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Donner case study om • 1. Medaille College MBA-621 Operations Management Case Study #2 Donner Company 3/8/2006 Amr Abbas 1 • Problem Definition The three-year old Donner Company has positioned itself well within both the small volume, customized (contract) printed circuit boards market as well as the large volume, generic (captive) printed circuit boards market. Large electronic firms (AT&T, IBM) produced their components in captive shops, while smaller sized companies, or when large and small quantities of simple technology or fast turn-around prototype boards were required, these requests usually are fulfilled by contract shops.

With 750 competitors in the US alone, and a market that is volatile, Donner’s ability to anticipate and resolve design problems and prototype techniques enabled it to maintain its competitive edge. However, this competitive edge has been compromised by poor on-time delivery and high rate of product return, in addition to planning and manufacturing problems that caused bottlenecks, shifting bottlenecks and improper utilization of labor. These problems began to hamper the overall performance of the firm, and management started evaluating the company’s position and different strategic policies. Following is detailed analysis and recommendations by evaluating the current conditions of the company, particularly the following areas: • Operational and strategic implications of company direction • Labor utilization • Materials • Capacity • Information flow • Evaluating the following performance criteria: Quality, Productivity and Delivery. 2 • Following detailed analysis of data, process flow and inventory strategies, my recommendations will be focused on the following opportunities: 1. Changing strategy from current position to one which concentrates on producing only small quantities of fast turn-around SMOBCs. Changing strategy from current position to one which concentrates on producing only large quantities of simple technology boards.

Changing strategy from current position to one which concentrates on producing large & small quantities of simple technology boards, through the use of two separate production lines. Company Objectives and Overview of Problems: With a company that is managed primarily by engineers, Donner’s core competency was, obviously, its engineering expertise, and it produced specialized circuit boards known as “soldermask over bare copper” (SMOBC) boards. Donner positioned itself to manufacture these boards to small and large electronic firms and management envisioned it as one of the industry leaders. However, in order to achieve this objective, perhaps Donner needed a management that is more business oriented rather than being managed by engineers who don’t necessarily possess the “business sense” to run a firm. Donner employed 22 production employees, managed by 4 senior executives. Please refer to exhibit 1 for Donner’s organizational chart.

Operators were cross- trained and able to perform different functions in different departments. This is 3 • considered to be a major advantage for a company to have; the ability to deploy employees to perform different functions in different areas (as needed). However, it seemed that there was a lack of effective communication strategy within the organization, as information did not flow properly within the different departments and workers often interrupted their work to discuss issues with the supervisor, deliver completed panels or secure more work from other work stations (low hanging fruits). David Flaherty, shop supervisor, is responsible for all aspects of the manufacturing processes from the time he received the order and blueprint until the order has been completed and shipped.

Flaherty is in charge of preparing work schedules, which occurred several days after the raw material has arrived from the vendor (most orders reached him 4 days after customers’ bids had been accepted, which included the time needed by purchasing to locate the raw material at a low price – 1 – 2 days on average). Flaherty spent much of his time planning and determining how to move jobs ahead of others and how to shift workers from one operation to another (to meet unexpected customers’ changes to specifications and to meet the deadlines for rush orders). Please refer to the information flow chart (exhibit 2) and the order process flow chart (exhibit 3). Donner promised its customers 3 weeks delivery on orders of 1000 boards or less, and 5 weeks on orders larger than 1000 boards. Rush orders (orders of 8 boards or less) were delivered after 4 days. Donner operated at a plant that was carefully chosen by management to minimize installation costs, preserved the life of expensive machinery and isolated the operation’s diverse environment.

After being in the same location for a year and a half, neither the machines nor the graphic equipment exhibited any signs of corrosion. In fact, by October 1986, Donner began to expand their 4 • current location, which was fully utilized, by installing an 1800 sq ft addition. This addition was due to be completed by November, 1987. Donner’s management had to implement policies that, in addition to manufacturing, had to be cost effective, as Donner was not able to attract outside capital (cited earlier: managed primarily by engineers, not necessarily business oriented). Analyzing Donner’s current situations, it is evident that the company is suffering from several problems relating to its manufacturing, labor, quality and delivery. Following is a highlight and a brief analysis of each of Donner’s problems: 1. Operating problems: Management could not manage the production bottlenecks effectively.

Each order was different, as per each customer’s specifications. Since there is no set quality policy in place, some raw material may be defective. When operators are working on a specific project, they may require additional raw material (which takes about 1 – 2 days to locate, then additional days to be delivered to Donner). This causes interruptions to the production cycle at one operation, which in turn causes a production bottleneck at the next operation. Often times, some customers make modifications to the original specs and ask for changes in production. This means that the operators have to stop working on a certain project and await new instructions from management once they receive the new specs from the customers. Once again, this causes a production bottleneck and, more seriously, starts to shift the bottleneck to another operation process.

Furthermore, rush orders represented a problem to Donner. The company promised 4 days delivery to customers. Looking at the bigger picture in this 5 • situation, we have a company that is being pressured by sudden interruptions (of production), not meeting its on-time delivery, suffers from bottlenecks at almost every stage of production yet continues to promise 4 days delivery on rush orders. This means that, no matter what, rush orders are a priority (Donner faced pressure from its competitors concerning the fulfillment of rush orders). Download Ost Architecture 101 Mp3.

If raw material is needed for rush orders, it is obtained from the existing inventory, which is originally bought to fulfill large orders. This causes possible shortages in inventory, which means that Donner’s purchasing has to locate and purchase additional material (a process that takes 2 days). The result is possibly stopping an operation process until new raw material is obtained, which also means down time for the operators (down time at one process, hence a bottleneck at a specific process). However, Donner experienced no problems with rush orders (these orders were completed by one senior employee) and had no reject rate. In fact, that was one area that did not suffer from any “hemorrhage”. Productivity problems: As a result of the operating problems, it is normal to predict, and expect, productivity problems. With frequent down times and order changes, management cited the fact that machines are idle for longer than expected.

In addition, standard labor time for each process (as depicted in exhibit 4-A) did not reflect accurate time at Donner itself, rather it was based upon industry standards and competitors’. In addition, Donner’s operation is sequential in nature, however management is faced with a decision whether to use manual labor (for drilling and punch press) or to use the CNC machine for the same purpose. It is evident that management did not prepare a breakeven analysis to be able to objectively determine which method to use with which kind of order. Furthermore, the sequential process flow currently utilized at Donner can cause a significant idle time for workers. As my analysis will show, a parallel flow of 6 • operations, at certain points, may alleviate this problem and save time on production cycle time.

Quality problems: Donner did not implement effective quality control measures to inspect the raw material or work in progress. Donner depended on the individual operators’ experience to perform informal examination as the operation shifted from one process to the next. The result was the increase rate of product return. The company’s reject rate in September alone amounted to 7%, of which 1% was a total loss and 6% required re-works because the end products did not meet the customers’ specifications. Clearly, re-works resulted in pulling operators from their current jobs to begin re-works on the returned boards, which in turn caused lack of productivity and bottlenecks.

Delivery problems: Similar to the current sequential manufacturing policy at Donner, it is no surprise to note the delivery problems. Merry Christmas Mr Lawrence Midi File Download. Because all these processes are interconnected, and especially because of the high rate of returns and re-works, Donner failed to meet is delivery dates (8 days late in September). Because re- works required pulling operators away from their current functions, deadlines were not met (due to delays in manufacturing and finishing work in progress); Donner continued to suffer from the inability to meet its delivery dates. However, rush orders were not affected and the company continued to promise 4 days delivery for such orders (this also caused bottlenecks and shifting bottlenecks as rush orders were treated with special status, raw materials and workers were simmered to satisfy these orders). 7 • Finally, the new sales manager for Donner, Lloyd Searby, noted his concerns that Donner’s sales may not exceed $2M in sales (in 1988) if it continued to “bleed” from its quality (returns and re-works) and delivery problems.

However, both Lloyd and the president believed that Donner should continue bidding for low volume orders and improve their quality standards, and believed this should stop the “bleed” and possibly push Donner towards $3M in sales. All these troubles resulted in financial problems that manifested itself in reduced sales in September and threatened Donner’s existence in the marketplace.

Data Analysis: Donner provided several exhibits to demonstrate the following areas of its operation: • Profit and Loss • Standard Process Flow • Inventory Following is an analysis of each area: • Profit and Loss (exhibit 5): From the P&L report we can identify few key points: Donner is, despite the manufacturing problems, profitable. In fact, from January 1987 to September 1987, Donner’s profit before tax exceeded the preceding two years. However, if we analyzed each month in 1987, it is obvious there is a 8 • negative trend from January till July, and another negative trend from August till September: $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 Sales (USD) Jan - Jul 1987 Jul-87 Aug-87 Sep-87 Months Monthly Sales Trend - 1987 It is clear that there was a sharp drop in profits from August till September (total of $11.7 million loss /drop in net profit). From the information provided by Donner, most of the manufacturing and delivery problems occurred in September, 1987. Further analysis of the Profit and Loss sheet indicates that there was 21 working days in September, 1987. Donner employed 22 employees who worked 8 hrs / day shift.

This amounted to a total of 3696 hours worked in that month. Direct labor amounted to $8.73 per employee ($32,300/3696 hrs). Total fixed cost was $34,100 and variable cost was $87,600. Added in exhibit 5 is a column to depict the different costs per unit (based upon 5761 units manufactured in September). 9 • • Standard Process Flow (exhibits 4-A and 4-B): Perhaps the most important exhibit provided by Donner to enable us to identify problems and suggest solutions.

From the information provided in exhibit 4-A, the following can be identified and calculated: • Breakeven point to decide when to use the automated CNC drill vs. Manual drill (based upon number of orders) • Breakeven point to decide when to use the automated CNC router vs. Manual punch press (based upon number of orders) • Identify bottlenecks within all areas of manufacturing with special focus on the Dry Film Photoresist process (to perform capacity analysis of the DFPR area by assuming order size of 8, 80 and 800 boards) • Standard labor time for an order size of 1, 8 and 200 boards Following is an analysis of each area: Since Donner purchased a CNC machine at $80,000 to perform the drilling and router functions, and also since these processes can be performed manually, it is important to decide which orders can be scheduled on the CNC machine and manually. This is achieved by performing a breakeven analysis of each function. It is important to note that the set up time for each process is fixed no matter the order size.

The run time is variable and changes per order size. Calculations of the breakeven points (please refer to exhibit 6 for complete calculation of breakeven points), for CNC or manual drill and for CNC or manual profile processes show the following results: 10 • • Drill process: For orders of 6 units or less, manual drill should be utilized as it will incur fewer costs (and less overall time to process) and for orders over 6 units the CNC drill should be utilized because the cost will be less than if manual is used, as well as time to process. • Profile process: For orders below 200 boards, manual punch press should be utilized as it will take less time and incur fewer costs, and for orders above 200 boards the CNC router should be utilized for the same reasons. Exhibit 4-A can also be used to identify bottlenecks within Donner’s standard process, particularly surrounding the capacity of the dry Film Photoresist area. It is critical to realize the true capacity to prevent bottlenecks and work-overload. If, for example, the maximum number of boards that the DFPR area can handle (due to the set up and run time involved in the process) is 100, then Donner should realize that order size that passes through the drilling process should not exceed 100 units (to match the DFPR capacity).

If the order sized is more than 100 (hence, more than the maximum capacity that the DFPR area can handle), a bottleneck is created and possibly shifted throughout the entire manufacturing process. In addition, since the DFPR area consists of several functions, it is important to be aware of the maximum capacity (as per order size) to prevent bottlenecks within the DFPR area. Exceeding maximum capacity will have a direct negative impact on quality and on-time delivery (two problems that Donner was already suffering from in September). Of course, the bottleneck will 11 • change from one area of the DFPR to the other, depending on the order size and the time involved in each process. Following is a table illustrating the results of an analysis of the DFPR area to determine the maximum daily capacity for order sizes of 8, 80 and 800 units (assuming normal 8 hours working days – 480 minutes): Order size DFPR area 8 80 800 Panel Prep 738.4 5485.6 15360 Laminate & Expose 174.4 960 1744 Develop 1.8 9600 Please refer to exhibit 7 for complete calculation methods used to determine DFPR daily capacities. To translate these numbers into facts, it is clear that in order to avoid bottlenecks for an order size of 8 boards, the number of boards that can be processed per day can not exceed 174.4 boards (by taking the least number of boards for each of the three stages of DFPR, as it reflects the maximum daily capacity of orders processed). If total boards did not exceed 174.4, this is, at least, a guarantee that Donner should not experience bottlenecks at the DFPR area, as well as at other areas of manufacturing, for an order size of 8 boards.

12 • The same is applied to the daily capacity for an order size of 80 boards. The maximum daily capacity for the DFPR area is 960 boards, based upon an order size of 80. Any increase in order size will result in a bottleneck.

For an order of 800 units, the maximum daily capacity for the DFPR area is 1744 boards without bottlenecks. It is clear then that based upon the order size, the daily capacity for the DFPR area changes.

The larger the order size, the more capacity the area can handle, however that capacity should not exceed the highlighted figures. Bottlenecks can cause work to pile at another stage of the process, which will impact the entire manufacturing process as a whole, which is a major factor in creating on- time delivery and quality problems.

In addition, the larger the order size, the less expensive unit price is. This is a simple application of economies of scale, which should enable Donner to continue to compete in this volatile market and maintain its competitive edge for the long term. Donner suffered from a productivity problem, as noted by the President of the firm, as well as the new sales manager. Both indicated that the labor time in the standard process flow chart (exhibit 4-A) did not reflect the true labor time at Donner. In September 1987, there was a total of 3696 hours worked (exhibit 5), however the standard process flow for September (exhibit 4-A) showed a total actual hours worked of 1531 hours. This means that there was a total of 2165 hours that were considered either as down time or idle (non-revenue producing), hence: unproductive (59% of idle time), yet paid for by Donner.

This also means the following: 2165 hrs / 21 days in September = 103 total hours wasted every working day 13 • 103 hours / 22 employee = 5 hours that are wasted by each employee every day, which is ¾ of the working day. This simply means that each employee worked an actual 3 hours on a normal 8 hours working day. Not only does this affect productivity, but Donner paid $8.73 per employee for 8 hours a day (each employee cost Donner $69.84 / day), yet they only worked for 3 hours (revenue generating production).

This amounts to a loss of $43.65 per day, per employee ($69.84 - $26.19). Calculate this loss by 22 employees, and it is clear that Donner wasted money on wages for hours either not worked or worked without generating revenue, that amounted to $960.3 every working day, and $20,166.3 a month! Furthermore, the standard labor time increases with the order size. Please refer to exhibits 8, 9 and 10 (standard process flow area) for complete calculations of labor time for 1, 8 and 200 orders respectively: Order size Labor time 1 board (exhibit 7) 8 boards (exhibit 8) 200 boards (exhibit 9) Manual 6.39 hrs 11.57 hrs 153.59 hrs CNC 11.16 hrs 11.85 hrs 30.67 It is clear that the labor time increases with the order size. As previously noted, the breakeven point for the drilling process is 6 boards, and the breakeven point for the profile process is 200 boards. Reviewing the table above, for an order size of 1 board, it is more cost effective for Donner to utilize an entirely manual procedure, as it takes about 6.40 hrs to finish an order and have it ready to be shipped. As the order size increases (for example, 200 boards), it is clear that it is past the breakeven point and therefore takes less time to be processed utilizing CNC drill and router rather than manual processing.

14 • In addition, Donner is now faced with several options to better utilize its labor. For example: for order size of 8 boards, Donner may choose to utilize manual drill combined with CNC router, or CNC drill with manual punch press. To illustrate, please refer to exhibits 8, 9 and 10 - proposed strategies areas: It is clear from the calculations that if the order size is 1 board, it is still cost and time effective to utilize an entirely manual process (standard labor time for an entire manual processing is 6.39 hrs), however once the order size increases to 8 boards (exhibit 9 – proposed strategy), it is less time consuming for Donner to utilize CNC drill + manual punch press, rather than an entirely manual or automated process (labor time for the proposed strategy – CNC drill + punch press - is reduced to 10.25 hrs). For order size of exactly 200 boards, Donner should utilize CNC drill and may choose between punch press or CNC router (as 200 boards is the breakeven point at which CNC drill must be utilized for time and cost effectiveness, and both punch press and CNC router take the same amount of time – 250 minutes). Labor time is reduced to 30.67 hrs with the proposed strategy (exhibit 10 – proposed strategy). For orders above 200 units, it is more efficient for Donner to implement a process than utilizes both CNC drill and router to ensure less labor time, less manufacturing lead time and better utilization of their resources.