Executive Summary Thicketwood Ltd. is a custom kitchen cabinet manufacturer based out of Kitchener, Ontario.

Cabinets made by Thicketwood are characterized by their custom design and handcrafted nature. Customers, typically brought in through word-of-mouth referrals, are willing to pay top dollar for this high quality product. Problem and Environment Currently, each cabinet is made entirely by hand, which takes a total of 221.6 minutes to complete. The production process consists of five stages: cutting, drilling, routing, assembling, and finishing. Routing, which takes 96 minutes per part, poses the largest restriction to capacity. Thicketwoods production of only five cabinets per day equates to an effective capacity of just 1250 custom cabinets per year. See Exhibit 1-Baseline for a detailed view of Thicketwoods current production line and resources. See Exhibit 2-Baseline Prod Sched for their current production schedule and capacity and throughput time. The demand forecasted for the upcoming year is 2000 cabinets; Thicketwood Ltd. is presented with the challenge of meeting this demand. In an effort to meet the demand, management is considering purchasing a CNC router, which would, in effect, eliminate the bottleneck at the routing stage. In addition to deciding on whether or not to purchase the router, Thicketwood must decide between a new and a used CNC router. Thicketwood currently employs 15 line workers, representing a total annual labor cost of $480,000 per year. Introducing a router to the production process would allow for a significant reduction in employees and, consequently, labor costs; however, one employee would have to be hired at a higher wage rate to operate the router. Purchasing a CNC router would also require initial training costs of $1,500, additional electricity usage of $1,000 per year, and regular maintenance of $4,500 per year. A

more detailed analysis of costs for the baseline scenario and for each of the routers is available in Exhibit 3. Analysis & Assumptions Quantitative Analysis: Effect of CNC router on the production line A CNC router will reduce the cycle time of routing one cabinet from 96 minutes to 48 minutes (12 minutes per part). Surprisingly this alone would only increase throughput form 1,250 to 1,667. After analyzing the production process with the addition of the routing machine, we realized that the bottleneck had moved to the hole drilling stage. To solve this we balanced the line by adding an additional worker at the new bottleneck, which in turn increased capacity to 2,500 cabinets / year, making market demand the new restriction. Given that limited information is offered about fixed costs, variable costs, and projected revenues, our analysis is based primarily on cost savings. New versus Used Router Purchasing a new router from High-Tech Inc. would require an initial cash outlay of $150,000. In our analysis, we assume that Thicketwood Ltd. has enough liquidity to cover this sizable investment. The new router will allow for a reduction of three line workers. Because it is a new, state-of-the-art machine, no additional maintenance expenses are expected. The warranty that comes with the router covers three years of the five-year life span. Although a used router from TDL Products would only require an initial cash outlay of $60,000, it would only substitute 2.5 workers and would cost $20,430 more to operate each year than the new High-Tech Inc. router. Exhibit 3.A shows the detail of this figure. The one-year warranty covers only 33% of its three-year life span, and would cost an additional $1,000 in maintenance expenses per year.

The net benefit of acquiring the routers is the result of the additional revenue earned from the increased 750-unit sales from being able to meet the market demand of 2,000 units, plus the cost savings that each router generates. Since both routers would increase revenue by the same amount, net benefits come solely from the cost efficiencies each router yields. The new High-Tech routers cost savings would amount to $61,105 per year, while the used TDL router would bring $40,675 per year. The calculated net cost reductions include the tax savings deriving from the depreciation cost that the machines allow for. (See Exhibit 3.A) By dividing the initial machine investment into the net cost savings that each machine yields, we obtained that the payback for the new High-Tech router is 2.5 years, and 1.5 years for the used TDL router. (See Exhibit 3.B) Qualitative Analysis: Thicketwood should consider the impact that purchasing the router will have on quality & design, customer value, and employee morale. Thicketwoods customer base has come to expect handcrafted, high-quality, custom-manufactured cabinets. Therefore, the quality, design, and customer value of the routed cabinets must be, at minimum, at par with the handcrafted nature of the original product. The router might actually produce a higher quality product than before, resulting in a more satisfied customer and increased demand, which would allow Thicketwood to increase its price points and generate a higher return. In the baseline scenario, Thicketwood is already overstaffed. The production only requires nine line workers and currently employs 15. Layoffs are inevitable. However, the resulting layoffs after purchasing the router may be blamed on the technological replacement of human resources and have a negative impact on the currently healthy management employee relationship.

A table showing the main pros and cons of each machine are listed below: Pros Smaller Initial Cash Outlay Established Vendor Relationship Local sales representative Confident in supplier servicing Reduce number of line workers by 2.5 workers State of the Art equipment Longer life span Longer warranty period Reduce number of line workers by 3 workers 60% machine life warranty coverage Cons Requires more maintenanceadditional cost Shorter warranty period Shorter life span 33% machine life warranty coverage Larger cash outlay No relationship with supplier Longer payback period

Used Router from TDL Products Co.

New Router from HighTech Inc.

Recommendation At a high-level analysis, we were able to make observations about the baseline scenario that, with simple tweaks, could immediately improve efficiency and/or reduce labor costs. Based on the information in the case (See Exhibit 1), we recommend the following improvements in labor productivity: The production line utilizes only nine employees while Thicketwood employs 15 line workers. Setting up a second routing line with its own assembly and adding one additional worker to the whole drilling stage, would allow Thicketwood to increase capacity and meet the next years 2000 cabinet demand, with no additional investment, and provided that there is enough room at the plant to accommodate the second production line. But as weve have already shown, the routing machines achieve the same result at a lower total cost.

Conversely, reducing the number of employees may reduce labor costs, thus increasing the production line profitability. After working through the analysis of each router, it is to Thicketwoods benefit to purchase the new High-Tech router. Because the capacity and production rate for both machines are equal, expected returns are dependent on the initial cash outlay, running costs, depreciation tax savings over the life span of the router, total router life span, and warranty coverage. Despite the $90,000 additional cash outlay, the new High Tech router is still $20,430 less expensive to operate per year. The cost savings will cover the price premium in just 4.4 years, which is less than the 5-year life span of the machine. (See Exhibit 3.B) Although purchasing the new High Tech router increased capacity from 1,250 to 1,666 cabinets / year (See Exhibit 4), this was not sufficient to meet the upcoming years demand for 2,000 cabinets, making further adjustments to the line necessary. After revising the production schedule including only the new routing machine, we see that the router, coupled with rebalancing the production line, will increase capacity from 1250 cabinets per year to 2,500. Purchasing the new router and balancing the line creates spare capacity that will allow us to meet future increases in demand. (See Exhibit 5) Our analysis also included balancing the line by adding a worker at the hole-drilling stage, beginning assembly on non-routed part first, and adding an additional worker at the assembly stage. Although it did increase capacity by 105.86 cabinets and decrease TPT by 85.8 minutes, the new bottleneck is still demand, eliminating the need for the capacity increase. Furthermore, the incremental cost of the extra worker (increase from 7 to 8) added to the assembly stage reduces the production line profitability. (See Exhibit 6)