AGV Advanced Simulation Text

This chapter contains detailed information on plant. Location is also discussed, including the option to locate in Mexico or the Czech Republic. Locating in either of these two areas carries additional risk and the potential for rewards which will be discussed. The benefits of adding High-tech to your plant is explored, along with a model for calculating production costs.

The physical plant is laid out in two stages for all industry types. Stage 1 is a building where raw materials are received and processed. Stage 2 is an adjacent building where the products are finished, packaged and shipped. The stages are not measured in square meters or feet. They are measured in terms of productivity. How many hours of work can the plant facilitate? The measurement is the number of hours of labor that can be completed using one full shift for one quarter of a year (13 weeks).

If Stage 1 were 5000 hours big, then the workers in the processing stage could put in 5,000 hours of work over that full quarter. If Stage 2 were 7,500 hours in size, then the workers could put in a maximum of 7,500 hours of work, full time, over the 13 week period.

Your team must design and build its plant(s). It is very important that the Stage 1 receiving and processing facility match the capacity of the Stage 2 finishing and shipping facility.

It is a fairly simple problem for one product. However, your facilities are capable of producing two different products (Product 1 and Product 2). If marketing executives specify Product 1 should be primary, then perhaps the firm should build the two stages to maximize production efficiency for P1.

However, if marketing then requests P2 be the primary product, your physical plant will no longer be efficient. The reason is that P2 requires a different processing-to-finishing ratio than P1 requires. The ideal Stage 1 to Stage 2 plant for P1 will not be ideal for manufacturing P2. Marketing will need to consider some strategy other than low price (minimum production cost) on which to compete if they request production from a plant not specifically designed for that product.

If production executives sense that marketing doesn't know what to do or that they can't make a commitment, the plant might be designed for flexibility. In fact, marketing executives might request a flexible production facility as part of their overall marketing strategy.

In this situation, minimum production cost can never be achieved. The advantage is that maximum cost will not have to be paid for substituting one product over the other. In this situation, the plant will always have some unused hours. But the cost for unused hours is limited since labor is only paid when working. If the plant's hours are not scheduled, workers do not get paid. The fixed and semi-fixed expenses related to capacity must be paid whether scheduled or not (mainly depreciation and administration).

The production specifications for each industry are defined in the Scent Industry Section. This includes raw material and labor requirements and costs along with cost to build plant hours, ideas on what to spend for maintenance, cost of shipping and so forth. You will need these exact numbers in order to design your plant.

Overtime may be defined as the hours which you schedule above and beyond your current capacity. If you have a plant which is 5,000 hours large in Stage 1 and 7,500 hours large in Stage 2, and you use up all of these hours in the given 13 week period yet your scheduled production is not yet met, then production will slip into overtime.

For example, let's assume that you schedule 5,000 units of Product 1 to be produced, and it takes 1.0 hour to process one unit of Product 1. In this case, everyone in Stage 1 will be working full time for the 13 week quarter. Now assume it takes 1.5 hours to process one unit of Product 1 in Stage 1, and you schedule production of 5,000 units. This means your workers will need to work 7,500 hours to meet your scheduled production.

They will use up 5,000 regular hours and then go to overtime up to 25% of normal or 1,250 hours. That still leaves 1,250 hours short. The union will not let them put in more hours. Therefore, the remaining 1,250 hours will be subcontracted out at a labor cost of 2.2 times the normal rate!

If production is scheduled such that subcontracting reaches beyond 100% of regular hours + overtime hours, the labor rate goes up again to 4.4 times the normal rate. If production is scheduled such that subcontracting reaches beyond 200% percent of regular hours + overtime hours, the labor rate rises further to 6.6 times the normal rate. If no hours exist and subcontracting is used for production, the program assumes 5,000 hours (in each stage) at 2.2 times the normal labor cost prior to moving into the 4.4 times labor cost.

Labor rates in either area are not negotiable. The labor rate is constant over a two year period and increases by a specific industry wide rate in the third year of the simulation. Remember that laborers in Area 2 are paid in Euro Dollars.

Raw material prices change quarterly. You can always find the prices for raw materials Type 1 and Type 2 at market and futures on the current Industry Report. The raw material prices are the same for both areas.

To keep costs down, you need to have a plant that can meet demand generated by the marketing team. In the Global View Simulation you have the option to hire a second shift which effectively doubles plant capacity.

The second shift works at night. The night shift uses the same facilities as the day shift. No second shift exists at the start of the simulation, whereas the day shift exists as soon as you add plant hours. Thus, you must add a second shift. A second shift is added in 10% increments up to 100% of the day shift (full plant capacity).

There is a one time charge for each 10% hired of $2,000. To reduce the second shift hours there is a one time severance payment of $1,000 for each 10% of the second shift you reduce.

Workers are not paid if they do not work. If they do work, they earn a 5% night premium over the day shift wage. Whether workers work or not, overhead charges of $350 per 10%, per quarter will apply.

It should be evident that you do not want to continually open and close second shift hours. It is less expensive to leave your night crew idle for a quarter or two and pay overhead costs, than to hire and fire your second shift labor.

Adding a second shift can be a very profitable way to extend the production capacity of your plant without building additional plant hours.

There are two areas in which you may locate your plant, area 1 which is NAFTA (North American Free Trade Area) and area 2 which is the EU (European Union). You are allowed to open only 1 plant in each area for a total of two possible plants. The retail markets are also defined as area 1 (NAFTA) and area 2 (EU).

You have two location options outside of the general choice of area 1 and area 2, these are Mexico and the Czech Republic. Note that if you choose to locate in Mexico or the Czech Republic some of your production and labor specifications will be different than other Area 1 locations, creating both opportunities and threats that you will not find from generic location of area 1 or area 2.

Labor in Mexico is cheaper than it is in other Area 1 locations. The labor rate in Mexico is 60% of the labor rate in all other Area 1 locations. All transactions in Mexico are in U.S. dollars, including wages.

You will find that along with the benefit of a reduced labor rate comes a less dependable production schedule. The workers in Mexico are as quick and able as workers in other Area 1 locations. The infrastructure of Mexico, however, is such that production is more erratic than it is in other Area 1 locations.

The ratio of scheduled production to actual production in most Area 1 locations is as follows:

In Mexico you will find a greater variance between scheduled and actual production:

There is no real or perceived variation in product image or quality between goods manufactured in Mexico and goods manufactured in other Area 1 locations.

The labor rate in Pilsen is 70% of the labor rate found in other Area 2 locations. All transactions in Area 2 sites, are in U.S. dollars except for wages and prices set for product. Wages in the Czech Republic must be paid in Euro Dollars.

The Czech Republic plans to join the EU market. Until that time, it has won approval to import non-agriculture products including juices and teas into the EU free of duties.

As in the Mexico analysis, the single most important variable is dependability of production. As in Mexico, the work force in the Czech Republic is of high quality. However, the supporting infrastructure is not of the quality needed to maintain dependable production schedules. In some quarters, power, transportation, phone and delivery systems prohibit meeting scheduled production.

In quarters when everything is just right, production is often not stopped as requested and labor rates run into overtime. This provides income to the workers that was lost in quarters of low production and makes up for underproducing in those low quarters.

You will find that the ratio of scheduled production to actual production in most Area 2 locations is as follows:

To construct a plant in Mexico or the Czech Republic you will have to make a Contract decision entry, along with the normal "add capacity" decision in the main decision set. Contracts will specify the Mexico or Czech Republic choice and make necessary changes to labor rates and production, while the Student Decision Program will specify the number of hours to be constructed and the corresponding costs.

Once a site in an area is selected, the alternative site in that area cannot be used. That is, one site per area is allowed. To change sites within the same area might be expensive and require several quarters. To do so, transfer or sell all plant hours through the Contracts Program.

A plant built in Mexico or the Czech Republic will carry the same costs for construction as other Area 1 and Area 2 plants. Plants in Mexico and the Czech Republic will also take two quarters to build with a one time site charge in the first quarter of construction of $80,000.

There is a limit to the number of hours which can be ordered in any given quarter. This limit is 299, or 29,900 hours. If you wish to build a plant larger than 29,900 hours per stage you will need to order additional hours in the following quarter.

The plant takes two quarters to build. In quarter three, the new hours are added to the old and ready for production. The contract requires 50% of the money to be paid in the quarter you request the plant hours and the remaining 50% in the following quarter.

New technology utilizes existing equipment and brings it to state-of-the-art production efficiency. This will stretch the effectiveness of your labor force.

You can request new technology , or High-tech through the Contracts Program. Specifications regarding cost reductions for your industry type, along with the cost of installation, are provided in the various industry sections of the Market Research Reports. No plant shut down is required when upgrading to the new technology standards. It takes one quarter to add and is ready for use in the following quarter.

New technology is expensive. Small firms, especially those who niche the market, may find the cost prohibitive given their small volume. High volume firms may find the cost reductions and increased capacity combine to yield a positive net present value. In some market groups, if competition becomes intense, large volume, low cost manufactures might invade niche markets. In this situation, small firms will need to reevaluate strategy and acquire the High-tech or move to a less competitive market group. While this situation is not common, it has developed in past simulations as well as in real life.

In other cases, large firms adding High-tech found that lowering price did not automatically mean more volume. Given high fixed costs, the large High-tech firms found their profits fell and, in turn, their stock decreased in value.

New technology is added to a plant site, not a stage. Benefits are measured in each stage. If a firm has two plants, the new technology can be added at any time to one, the other, or both. The quoted cost is per one plant site. Any hours added to your High-tech factory in the future will have the High-tech savings.

Production costs consist of two components - labor and raw materials. Other variable and semi-variable expenses, such as sales commission, are not included in the simulation's calculation of unit manufacturing cost. To determine unit manufacturing cost use the following procedure.

(Number of Type 1 raw material units needed) x (cost of a R.M. unit) +
(Number of Type 2 raw material units needed) x (cost of a R.M. unit) +
(Hours of Stage 1 labor needed) x (cost of one hour of labor) +
(Hours of Stage 2 labor needed) x (cost of one hour of labor)
= cost of producing one unit.

To determine the cost of manufacturing a unit in overtime, multiply the cost of one hour of labor in Stage 1 and Stage 2 by 1.5. Then, recalculate to determine overtime unit manufacturing cost.

To determine subcontracting unit cost, do the same thing as for overtime, but use 2.2 (4.4 or 6.6) times one hour of labor instead of 1.5.

To enter production decisions, simply enter the number of units of Product 1 and Product 2 you want manufactured under Shift 1; and if desired, under Shift 2.

The simulation program will automatically use normal time until a shift in one stage has used up all its hours. The program then assumes 1.5 times the normal labor rate until another 25% of the hours are used.

The program then assumes 2.2 times the labor rate. This rate moves up to 4.4 times the labor rate after 100% of regular + overtime hours is used. In turn, this rate will rise to 6.6 times the labor rate after 200% of regular + overtime hours is achieved.

If no hours exist and subcontracting is used, the program will assume 5,000 hours per stage at the 2.2 labor rate before moving up to the 4.4 range.

Subcontracting, as you can see, is extremely expensive and should not be undertaken without a thorough understanding of the costs involved.

The cost of raw materials Type 1 and Type 2 will depend upon whether you are using raw materials in inventory (ordered in the previous quarter as "futures") or whether you are using raw materials ordered by the program at market. Raw material futures are always cheaper than purchasing at market.

Remember, if the program orders raw materials for you, your firm will loose 2 weeks of production time.

In order to determine the cost of labor involved in producing 1 unit of product you will have to know how many hours of labor your product requires in each stage (Stage 1 and Stage 2) as well as the hourly wage paid to workers in each of these stages.

You will find the specific costs and requirements for labor listed in the Scent Industry Section.