Lawn King, Inc.

John Conner, marketing manager for lawn King, looked over the beautiful
countryside as he drove in the corporate headquarters in oline, III. John
had asked his !oss, Kathy "ayne, and the #eneral anager of Lawn King,
to call a meeting in order to review the latest forecast figure for fiscal year
$%&%. "hen he arrived at the plant, the meeting was ready to begin. 'thers
in attendance at the meeting were James (airday, plant manager) Joan
"atterson, controller) and *arold +inter, +ersonal 'fficer.
John started the meeting by reviewing the latest situation. ,I-ve .ust returned
from our annual sales meeting and I think we lost more sales last year than
we thought, due to back/order conditions at the factory. "e have also
reviewed the forecast for ne0t year and feel that sales will be $$1,111 units
in physical year $%&%. 2he marketing department feels this forecast is
realistic and could be e0ceeded if all goes well.3
4t this point, James (airday interrupted by saying, ,John, you-ve got to be
kidding. Just three months ago we all sat in this same room and you
dedicated sales of %&,111 units for fiscal -&%. 5ow you-ve raised the forecast
by $6 percent. *ow can we do a responsible .ob of production planning
when we have a moving target to shoot at73
Kathy inter.ected, ,Jim, I appreciate your concern, but we have to be
responsive to changing market condition. *ere we are in 8eptember and we
still haven-t got the firm plan for fiscal -&%, which were .ust started. I want
to use the new forecast and develop an aggregate plan for ne0t year as soon
as possible.3
John added, ,"e-ve been taking to our best customers and they-re
complaining about back orders during the peak selling season. 4 few have
threatened to drop our product line if they don-t get better service ne0t year.
"e have to produce not only enough products but also the right models to
service the customer.3
2he Lawn King $%&% fiscal year runs from 8eptember $, $%&& to 4ugust 9$, $%&%.
anufacturing +rocess
Lawn King is a medium/si:ed producer of lawn/mower equipment. Last
year, sales were ;$<.= millions and preta0 profits were ;6 million, as shown
in >0hibit $. 2he company makes four lines of lawn mowers, a 61/inch self/
propelled mower, and a 66/inch delu0e self ?propelled mower. 4ll these
mowers are made on the same assembly line.
@uring the year, the line is changed over from one mower to the ne0t to
meet the actual and pro.ected demand.
Exhibit 1
Profit and Loss Statement ($000)
FY 87 FY 88
Sales $11,611 $1,6!
"ost of #oods Sold
$aterials 6,%0 8,00&
'ire(t Labor !,100 !,&)&
'e*re(iation 7% )6!
+,erhead !&6 %1
-otal "#S
),%) 11,))%
# . / ex*ense !70 %1
Sellin0 Ex*ense 10 1)7
-otal Ex*ense
),8) 1!,&0
Pretax Profit 1,76! 1,)&8
2he changeover cost of the production line depends on which type of mower
is being produced and the ne0t production model planned. (or e0ample, it is
relatively easy to change over from the 61/inch push mower to the 61 inch
self/propelled mower, since the mower frame is the same. 2he self/propelled
mower has a propulsion unit added and a slightly larger engine. 2he
company estimated the changeover costs as shown in >0hibit 6.
Exhibit !
Line "han0eo,er "ost $atrix
"han0ed -o
181 !01 !01 SP !!1 SP
"han0ed From
181
2 $!,000 $!,000 $!,&00
!01 $!,000 2 $&00 $1,&00
!01 SP
$!,000 $&00 2 2
!!1 SP $!,&00 $1,&00 $1,&00 2

SP denotes "self-propelled." Changeover cost includes the wages of the work force used to
adjust the assembly line from one model configuration to another.
Lawn King fabricates the metal frames and metal parts their lawn mowers in
their own machine shop. 2hese fabricated parts are sent to the assembly line
along with parts purchased directly from vendors. In the past year,
appro0imately ;& millions in parts and supplies were purchased, including
>ngines, bolts, paints, wheels and sheet steel. 4n inventory of ;$ million in
purchased parts is held to supply the machine shop and the assembly line,
only a few days of parts are kept at the plant, since supplies are constantly
coming into the factory. 4 total of $11 employees work at the main plant in
oline, III, 2hese employees include A1 workers on the assembly line, 6=
workers in the machine shop, $1 maintenance workers, and = office staff. 4
beginning assembly/line worker is paid ;B.$= per hour ;6.%1 an hour in
benefit. 8enior maintenance and machine/shop employees earn as much as
;$< per hour.
It generally takes about 6 weeks for a new employee to reach full
productivity on the assembly line. 4fter 9 months) an employee can request
rotation to other .obs on the line if .ob variety is desired. 4t least some of the
workers find the work quite repetitive and boring.
2he plan is unioni:ed, but relation between the union and the company has
always been good. 5evertheless, employee turn over has been high. In the
past year, appro0imately =1 percent of the employees left the company,
representing a total training cost of ;<6,111 for the year. 2here is also
considerable absenteeism, especially on ondays and (ridays, causing
production disruptions. 2o handle this situation, si0 ,fillers3 are kept on the
work force to fill in for people who are absent on a given day. 2hese fillers
also help train the new employees when they are not needed for direct
production work.
+roduction +lanning
2he actual sales and forecasts are shown in >0hibit 9. 5ot only are the sales
highly, but total sales are dependent on the weather. If the weather is good in
early spring, customers will be more inclined to buy a new mower. 4 good
grass/growing also encourage sales during the summer.
Exhibit %
Sales 'ata in 3nits

FY 87
Fore(ast
FY 87
/(t4al
FY 88
Fore(ast
FY 88
/(t4al
Latest
FY 8)
Fore(ast
181 %0,000 !&,%00 !%,000 !!,%00 !,000
!01 11,)00 1&,680 !0,%00 !%,&00 %&,&00
!01 SP 1&,600 1,!00 !0,00 !1,!00 %1,&00
!!1 SP 10,&00 1,%!0 !1,%00 17,600 1),000
-otal
68,000 6),&00 8&,000 8,600 110,000
It appears that customers are more likely to buy the high/priced self/
propelled mowers in good economic times. In recessionary periods, the
bottom/of/the/line $&/inch mower does better.
2he production strategy in current use might be described as a one/shift
level/work/force strategy with overtime used as needed. 2he work force is
not always e0actly level due to turnover and short/run production
requirement. 5evertheless, the policy is to keep the work force as level as
possible. 'ver time is used, when the regular work force can not meet
production requirements.
Exhibit
3nits of Prod4(tion and Sales

181 !01 !01 SP !!1 SP
+,ertime
5o4rs
6e0innin0 7n,entor8 ,1!0 %,10 6,!&0 %,100 2
Se*288
Prod4(tion %,000 %,100 2 2
2
Sales !10 00 180 110
+(t288
Prod4(tion 2 2 %,00 %,&00
2
Sales 600 &10 &00 %00
9o,288
Prod4(tion %,000 %,800 2 2
2
Sales 1,010 )70 860 78&
'e(288
Prod4(tion 2 2 ,00 %,7&0
1,000
Sales 1,!00 1,!0 1,0%0 )%0
:an288
Prod4(tion ,000 ,100 2 2
1,&00
Sales 1,%0 1,680 1,1!0 1,1!0
Feb288
Prod4(tion 2 2 ,00 %,&00
1,6!0
Sales !,10 !,!10 !,180 1,8&0
$ar288
Prod4(tion %,000 %,000 !,000 2
1,!0
Sales ,870 &,100 ,&60 %,!10
/*r288
Prod4(tion 2 2 !,000 ,&00
2
Sales &,1!0 ,8&0 &,1%0 %,87&
$a8288
Prod4(tion %,000 !,000 !,000 2
2
Sales %,!10 %,%10 !,)80 !,6&0
:4n288
Prod4(tion 1,000 2 !,000 %,000
2
Sales 1,00 1,&00 1,%!0 800
:4l288
Prod4(tion !,000 %,000 !,000 2
2
Sales 710 )&0 680 1,010
/40288
Prod4(tion !,000 !,000 2 !,000
2
Sales 00 600 660 )60
-otal
FY 88
Prod4(tion !1,000 !1,000 !!,!00 !0,!&0
2
Sales !!,%00 !%,&00 !1,!00 17,600
End 7n,entor8 (8;%1;88) !,8!0 60 7,!&0 &,7&0 2
9ominal Prod4(tion <ate;'a8= !0 00 %&0 %00 2
Fiscal year !"". #n asterisk $%& indicates the standard rate of Production
2he actual monthly production output and sales for fiscal year $%&& are
shown in >0hibit <. @ifferences between sales and production were absorbed
by the inventory. If stock outs occurred, the order was back logged and filled
from the ne0t available production run. Lawn king utili:ed a 91 percent
carrying cost per year for inventory.
>ach June, an aggregate production plan is prepared for the upcoming fiscal
year. 2he plan shows the level of production for each model type and month
of the year. 2he aggregate plan is used for personnel planning) inventory
planning, and budget preparation. >ach month during the year, the plan is
revised on the basis of the latest conditions and data.
'vertime is paid at $=1 percent of regular time.
!ack to the eeting
2he meeting continued with Joan +eterson saying, ,"e must find the way to
reduce our cost. Last year we carried too much inventory, which required a
great deal of capital. 4t 91 percent carrying cost, we cannot afford to build
up as much inventory again ne0t year.3
*arold +inter added, ,If we reduce our inventories by more nearly chasing
demand, the labor force will fluctuate from month to month and our hiring
and lay off costs will increase. It currently costs ;&11 to hire an employee,
including the lower productivity on the line during the training period and
the effort required to find new employee. I also believe it costs ;$=11 to
layoff and employee including the severance costs and supplemental
unemployment benefits that we pay.3
James (airday e0pressed concern that a new shift might have to be added to
accommodate the higher forecast. ,"e are already at plant capacity and the
additional units in the new forecast can-t be made with one shift. I want to
be sure these sales forecast realistic before we go through the trouble of
hiring an entire second shift.3
Lunch time had arrived and the meeting was drawing t a close. Kathy
"ayne emphasi:ed that she want a new production planned developed soon.
,Jim, I want you to develop an aggregate production plan that considers the
costs of inventory, over time, hiring, and layoff. If your plant results in back
orders, we will have to incur greater costs later in the year to meet demand. I
will not allow to same stock out situation that we e0perienced last year. 32he
meeting ad.ourned for lunch.
2his cost includes capital costs C61 percentD, obsolescence C= percentD, and warehouse
costs C= percentD