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1. Review the forecast in Exhibit 3. Does it seem reasonable, based on the past demand and input from the marketing department? What concerns, if any, do you have?

2. Sales and Operation Planning is often based on demand at the level of the product family. Explain what that means for Lawn King.

Case Study Lawn King, Inc.: Sales and Operations Planning excel John Conner, marketing manager for Lawn King, looked The changeover cost of the production line depends over the beautiful countryside as he drove to the cor on which type of mower is being produced and the next porate headquarters in Moline, Illinois. John had asked production model planned. For example, it is relatively his boss, Kathy Wayne, the general manager of Lawn easy to change over from the 20-inch push mower to the King. to call a meeting in order to review the latest fore 20-inch self-propelled mower, since the mower frame is cast figures for fiscal year 2020. When he arrived at the same. The self-propelled mower has a propulsion the plant, the meeting was ready to begin. Others in unit added and a slightly larger engine. The company attendance at the meeting were James Fairday, plant estimated the changeover costs as shown in Exhibit 2. manager, Joan Peterson, controller, and Harold Pinter Lawn King fabricates the metal frames and metal parts personnel officer for its lawn mowers in its own machine shop. These fabri- John started the meeting by reviewing the latest situ- cated parts are sent to the assembly line along with parts ation: I've just returned from our annual sales meeting, purchased directly from vendors. In the past year, approx- and I think we lost more sales last year than we thought, imately $8 million in parts and supplies were purchased, due to back-order conditions at the factory. We have including engines, bolts, paint, wheels, and sheet steel also reviewed the forecast for next year and feel that An inventory of $1 million in purchased parts is held to sales will be 110.000 units in fiscal year 2020. The supply the machine shop and the assembly line. When a marketing department feels this forecast is realistic and particular mower is running on the assembly line, only a could be exceeded if all goes well." few days of parts are kept at the plant, since supplies are At this point, James Fairday interrupted by saying, constantly coming into the factory. John, you've got to be kidding. Just three months ago we all sat in this same room and you predicted sales of 98,000 units for fiscal 2020. Now you've raised the forecast by 12 percent. How can we do a reasonable job of production planning when we have a moving target to shoot at?" Kathy interjected, "Jim, I appreciate your concern, but we have to be responsive to changing market condi tions. Here we are in September and we still haven't got a firm plan for fiscal 2020, which has just started. I want to use the new forecast and develop a Sales and Opera- tions Plan (S&OP) for next year as soon as possible." John added, "We've been talking to our best custom- ers, and they're complaining about back orders during the peak selling season. A few have threatened to drop our product line if they don't get better service next year. We have to produce not only enough product but also the right models to service the customer." Potavage fotostock MANUFACTURING PROCESS EXHIBIT 1 Profit and loss statement (5000). Lawn King is a small-sized producer of lawn mower FY2018 FY2019 equipment. Last year, sales were $14.5 million and pretax profits were $2 million, as shown in Exhibit 1. The com- Sales $11.611 $14,462 pany makes four lines of lawn mowers: an 18-inch push Cost of goods sold Materials 6,340 8,005 mower, a 20-inch push mower, a 20-inch self-propelled Direct labor 2.100 2,595 mower, and a 22-inch deluxe self-propelled mower. All Depreciation 743 962 these mowers are made on the same assembly line. Dur. Overhead 256 431 ing the year, the line is changed over from one mower to Total CGS 9.439 11,993 the next to meet the actual and projected demand. G&A expense 270 314 Selling expense 140 197 Total expenses 9.849 12,504 'The Lawn King 2020 fiscal year runs from September 1, 2019, 10 Pretax profit 1.762 1.958 August 31, 2020 This case was prepared by Roger G. Schroeder for class discussion. Copyright by Roger G. Schroeder, 2016, 2019. All rights are reserved. Reprinted with permission EXHIBIT 2 Line changeover cost matrix Changed to 18 20 20" Sp. 22" SP 18 $2,000 $2,000 $2.500 Changed from 20 $2.000 $ 500 $1,500 20' SP $2.000 $ 500 22" SP $2,500 $1,500 $1,500 SP dentes del propelled"Changeover cost includes the wages of the workforce used to adjust the assembly line from one model configuration to another A total of 100 employees work at the main plant in in early spring, customers will be more inclined to buy a Moline. These employees include 60 workers on the new mower. A good grass-growing season also encour- assembly line, 25 workers in the machine shop, 10 main- ages sales during the summer. tenance workers, and 5 office staft. A beginning assem- It appears that customers are more likely to buy the bly line worker is paid $10.15 per hour plus $2.90 an high-priced self-propelled mowers in good economic hour in benefits. Senior maintenance and machine-shop times. In recessionary periods, the bottom-of-the-line employees earn as much as $17 per hour 18-inch mower does better. It generally takes about two weeks for a new The production strategy in current use might be employee to reach full productivity on the assembly described as a one-shift level-workforce strategy line. After three months, an employee can request rota- with overtime used as needed. The workforce is not tion to other jobs on the line if job variety is desired. At always exactly level due to turnover and short-run least some of the workers find the work quite repetitive production requirements. Nevertheless, the policy is and boring to keep the workforce as level as possible. Overtime The plant is unionized, but relations between the is used when the regular workforce cannot meet pro- union and the company have always been good. Nev- duction requirements ertheless, employee turnover has been high. In the The actual monthly production output and sales for past year, approximately 50 percent of the employees fiscal year 2019 are shown in Exhibit 4. Differences left the company, representing a total training cost of between sales and production were absorbed by the $42,000 for the year. There is also considerable absen- inventory. If stockouts occurred, the order was back- teeism, especially on Mondays and Fridays, causing logged and filled from the next available production run. production disruptions. To handle this situation, six"fill- Lawn King utilized a 30 percent carrying cost per year ers" are kept on the workforce to fill in for people who for inventory. are absent on a given day. These fillers also help train Each June, an S&OP plan is prepared for the the new employees when they are not needed for direct upcoming fiscal year. The plan shows the level of pro- production work. duction for each model type and month of the year. PRODUCTION PLANNING The actual sales and forecasts are shown in Exhibit 3. Overtime work is paid at 150 percent of regular time. Not only are the sales highly seasonal, but total sales This cost includes capital costs (20 percent obsolescence are dependent on the weather. If the weather is good 5 percent, and warehouse costs (5 percent. EXHIBIT 3 Sales data in units. 18" 20" 20" SP 22" SP Total FY2018 Forecast 30.000 11.900 15.600 10.500 68,000 FY2018 Actual 25.300 15.680 14,200 14,320 69,500 FY2019 Forecast 23,000 20,300 20,400 21,300 85,000 FY2019 Actual 22,300 23,500 21,200 17.600 84.600 Latest FY2020 Forecast 24.000 35,500 31.500 19.000 110.000 Overtime Hours 20" SP 6,250 22" SP 3,100 20 3,140 3,100 400 - 180 3.400 500 110 3.500 300 - 510 3.800 970 - 860 4.400 1.030 785 3,750 930 Sales 1.000 1,420 4,100 1.680 1,500 1,120 3,500 1.850 1.620 EXHIBIT 4 Units of production and sales, fiscal year 2019. 18" Beginning Inventory 4,120 September 2018 Production 3,000 Sales 210 October 2018 Production Sales 600 November 2018 Production 3,000 Sales 1.010 December 2018 Production 1,200 January 2019 Production 4,000 Sales 1,430 February 2019 Production Sales 2,140 March 2019 Production 3,000 Sales 4,870 April 2019 Production Sales 5,120 May 2019 Production 3,000 Sales 3.210 June 2019 Production 1,000 Sales 1,400 July 2019 Production 2.000 Sales 710 Aug. 2019 Production 2,000 Sales 400 Total Production 21,000 FY 2019 Sales 22.300 End inventory (8/31/19) 2.820 Nominal production rate/ day (one shift 420 2.210 3,000 5.100 1.240 1,120 4,400 2.180 2.000 4.560 2.000 5,130 2.000 2,980 2.000 1,320 2.000 680 3.210 4,500 3.875 4,850 2.000 3,310 1 - 2,650 3,000 800 - - 1.500 3,000 950 2.000 600 21.000 23,500 640 1,010 2.000 960 660 22.200 21,200 7.250 20,250 17,600 5.750 400 350 300 This plan is used for personnel planning, inventory planning, and budget preparation. Each month during the year, the plan is revised on the basis of the latest conditions and data BACK TO THE MEETING The meeting continued with Joan Peterson saying, "We must find a way to reduce our costs. Last year we car- ried too much inventory, which required a great deal of capital. At 30 percent carrying cost, we cannot afford to build up as much inventory again next year." Harold Pinter added, "If we reduce our inventories by more nearly chasing demand, the labor force will fluctuate from month to month and our hiring and lay- off costs will increase. It currently costs $800 to hire an employee, including the lower productivity on the line during the training period and the effort required to find new employees. I also believe it costs $1,500 to lay off an employee, including the severance costs and supple mental unemployment benefits that we pay." James Fairday expressed concern that a new shift might have to be added to accommodate the higher fore cast. "We are already at plant capacity, and the additional units in the new forecast can't be made with one shift. want to be sure these sales forecasts are realistic before we go through the trouble of hiring an entire second shift" Lunchtime had arrived and the meeting was drawing to a close. Kathy Wayne emphasized that she wanted a new production plan developed soon. "Jim, I want you to develop an S&OP plan that considers the costs of inventory, overtime, hiring, and layoff. If your plan results in back orders, we will have to incur greater costs later in the year to meet demand. I will not allow the same stockout situation that we experienced last year. The meeting adjourned for lunch Lawn King, Inc.: Sales and Operations Planning 471 Discussion Questions 1. Review the forecast in Exhibit 3. Does it seem rea- sonable, based on past demand and input from the marketing department? What concerns, if any, do you have? 2. Sales and Operations Planning is often based on demand at the level of a product family. Explain what that means for Lawn King 3. Develop an S&OP plan by month for fiscal year 2020. Consider the use of several different production strategies. Which strategy do you recommend? Use Excel to save time in making these plans 4. If Lawn King decides to add a second production shift, what costs and factors should be accounted for, beyond hourly labor