Business and Management

CENTRAL PHILIPPINE UNIVERSITY

School of Graduate Studies, College of Business and Accountancy
A CASE ANALYSIS
ON
CHADS CREATIVE CONCEPTS
Presented to
JOHN E. TAMPO
Professor
In Partial Fulfillment of the Requirements
in
MBA 723- Production and Operations Management
Submitted by
Ardaa, Kris Diane
Dacayo, Leslie
Espera, Cindy
Espinosa, Brix
Farren, Su Sherrie
Phan, Nghia Trong
Sugalam, Junie
December 6, 2014
CASE No. : 1
TITLE : Chads Creative Concepts
I. TIME CONTEXT
This business situation should be resolved in the next business cycle (at least, 1 year).

II. POINT OF VIEW

Chad Thomas, founder and owner of Chads Creative Concepts, hired a consultant to do management advisory
services and has over 10 years of experience in management accounting for manufacturing concerns. This is based on
the consultants sound advises.
III. STATEMENT OF THE PROBLEM
Chads Creative Concepts sales figures may be increasing for both product lines however, the Accounting department
confirmed that the profit is not doing well. This case analysis is aimed at determining the best production decision and
corresponding business strategies for Chad's to maximize operational profit.
IV. SECONDARY PROBLEMS
None
V. OBJECTIVES
1. To maximize sales potential (100%) from producing wooden furniture pieces within the next business year.
2. To minimize cost of production and carrying costs as to material inputs
(low or zero raw materials inventory) and work-in-process inventory
(lowor zero) for the next business year.
3. To optimize current normal capacity of production and manufacture the best mix which would maximize profit by
next business year.
4. To reduce slow-moving inventory to none by end of next business year.
5. To assess the current overall impact of manufacturing standard product line in terms of sales, expenses and profits.
6. To continue its growth and maintain its creative designs and high-quality workmanship to satisfy customers.
VI. AREAS OF CONSIDERATION
A. Strengths, Weaknesses, Opportunities, Threats (SWOT)
STRENGTHS:
1. Flexibility in Production of Both Product lines
The firm is able to produce two product lines (Custom-made and Standard furniture pieces) with only limited
resources: Single manufacturing plant, one machinery, same number of laborers/production personnel.
2. Competent Sales and Marketing Department
The products (Custom-made and Standard furniture pieces) that the firm produces are readily marketable and market
revenues are increasing for both lines. Sales of custom-made furniture remain strong. Also, sales of standard pieces
furniture are steadily increasing.

3. Solid reputation for innovative designs and high-quality workmanship.

The company has already established a reputable furniture business in terms of creative designs and excellent
workmanship.
WEAKNESSES:
1. Limited Equipment/Machinery Production Capacity
Only one equipment / machinery (GPM- general purpose machine) is available to produce both product types
(Custom-made and Standard furniture pieces)
2. Limited Labor Resources
Same group of laborers/production personnel does the manufacturing of both products.
3. Only One Manufacturing Plant
A single manufacturing plant is being used to meet production requirements and the plant is being utilized at its full
capacity.
4. Poor Production Scheduling
Other than the limitations in the equipment, manufacturing plant and labor resources, due to poor production planning,
unexpected orders for customized furniture pieces require the firm to stop processing standard pieces even in the
middle of production. This is to prioritize manufacturing of new orders of custom-made products. This has adversely
affected the ability of the firm to meet lead times committed to deliver standard pieces.
5. Unprofitable Operations
The firm has increased sales and has penetrated a new market niche (standard furniture pieces) however, operations
remains unprofitable According to Accounting the firm must have not set the Selling Price appropriately to cover for
the costs and generate profit or, the Variable Unit Costs of production might be too high.
6. Existence of Slow-Moving Inventory items Raw Materials and Work-in-Process
Partly due to several reasons e.g., pending production process for Standard pieces, untimely ordering of raw materials,
production plan schedule not strictly managed and followed, etc., there is accumulation of slow-moving items in
inventory (Raw Materials and Work-in-Process) which ties up some current assets (e.g., cash).
OPPORTUNITIES:
1. Increasing Demands for Both Products
Customers demand or sales for both products are increasing.
2. Ability to Generate Higher Sales Revenue for Custom-made pieces
3. Ability to Capture Other Market Niche

THREATS:
1. Increasing Costs for Producing Standard Pieces
This could be the reason why, Customized pieces have higher profit margin than Standard pieces.
2. Customers for Standard Pieces are Price-Sensitive
3. Delivery of Standard Pieces Require Stringent Delivery Lead Times
Delivery lead time of manufacturing standard pieces is not flexible (customer-imposed).
B. Other Facts of the Case
1. Equipment is general-purpose in nature to allow flexibility for custom-made pieces.
2. Laborers have good skills-creative and high-quality workmanship.
3. Custom-made pieces share 60% sales volume and sales revenue of 75%.
VII. ALTERNATIVE COURSES OF ACTION
1. Produce only one product line- custom-made pieces.
2. Produce only one product line- standard pieces.
3. Do nothing- retain current production situation.
If the contribution earned from an unprofitable product line can be used to offset the unavoidable costs or fixed costs,
then the company must continue its present production operational strategies.
4. Change current production mix of both product lines.
VIII. DECISION CRITERIA
1. Maintain existing capacity.
a. No plant expansion nor additional manufacturing equipment to be acquired therefore, no production capacity
increase.
b. Retain current number of laborers.
2. Suppliers (of raw materials, etc.) lead time are definite or can be reliably calculated.
3. In case there is excess capacity and only product line is maintained, market is able to absorb additional products of
whichever (product) line.
4. Maximize profit potential for the firm, where possible.
5. Maintain product quality always.
6. Sales price (SP) for customized product can be increased; SP for standard pieces cannot be raised.

7. Only costs associated with standard pieces are rising.

8. Profitability needs improvement.
9. Cost reduction strategies must be employed (e.g., carrying cost, ordering cost, inventory investment).
10. Delivery lead time of custom-made products only can be prolonged.
IX. DECISION ANALYSIS
OPPORTUNITIES (EXTERNAL)
1. Increasing Demand for Both Products
2. Ability to Generate Higher Sales Revenue for Custom-made Pieces
3. Ability to Capture Other Market Niche THREATS
(EXTERNAL)
1. Increasing Costs for Producing Standard Pieces
2. Customers for Standard Pieces are Price-Sensitive
3. Delivery of Standard Pieces Require Stringent Delivery Lead Times
STRENGTHS-OPPORTUNITIES
STRENGTHS-THREATS
STRENGTHS (INTERNAL)
1. Flexibility in Production of Both Product lines
2. Competent Sales
and Marketing Department
3. Solid Reputation for
Innovative Designs and High Quality Workmanship The firm is able to meet increased production requirements as to
specifications of both product lines customized and standard pieces.
Any products manufactured can be readily marketed and sold to the customers.
Although the firm is able to produce both lines but higher costs of production is expected from manufacturing
standard pieces.
Since customers for standard pieces are price-sensitive and requires stricter delivery lead times, it is not feasible to
neither increase sales prices nor extend delivery lead times for this product line.
WEAKNESSES-OPPORTUNITIES WEAKNESSES-THREATS

WEAKNESSES (INTERNAL)
1. Limited Equipment/Machinery Production Capacity
2. Limited Labor Resources
3. Only one Manufacturing Plant
4. Poor Production Scheduling
5. Unprofitable Operations
6. Existence of Slow-Moving Inventory Items Raw Materials and Work-in-Process The increasing sales demand
for both product lines over-exert the manufacturing capacity of the lone machinery and the only 1 manufacturing plant
being used thus, quality could be adversely affected in the long run.
Also, customized pieces require more time to produce thus, since there is limited labor resources, additional
production of one product line (most of the time, that which gives lesser margin) has to be put-off to accommodate the
production of customized pieces.
The poor scheduling of production is also apparent since during increased demand of a certain product line,
production of those which are already in-progress is simply halted, ignoring the committed delivery lead times
associated with those unfinished batches.
The company may be experiencing increasing demand and sales, however, the profits are not looking good according
to Accounting. There could be something wrong with either the sales price factor or the cost price factor of the firm, or
both.
To accommodate the increasing demand for customized products, those manufactured standard pieces that are
unfinished are set aside thus, increasing raw materials that are yet to be used and work-in-process inventory; this has
required the firm to lease an expensive warehouse to keep such excess inventories.
At the current production capacity, capturing a new market niche would definitely be over-exerting the current
resources causing machinery breakdown, accidents in the production plant or lower quality of workmanship due to
exhaustion.
The scarcity in the production equipment, manufacturing plant and labor resources can also contribute to the higher
manufacturing costs for standard pieces, beyond the control of the firm. Thus, it is not advisable to reduce costs
further.
The issue in the scarcity of resources also contribute to the challenge in scheduling production. Thus, delivery lead
times for standard pieces are adversely affected and this could result to dissatisfaction of customers.
Also, even if the firm is not realizing much profit, it cannot resort to increase sales prices because customers for
standard pieces are not flexible to such.
Slow-moving inventory items from raw materials and unfinished inventory items (work-in-process) need to be sold
to reduce carrying costs and ultimately increase profits.

X. DECISION
Firm must consider the first option produce only one product line: the custom-made pieces. Besides, this product
accounts 60% volume and 75% sales revenue, the market can absorb more of this product anyway. Therefore, given
the current production capacity, Chads Creative Concepts should manufacture only custom-made product type, to
maximize profit.
XI. STRATEGY OF IMPLEMENTATION
Short-term Plans (one business cycle or year)
1. Working Schedule
Since no additional hiring is recommended in the short run, labor resources and manufacturing processes need to be
systematically scheduled to meet demands of customers without sacrificing quality. Some companies employ the
specialization technique (factory-style) to ensure that laborers develop specialized skills to increase their working
efficiency to eventually, improve further their quality of work. With the giving-up of production of the standard
pieces, the equipment could be maximized to produce custom-made pieces only.
2. Delivery Schedule
Lead times need to be re-negotiated for customized pieces only. This is because, for working schedule to be effective,
only realizable lead times should be committed to customers. This could further manage the expectations of customers
and improve customer relations. Also, since it is not very flexible to do this to standard product pieces, such product
line indeed should be given up. Manufacturing of customized products could then be well-positioned without
sacrificing quality.
3. Capacity Utilization
In the short run, considering that the firm would retain its current manufacturing capacity (as to plant and equipment),
then only proper scheduling could be employed and one product would be manufactured the customized pieces. This
product line should be more profitable for the company so it is just appropriate to retain it. Specialization could also
promote the production process to be more efficient and cost-effective.
4. Inventory Management
To control quantity of raw materials being maintained, it would be necessary that the firm employs the economic order
quantity (EOQ) model which would allow the firm to order only enough for its production requirements of customized
products. It could also employ JIT eventually once its able to perfect the process of determining annual demand for
the year.
For work-in-process inventory items to be reduced to zero, those items in the warehouse should be disposed of by sale
(if further processing will not result to higher profit than selling them in their current form (unfinished). If raw
materials and work-in-process inventory items could be reduced to a minimum or zero, warehouse rent could create
cost savings and cash tied-up to such inventories could still be utilized/re-invested within the short term.

5. Increased Profitability
Manufacturing of the standard pieces, if foregone, would enable the company to maximize profit as the increasing cost
of production for standard pieces would definitely drive the revenues down. Also, inflexibility as to increasing the
sales prices for standard pieces due to customer-driven restriction could limit the profit potential of the company to a
minimum. With the excess capacity (40% of sales volume), the company may be able to increase its profits by
producing more customized pieces and sell that at higher prices instead. With the strong marketing and sales
department of the firm, it could readily fill-in additional demand for the market to absorb.
6. Rethinking the Business Model
It is important that Chad Thomas must also consider rethinking the companys business model. Chads Creative
Concepts started and already positioned the company as a manufacturer of custom-made furniture. So before making
any decision to expand and diversify its operations by producing standard pieces or penetrating new niche/s, Mr.
Thomas should reflect and ask himself, What is really the business model of Chads? Is it to concentrate in
customizing wooden furniture or to be a producer of all types of wooden furniture? Once this is clear, then the
company is able to develop more strategic moves in attaining its company goals/objectives.

Case
University of the East
Graduate School
MBAN Program
Operation Management (GMB 723) 9:00-12:00
Case Analysis:
Chads Creative Concept
Submitted by:
Renz Marion G. Aquino
Submitted to:
Engr. Melodia Pahati
Chads Creative Concept
Case Analysis
I. View Point
As the founder of the company our objective is to maximize the sale of both standard and custom made furniture at the
same time create a good production system.
II. Time Context
The problem started when the company introduced a standard line of furniture and begun retailing its product to retail
outlets.
III. Statement of the problem
a. Primary
The effect of standard furniture in production and financial structure of the company over the long run.
b. Secondary
i. Large volume of inventory
ii. Expensive warehouse rents

iii. No space left for plant expansion

iv. Longer lead time
IV. Areas of consideration
c. Strength
v. High quality workmanship
vi. Solid reputation for its creative designs
d. Weaknesses
vii. Costly standard furniture
viii. Large volume of inventory
ix. Disorganized production system
x. Operates single manufacturing facility
e. Opportunities
xi. Company growth because of customer demands
xii. Location encompass the entire great Lake Erie
f. Threats
xiii. Competitors on retail outlets cost less
V. Analysis of the Problem
g. With the case of Mr. Thomas, it is necessary to understand layout planning. I suggest that Mr. Thomas apply the
Hybrid layout in producing furniture. Hybrid layout combines elements of both process and product layout, in which
some portions of the facility are arranged in a process layout and others are in product layout. Since manufacturing
furniture require both fabrication and assembly operations-in which components are made from wood(raw materials)
for both standard and custom furniture- have a flexible flow, whereas assembly operations-in which components are
assembled into finished product have a line flow. Figure 1 illustrates how Hybrid layout can simplify the production
process. (Process flows before and after the use of GT cells. Source: Mikell P. Groover, Automation, Production
Systems, and Computer-Aided Manufacturing)
Figure 1.
h. The production of the standard furniture impacts the company in both bad and good effect. The good effect is that
customers may now access on popular types of furniture in retail store and with this, the companys sales steadily
increases. Further effect of having a standard line furniture is that the company now increased the lead time for both

types of furniture causing delay in shipment. The increase in lead time also increases the level of inventory in the
warehouse that might force the company to rent for expensive warehouse; therefore the fixed cost will increase,
reducing profit.
i. Mr. Thomas can avoid the problem he is now facing, if he just analyzes the production process of the company. He
should reduce the inventory by minimizing the production line backlogs. This will fasten the production for both
product lines and will reduce the possibility of renting another warehouse.
VI. Conclusion
Producing products in the same line can be crucial in manufacturing company; plenty of consideration must be
accounted, the raw materials, the machinery and the most important is the process of producing the product. It can
adversely affect the financial and production structure of the company.
A good analysis in layout planning can help solve the problem. But before Mr. Thomas can make a decision regarding
physical arrangement, he should consider the four question that needs to be addressed that is; In what centers should
the layout include, how much space and capacity does each other need, how should each other centers space be
configured, and where should each other be located.
A Group Technology or GT is an option in achieving layouts with low-volume process. This manufacturing technique
creates cells not limited to just one worker and has a unique way of selecting work to be done by the cell. However, by
creating GT cells, Mr. Thomas has definitely created more line flows and simplified routings of process.
Layout choice can help immensely in communicating an organizations product plans and competitive priorities.
VII. Source
Operations Management 5th Edition by; Lee J. Krajewski and Larry P. Ritzman
2000 by Pearson Education Asia Pte ltd

Chad Thomas Operation Management Case

1. What types of decisions must Chad Thomas make daily for his companys operations to run effectively? Over the long run?
To be best serve external customers, the types of decisions Chad Thomas must make daily for running the companys operations effectively that
are including capability planning, process improvement, managing production and project, managing and scheduling resources and quality
control.
It is exciting to have the business expansion and increasing sales in order to gain profit. However, in this case, Chads Creative Concept does not
have the capability to meet the soaring customer demand. Thus, identifying the companys capability and production bottleneck are most
important and must be considering at first. Secondly, design new processes to optimize the firms capability and maximize the production level
thereby to shorten the lead time in order to lower inventory warehouse and handling cost. The third, project production plans in monthly, weekly
and daily basis. The next, since the companys resources are limited, therefore, Chad must make decisions on managing and scheduling the
limited materials, equipment, other facilities and human resources. Allocate resources effectively to optimize the production process. Finally, to
be best serve and satisfy customers, avoid defected products from the mass production process, the performance and quality control must be
tracking. In addition, Chad might to think about to hire more staffs and rent a cheaper warehouse to handle the current problems.
Over the long run, Chad must make visionary corporation strategy and the following production strategy. Maintaining the companys existing
capabilities and develop new capabilities to best serve customers. Expand the business by hiring another production team to concentrate to the
standard line of furniture. Expand the companys facilities and managing resources, scheduling staff and make work plan. Measure the product
quality, control the lead time and ensure to meet delivery schedule and customer satisfaction.
2. How did sales and marketing affect operations when they began to sell standard pieces to retail outlets?
Due to limited capabilities of the company in the resource-poor setting, the operation of the company was affected by the sales and marketing
when Chad Creative Concept began to sell standard pieces to retail outlets.
The companys production capability cannot meet the increasing sales and marketing expansion. This result has been leading the companys
product lead time increase by both the custom and standard line furniture. In addition, the company has to deal with the in process materials, and
unfinished products by renting the expensive public warehouse. This also will increase the companys cost. Another factor that would affect the
operation are the performance and quality control. This would be happened because the huge work load, tight production schedule and poor
human resources, and this resulted in poor product quality and defected products.
3. How has the move to producing standard furniture affected the companys financial structure?
Since the limited production capability is difficult to handle the increasing sales, order and huge customer demand. Many of the production plans
cannot meet the schedule due to the shortage of experiences workers. There are more and more in process products and materials overstock in
the plant and rented public warehouse which cannot meet the schedule to delivery to the customers. This result in a diminishing turnover of
capital and therefore affect the companys finance structure.
4. What might Chad Thomas have done differently to avoid some of the problems he now faces?

In order to avoid the current problems he facing right now, Chad might identify the plants production capability first and therefore to make an
effective sales, order and production plan in the existing capability setting. The other alternative is to expand the business by purchasing more
facilities, equipment and hiring more employees. Separate the custom and standard line furniture by funding another production team to
concentrate on the standard line furniture. Hire an independent consultant in the plant to make wise advice for him. Find an cheaper warehouse
therefore to cut the cost.