Case: Planning at a Plywood Mill

The chief of planning at Standard Plywood Company is all set to plan for the next year. He has to face
two decisions, i.e. i) Plant Capacity and ii) Labour rate.

The plant capacity decision involves whether or not the firm should expand the mill, by how much and
when. If they decide to expand now, additional capacity can be added at first quarter of next year.

The second decision relates to labour organizations that are about to start with the company’s labour
union. The company and the labour union have to agree on a labour rate for the coming year. This is
a joint decision and the result of a negotiation process.

The company has prepared forecasts of the prices for the plywood that it will sell next year as well as
projections for how much would be sold (i.e. an estimate of demand). The company has a policy of
producing to order so that no inventory of plywood is maintained. This implies that the company
cannot sell more than what it can produce in any period. Forecasts, have been made for the price of
logs, the raw material from which the plywood is made.

In order to produce plywood, the company incurs expenses for (i) labour, (ii) supplies and (iii) raw
material i.e. logs. Other expenses are related to sales. The company leases its production equipment
and pays fees for these leases. There are also certain fixed (overhead) costs during each period.

The present capacity is 9,200 MSF per quarter. For each MSF of plywood that is produced, 0.52 MBF
of logs is required. The total labour hour required depends on the plywood production and the labour
productivity.

Labour hour = plywood production / labour productivity

Each MSF of plywood uses $28 in supplies in the production process. Sales expense is 10% of sales
revenue. Fixed expense is $20,000 per quarter. The cost of leasing equipment is $11 per MSF of
installed capacity per quarter. The current labour rate is $9 per hour.

Estimates for exogenous variables are given in the table below:

Variable Unit Quarter 1 Quarter 2 Quarter 3 Quarter 4

Plywood price
$ / MSF 125 125 130 130
Plywood demand
MSF 10,000 10,800 8,000 10,000
Log cost
$ / MBF 75 75 75 80
0.4
Labour productivity MSF / hr 0.4 0.4 0.4

Questions:

1) Design a spreadsheet model to arrive at the profit for each quarter and the annual profit.

2) How much could the labour rate increase before the mill became unprofitable?

3) If for an addition of $2 in the labour rate, the union promises to improve the productivity to
0.5. is this proposal acceptable from profit point of view?

4) What is the impact of additional capacity on annual profit?

Important factors in Modeling the case

Decision Variables

LABOUR RATE: Average wage for mill employees (Dollar per hour)

ADDITIONAL CAPACITY: amount of capacity (MSF or thousands of Surface Square Feet

of plywood capacity) added in each quarter

Performance Measures

PROFIT: Net profit from operating the mill each quarter and for the year

Exogenous Variables

PLYWOOD PRICE: Sales price for plywood each quarter (dollar per MSF)

DEMAND: Demand for Plywood each quarter (MSF)

LOG COST: Purchase cost of logs (dollars per MBF – dollars per thousand board feet)

LABOUR PRODUCTIVITY: Production output (MSF) per labour hour

Constraints & Policies

No inventories of plywood. Production of plywood is scheduled to match sales. Analysis is to

be done by quarters

Intermediate Variables

REVENUE: Revenue from sales of plywood per quarter

OPERATING EXPENSES: Expenses associated directly with producing plywood (supplies

expense, raw material expense and labour expense)

SUPPLIES EXPENSE: Expenses for supplies per quarter

LABOUR EXPENSE: Cost of labour per quarter

LOGS REQUIRED: Amount of logs needed for production (MBF per quarter)

PLYWOOD PRODUCTION: amount of Plywood produced (MSF per quarter)

CAPACITY: Annual production capacity of mill (MSF per quarter)

OTHER EXPENSE: Total of other expense including sales expense, fixed expense and
equipment expense per quarter

SALES EXPENSE: Expense for marketing plywood per quarter

FIXED EXPENSE: Fixed expense per quarter

EQUIPMENT EXPENSE: Lease cost for equipment per quarter

 Influence diagram for the Case Planning at a Plywood Mill

Profit

Other Expense Operating

Expenses

Sales Fixed Equipment Supplies Raw material Labour

Expense Expense Expense Expense Expense Expense

Logs Labour Hours

Required
Revenue
Plywood
Production

Capacity

Plywood Demand Log cost Labour

price Productivity
Labour Rate
Additional
Capacity