,598

4,299

3,352

11400

8550

4750

4180

29888

18103

4861

518

2470

2921

3749

120

90

50

44

0%

120

90

50

44

$293,760

$220,320

$122,400

$107,712

$0

0

–30

–40

–6

$0

$45,000

$60,000

$9,000

$93,400

$56,572

$15,191

$1,619

$7,719

$9,128

$11,716

$0

–

$387,160

$350,332

$308,951

$295,379

$273,039

$191,528

$128,428

STRATEGY DESCRIPTION & ASSUMPTIONS

A TWO-SHIFT STRATEGY IS USED TO CLOSELY MATCH DEMAND. THE FIRST

SHIFT PROVIDES A TOTAL OF 120 WORKERS. SOME WORKERS ARE LAID-OFF

AT THE END OF THE PLANNING PERIOD TO ARRIVE AT 3700 UNITS IN

INVENTORY.

$3,290,880

TOTAL COST OF THIS STRATEGY