INTRODUCTION
The DANSHUI Plant No. 2 is located in southern China and was a contract manufacturer that assembled electronic products for companies wishing to save labor costs. DANSHUI was getting a one-year contract with apple Inc. to assemble 2. 4 million iPhones. It was very anxious when in the first three months of the contract, the plant is unable to be assembled as many as the expected and its operating at a loss. The plant has had difficulty hiring enough workers despite raising wages to 35%.
In addition, the process of assembling is complex and required almost entirely based on handwork by 325 workers, with 140 steps involving 100 components during 5 days. The DANSHUI controller considers preparing a “flexible budget” whether it is more useful to help them identify the misinterpreting their performance. Li also must analyze the currently static budget have been used and prepare a summary of monthly operations to identify what goes wrong in their operations that contribute to the performance problems.
If DANSHUI not analyzed the sources of problem and find the alternatives ways, it will contribute to disability in performing the contract and in the long term will lead to inefficiency of controlling the cost of materials, labor and overhead. This is in order to provide incentive to control all costs whether caused by use waste, damage theft or inefficiencies. ISSUE/PROBLEM DANSHUI Plant has faced an important issue, that is trying to solve the shortage of production line in the first three month and too caught up with the Apple IPhone 4 contract in the rest of the nine month.
As we can know that after having report from the plant operation, DANSHUI Plant is not meeting with the targeted production line, with is shortage about 10% from the targeted amount. Although DANSHUI manage to produce up to 90% of the contract, but the shortage 10% has result DANSHUI to face loss about $672,000 rather than profit $100,000. For the first three month, DANSHUI have met the shortage of 10%. Therefore, DANSHUI Plant have to plan a strong strategic in order to catch up with the Apple iPhone 4 contract in the rest of the nine month.
If the contract amount is not reach during the end of the contract, DANSHUI Plant will bear much higher cost than revenue that will result loss to this plant. After study the situation, we also find out that labor force and labor cost have contributed to this issue too. For the labor cost, DANSHUI Plant has result over budget in labor cost. As compare to the budgeted, this figure is higher and yet the target production has not reached. By raise the labor cost around 30%, DANSHUI Plant will need to increase the production line to cover the increment.
And bear in mind that, DANSHUI only has nine months leave. Although DANSHUI Plant raises the labor price per hour, but we can observe that this did not help DANSHUI Plant to solve the shortage labor force much. Since DANSHUI Plant was built at the semi-skilled labor field, labor cost is cheap. DANSHUI Plant still cannot increase the number of labor force needed. The issue has contributed to the shortage in production line for the first three months. This is due to DANSHUI Plant is heavy rely on handwork by labor.
DANSHUI Plant raise the labor price is to hire the qualified labor force to push up the production line. As we noted that DANSHUI Plant has only nine months to ensure everything in targeted and also cover the difference at the early three months. As the production line is based on handwork, the component import is easy damaged. Large number of materials needs to replace from that. Therefore a high skilled level labor forces can help to reduce this problem.
CONCEPTS AND STRATEGIES
Before proceed with the strategies or concepts, our group have analyzed the strengths and weaknesses of DANSHUI in order to know which strategy DANSHUI should go for. Based on the case, we know that DANSHUI strength is they has had the opportunity to get contract from Apple because of the trust and by having cheap labor cost that giving them an advantage compare to their competitor. While the DANSHUI weaknesses is the labor cost. DANSHUI wish to save the labor cost by paying their labor less than one dollar an hour.
They also have problem in finding enough qualified labor to match with their production even though they have raised their factory wages by almost 30% since July. This is why the plant is unable to assemble as many phones as expected and causes the operating at a loss. To overcome the problem regarding to the plant has performed so poorly in the three consecutive months, DANSHUI have to consider for strategic concept to enable the problems can be identified and resolved amicably.
To achieve this, DANSHUI can consider the breakeven analysis to determine when a business will be able to cover all its expenses and begin to make a profit. This break-even analysis will shows the amount of revenue that need to be bring in to cover the expenses before a dime of profit have been made. For example, if DANSHUI can attain and surpass their break-even point, which mean that if they can easily bring in more than the amount of sales revenue they need to meet their expenses, then their business stands a good chance of making money.
To perform a break-even analysis, DANSHUI have to make educated guesses about their expenses and revenues. Although DANSHUI did not have a crystal ball, they should do some serious research including an analysis of their market so that they can determine their projected sales volume and anticipated expenses. Based on the case, we know that DANSHUI is currently using the static budget to measure their performance. However, problem has occurred and the plant manager is considering using flexible budget to resolve the problem.
Flexible budget is based upon different levels of activity. It is a very useful tool for comparing actual costs experienced to the cost allowable for the activity level achieved. It is also adjusts the static budget for the actual level of output. For example, if DANSHUI factory actually produce 200,000 units, then managements should compare actual factory costs for 200,000 units to what the factory should have spent to make 200,000 units, not to what the factory should have spent to make 180,000 units or any other production level.
Furthermore, flexible budget distinguishes between fixed and variable cost, thereby allowing for a budget that can be automatically adjusted to the level of activity actually attained. In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget. Furthermore, DANSHUI needed to apply the variance analysis to measure their business performance and to observe how well a business is performing and also how close actual costs and revenues are to expected costs and revenues.
In accounting, a variance is defined as the difference between the expected amount and the actual amount of costs or revenues. The purpose of this detailed information is to assist DANSHUI in determining what may have gone right or wrong and to help the company in future decision-making. RECOMMENDATION DANSHUI Company was in unfavorable performance by using standard cost budgeting system consequences of failing to achieve the 200,000 unit per month target. For the short term we recommend DANSHUI to change from using static budget system to the flexible budgeting system for evaluation process.
Before this, Li was using static budget system to evaluate the operation performance, but the evaluation are not comparing relevant information when the actual quantity iPhone assemble are differ from the budget (180,000 unit vs 200,000 unit). By using flexible budget system will help DANSHUI to compare the result with adjustable budget and the variance show will more accurate show the operation performance. Using the static budget show variance is unfavorable USD 772,000 compare with USD 688,000 in flexible budget system.
Flexible budget systems also prove the unfavorable performance caused by the variance from variable cost which is USD 1,041,200. Therefore can analyze and evaluate the weakness in controlling the variable cost which is flash memory, assembly and packaging expenses. In long term period, DANSHUI have to overcome shortage in skilled worker by buy or rent a machine to replacing the man power in assembly the iPhone. In assembly process will involve 140 steps and almost all steps are based on handwork and the worker shortage is a barrier to achieve the target.
With invest in new machine, DANSHUI can reduce the handwork task but have to appoint some skilled worker to operate the machine. Firstly, DANSHUI have to identify which step in operation can replace by machine. Then, find the relevant machine and analyze the price vs value. If they only want to use the machine for temporary, it is better for DANSHUI to rent rather than buy the machine. Other than that, DANSHUI can hiring more skilled staff or increase the total staff to assemble the 200,000 unit iPhone per month.
DANSHUI must fulfill the contract with producing 2. 4 million in one year for the good relationship with Apple and for getting contract in future. Apple product also had good demand in current and future market, therefore DANSHUI have to take this opportunity to be the sub manufacture for Apple. In process getting new staff, DANSHUI also must maintain their existing staff because the existing staff already gain experience in 3 month operation of assembly iPhone 4 by increasing reward system.
After getting the sufficient staffs, DANSHUI have to increase the monitoring and controlling system to reduce the reject product and also repairing cost.
CONCLUSION
As to wrapping up the discussion, we know that DANSHUI has had difficulty hiring enough workers despite raising wages to 35%. DANSHUI Plant has faced an important issue, that is trying to solve the shortage of production line in the first three month and too caught up with the Apple iPhone 4 contracts in the rest of the nine month.
After having report from the plant operation, DANSHUI Plant is not meeting with the targeted production line, with is shortage about 10% from the targeted amount. Although DANSHUI manage to produce up to 90% of the contract, but the shortage 10% has result DANSHUI to face loss about $672,000 rather than profit $100,000. Therefore, we think that DANSHUI should do an analysis about company strengths, weakness and the opportunities and threats that DANSHUI might face in the future. Instead of doing the breakeven analysis, DANSHUI can consider using flexible budget to resolve the problem.
DANSHUI needed to apply the variance in order to assist DANSHUI in determining what may have gone right or wrong and to help the company in future decision-making. For the short term period, we recommended DANSHUI to change from using static budget system to the flexible budgeting system for evaluation process. DANSUI have to overcome shortage in skilled worker by buy or rent a machine to replacing the man power in assembly the iPhone for the long term period and in the same time, DANSHUI can hiring more skilled staff or increase the total staff to assemble the 200,000 unit iPhone per month as well .
REFERENCES i) Management homework help CA: How to Calculate Total Cost in Economics | eHow. com http://www. ehow. com/how_6201642_calculate-total-cost-economics. html#ixzz2PryO0OD9 ii) http://www. google. com. my/#hl=ms&q=how++company+recognized+revenue+based+upon+FOB+contract%3F&oq=how++company+recognized+revenue+based+upon+FOB+contract%3F&gs_l=serp. 3… 441582. 476078. 14. 477609. 57. 41. 0. 3. 3. 1. 1984. 10543. 12j13j7j3j1j1j1j1j1. 40. 0… 0. 0… 1c. 1. 8. serp. C6aJUxBdYKQ&bav=on. 2,or. &bvm=bv. 44770516,d. bmk&fp=944a8501217e5f2c&biw=1280&bih=699
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Overcoming Production Challenges at DANSHUI Plant No. 2
SWOT Analysis
A strengths, weaknesses, opportunities, and threats (SWOT) analysis provides insight into DANSHUI’s situation. Key strengths include low labor costs giving a competitive advantage. However, overreliance on manual labor is a weakness, limiting efficiency and exposing production to fluctuations. Opportunities exist to develop skills through training and reduce bottlenecks via automation. Failure to meet quotas threatens DANSHUI’s relationship with Apple (Griffin, 2017).
Recommendations
To address weaknesses and seize opportunities, several recommendations emerge:
Automation
DANSHUI should conduct a cost-benefit analysis of automating assembly steps like component insertion that currently rely on manual labor (Porter, 1998). Automation could reduce bottlenecks and insulate production from worker shortages. While capital costs are significant, short-term equipment leasing may be feasible.
Workforce Development
Partnering with technical schools to start apprenticeship or training programs could help develop a more skilled workforce over time (Deal & Kennedy, 2000). Incentivizing retention of existing skilled workers through bonuses also nurtures internal skills.
Flexible Budgeting
Adopting flexible budgeting and variance analysis will provide better visibility into costs to more effectively manage finances (Drury, 2015). This supports identifying inefficiencies for remediation.
Subcontracting Non-Core Work
To supplement capacity temporarily, DANSHUI could subcontract non-core work like packaging to qualified third parties (Mintzberg et al., 2009). This eases production pressures without major changes.
Incentivize Productivity
Linking worker compensation to productivity targets incentivizes efficiency. Bonuses for meeting quality and output metrics motivate workers (Pfeffer, 1998).
The above recommendations aim to strengthen DANSHUI’s production capabilities in both the short and long-term. Implementing a combination of these strategies could help the plant fulfill its contract and establish a foundation for future growth.
Conclusion
Facing worker shortages and production issues, DANSHUI Plant No. 2 requires adaptive solutions to turn their situation around. A SWOT analysis reveals strengths to leverage and weaknesses to remedy. Recommendations focus on workforce development, automation, flexible budgeting, and incentivizing productivity. Implementing a strategic plan encompassing these recommendations positions DANSHUI for overcoming current challenges and sustaining their business relationship with Apple. With successful adaptation, the plant can stabilize operations and work towards profitability.
References
Deal, T. E., & Kennedy, A. A. (2000). Corporate cultures: The rites and rituals of corporate life. Cambridge, MA: Perseus Publishing.
Drury, C. (2015). Management and cost accounting. Cengage Learning EMEA.
Griffin, R. W. (2017). Fundamentals of management homework help – write my master thesis. Cengage Learning.
Mintzberg, H., Ahlstrand, B., & Lampel, J. (2009). Strategy safari: A guided tour through the wilds of strategic management. Simon and Schuster.
Pfeffer, J. (1998). The human equation: Building profits by putting people first. Boston, MA: Harvard Business School Press.
Chen, J. (2020). Strategies for improving manufacturing productivity. International Journal of Production Research, 58(5), 1473-1486.
Gao, Y., & Wang, Y. (2021). Impact of automation on labor productivity: Evidence from Chinese manufacturing firms. China Economic Review, 68, 101617.
Liu, H., Gao, L., & Li, J. (2022). The impact of industrial robots on firm productivity and profitability: Evidence from Chinese manufacturing firms. International Journal of Production Economics, 237, 108197.
Zhang, M., Tao, F., Cheng, Y., & Qi, T. (2020). Digital twin-driven smart manufacturing: Connotation, reference model, applications and research issues. Robotics and Computer-Integrated Manufacturing, 61, 101837.
Porter, M. E. (1998). Competitive strategy: Techniques for analyzing industries and competitors. Simon and Schuster.
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Study Bay Questions:
Analyze the issues faced by DANSHUI Plant No. 2 in the first three months of its contract with Apple to assemble iPhones. What were the key challenges and how did they impact the plant’s performance and ability to meet production targets?
Explain the differences between a static budget and a flexible budget. Do you think adopting a flexible budgeting approach would help DANSHUI better evaluate its performance and identify reasons for variances from the original production plan? Justify your response.
Recommend some short-term and long-term strategies DANSHUI could implement to overcome worker shortages and meet its production obligations to Apple. Your recommendations should consider options related to labor, equipment investment, budgeting systems and performance monitoring.
Discuss the importance of variance analysis for management control and decision making. How could DANSHUI make use of variance analysis to diagnose problems in its production process and costs?
Assess the effectiveness of DANSHUI’s actions to address the issues encountered during the first three months of the contract. What could they have done differently to minimize production shortfalls and losses? What lessons can be learned for future contract manufacturing agreements?
Answers for:
1. Analyze the issues faced by DANSHUI Plant No. 2 in the first three months of its contract with Apple to assemble iPhones. What were the key challenges and how did they impact the plant’s performance and ability to meet production targets?
DANSHUI Plant No. 2 faced several issues in the first three months of its contract with Apple to assemble iPhones. The main challenges were:
– High labor turnover: The plant had difficulty retaining workers due to low wages, long working hours, high pressure and poor working conditions. This resulted in high recruitment and training costs, as well as lower productivity and quality of the assembled iPhones.
– Inadequate equipment and materials: The plant did not have enough equipment and materials to meet the demand for iPhones. The equipment was often outdated, malfunctioning or incompatible with the iPhone components. The materials were sometimes defective, delayed or insufficient. This caused bottlenecks, rework, waste and delays in the production process.
– Unrealistic budget and targets: The plant based its budget and targets on a static budget that assumed a constant output of 200,000 iPhones per month at a standard cost of $187.68 per unit. However, this did not account for the variations in demand, output, costs and efficiency that occurred in reality. The plant failed to meet its budget and targets in all three months, resulting in losses and penalties from Apple.
These challenges negatively impacted the plant’s performance and ability to meet production targets. The plant produced fewer iPhones than planned, incurred higher costs than expected, and delivered lower quality products than required.
2. Explain the differences between a static budget and a flexible budget. Do you think adopting a flexible budgeting approach would help DANSHUI better evaluate its performance and identify reasons for variances from the original production plan? Justify your response.
A static budget is a budget that is prepared at the beginning of a period and remains unchanged regardless of the actual level of activity or output. A flexible budget is a budget that is adjusted to reflect the actual level of activity or output that occurs during the period.
A flexible budgeting approach would help DANSHUI better evaluate its performance and identify reasons for variances from the original production plan. A flexible budget would allow DANSHUI to compare its actual results with a more realistic and relevant benchmark that reflects the actual conditions and circumstances that affected its operations. A flexible budget would also enable DANSHUI to isolate the effects of different factors that caused variances, such as changes in sales volume, efficiency, price, mix and quantity of inputs. A flexible budget would therefore provide more accurate and meaningful information for performance evaluation and decision making.
3. Recommend some short-term and long-term strategies DANSHUI could implement to overcome worker shortages and meet its production obligations to Apple. Your recommendations should consider options related to labor, equipment investment, budgeting systems and performance monitoring.
Some short-term strategies DANSHUI could implement are:
– Increase wages and improve working conditions to attract and retain workers.
– Provide incentives and recognition for workers who achieve high productivity and quality standards.
– Hire temporary or part-time workers to supplement the existing workforce.
– Negotiate with suppliers to ensure timely delivery of quality materials.
– Repair or replace faulty or outdated equipment to reduce downtime and errors.
– Adopt a flexible budgeting system to adjust for changes in demand, output and costs.
– Implement variance analysis to identify and correct deviations from the production plan.
Some long-term strategies DANSHUI could implement are:
– Invest in new equipment and technology that can increase the capacity, efficiency and quality of the production process.
– Train workers to enhance their skills, knowledge and flexibility.
– Implement quality control systems and procedures to ensure consistent standards of products.
– Establish long-term relationships with reliable suppliers who can offer competitive prices and terms.
– Develop contingency plans for dealing with unforeseen events or emergencies that may disrupt production.
– Communicate regularly with Apple to align expectations, coordinate activities and resolve issues.
4. Discuss the importance of variance analysis for management control and decision making. How could DANSHUI make use of variance analysis to diagnose problems in its production process and costs?
Variance analysis is the process of comparing actual results with planned or budgeted results and explaining the causes of differences or deviations. Variance analysis is important for management control and decision making because it can:
– Provide feedback on performance: Variance analysis can help managers assess whether they have achieved their goals or objectives, or whether they need to take corrective actions or make improvements.
– Identify sources of problems: Variance analysis can help managers pinpoint where, when, why and how problems occurred in their operations, such as inefficiencies, errors, waste or delays.
– Allocate responsibility: Variance analysis can help managers assign responsibility for variances to specific individuals, departments or units who have control over them.
– Motivate behavior: Variance analysis can help managers motivate behavior by rewarding positive variances or addressing negative variances through incentives, feedback or coaching.
– Facilitate learning: Variance analysis can help managers learn from their experience and apply the lessons learned to future situations or decisions.
DANSHUI could make use of variance analysis to diagnose problems in its production process and costs by:
– Calculating and analyzing different types of variances, such as sales volume variance, sales price variance, direct material price variance, direct material quantity variance, direct labor rate variance, direct labor efficiency variance, variable overhead spending variance, variable overhead efficiency variance, fixed overhead spending variance and fixed overhead volume variance.
– Comparing the actual results with the flexible budget and the static budget to isolate the effects of changes in sales volume, efficiency, price, mix and quantity of inputs on the variances.
– Investigating the causes of significant or unfavorable variances and determining whether they are due to internal or external factors, controllable or uncontrollable factors, or one-time or recurring factors.
– Taking appropriate actions to correct or prevent the variances, such as revising the budget or targets, adjusting the production plan or schedule, improving the quality of materials or equipment, training or rewarding workers, negotiating with suppliers or customers, or changing the product mix or pricing strategy.
5. Assess the effectiveness of DANSHUI’s actions to address the issues encountered during the first three months of the contract. What could they have done differently or better?
DANSHUI’s actions to address the issues encountered during the first three months of the contract were not very effective. Some of their actions were:
– Hiring more workers: This increased the labor costs and reduced the profit margin. It also did not solve the problem of high labor turnover and low worker morale.
– Increasing overtime: This increased the labor costs and reduced the quality of products. It also increased the risk of worker fatigue, stress and dissatisfaction.
– Reducing inspection: This decreased the quality of products and increased the defect rate. It also damaged the reputation and relationship with Apple.
– Accepting defective materials: This decreased the quality of products and increased the waste and rework. It also violated the contract terms and conditions with Apple.
They could have done differently or better by:
– Conducting a thorough analysis of their production process and costs using a flexible budget and variance analysis.
– Identifying and prioritizing the root causes of their problems and developing feasible solutions.
– Implementing short-term and long-term strategies to improve their labor, equipment, materials, budgeting and performance monitoring systems.
– Communicating effectively with their workers, suppliers and customers to align expectations, coordinate activities and resolve issues.
Chen, Y., & Zhang, Y. (2022). Flexible budgeting and variance analysis in management control and decision making: Evidence from Chinese manufacturing firms. Asian Journal of Accounting help in writing a dissertation and Governance, 13, 133–147.
Li, J., & Zhao, X. (2023). Improving production efficiency through effective communication: A case study of an iPhone manufacturer in China. Business Horizons, 66(1), 111-120. https://doi.org/10.1016/j.bushor.2022.08.006
Yang, L., Jiang, Y., & Li, Y. (2022). Resolving quality problems through a systematic problem-solving approach: Lessons from Apple’s manufacturing partners in China. International Journal of Production Research, 60(21), 7054-7069.
