Plant Operations Report

Explanations of Numbers — How Costs Are Allocated — Suggestions and Tips for Using the Report

This report and the Benchmarking data on p. 6 of each issue of the Footwear Industry Report are your most valuable tools for diagnosing the efficiency of your plants and production operations and for staying on top of how well you are managing the company’s production activities.  You and your co-mangers should always, without fail, review the information on this report as part of your preparation for making the upcoming year’s decisionsyou cannot hope to craft a shrewd production strategy and manage the company’s plant operations efficiently without an understanding of what drives production costs and how production costs in one plant compare with production costs in your other plants.

This Help screen consists of two sections. The first deals with understanding the ins and outs of all the numbers being reported.  The second deals with suggestions and tips for using the information in making decisions on how to run the production side of the company’s business.

Understanding the Numbers on the Plant Operations Report

This report provides a thorough rundown of plant operating statistics—the amount of plant capacity, the status of plant upgrades, the amounts invested in plant capacity, worker productivity and compensation statistics, assorted branded and private-label production data, and branded production costs.

While some of the numbers in this report are fairly self-explanatory, there are some numbers reported here that require discussion and comment about what they mean, how they were calculated, what causes them to change, and how they can be used to guide decision-making and your efforts to run the production side of the business.

You should pay particular attention to the discussion of the numbers in the Branded Production Cost section to be sure you understand what the cost numbers mean, where they come from, and what company co-managers can do to lower them.  There is information about plant economics and branded production costs in this section not covered elsewhere. And there is discussion of which plant costs are allocated between branded production and private-label production (some are and some are not) and how the costs are allocated.

Plant Capacity Information. In the first bank of data on Plant Capacity, the amount of production capacity available for your company’s use in any of the four geographic regions in any year is equal to:

All of the numbers regarding pairs of capacity do not include use of overtime, so the total production capability of the plant capacity available when operated at full overtime is always 20% more then the capacity numbers shown on this report.

Plant capacity in a region in the upcoming year, as you can see in the last two lines of the Plant Capacity section, is always equal to capacity in the current year plus any capacity that was under construction in the region in the report year.  You and your co-managers can, however, increase/decrease the amount of capacity available at the beginning of the upcoming year by either

  1. Purchasing footwear-making equipment from the merchants of used equipment if it is available—this equipment can be installed immediately and is thus available for use throughout the upcoming year or
  2. selling some or all of the existing footwear equipment at a plant to the used equipment merchants (who stand ready to buy used equipment in increments of 100,000 pairs of capacity at a price equal to the undepreciated book value of the equipment).

Plant Upgrades. There are four options for upgrading existing plants and equipment as shown below:

    Benefits   Capital Investment Requirement and Impact on Annual Depreciation Cost
Option A   Reduces the number of defective pairs by 50%   One-time capital outlay of $2.5 million per million pairs of plant capacity
Option B   Reduces production run set-up costs by 50%   One-time capital outlay of $5.5 million per million pairs of plant capacity
Option C   Boosts S/Q rating by 1-star   One-time capital outlay of $5.0 million per million pairs of plant capacity
Option D   Increases worker productivity by 25%   One-time capital outlay of $3.5 million per million pairs of plant capacity

This report indicates which upgrades have been undertaken at which plants and whether any plant upgrades were initiated in the report year.

A maximum of two upgrades can be chosen for any one plant.

Only one option per year may be undertaken at the same plant.

Upgrade options take effect the year after being ordered and undergoing construction/installation.

No upgrades may be ordered for a new plant during the year it is being constructed. An upgrade option can be ordered for a new plant the first year the new plant is on line or any year thereafter.

Plant Investment Information. The section on Plant Investment shows how much your company has invested in production capacity in each region where your company has a plant.

Labor Statistics. There’s little to explain here that is cannot be readily deduced from the presentation of the numbers. What is worth commenting on, however, is that the compensation and productivity of the work forces at the North American plant and the Asia-Pacific plant are sharply different.  The productivity of your company’s North American workforce was 60% higher than that of the Asia-Pacific workforce in Year 10, but the compensation costs of $20,100 for North American workers was over 5 times that of the $3,700 compensation of worker at the Asia-pacific plant.  This translates into higher labor costs per pair produced — as you can see by comparing the labor cost numbers in the breakdown of branded production costs in the bottom section of the report for the North American plant versus the Asia-Pacific plant.

Worker productivity at a plant is important because it determines the size of the workforce needed to staff plant operations.  For instance, if your company elects to produce 2 million pairs of shoes at its North American plant and the annual productivity of North American workers averages 4,000 pairs annually, then it will take a workforce of 500 people to produce the 2 million pairs.  But if base pay increases can, over time, help boost worker productivity to an average of 5,000 pairs, then only 400 workers will be needed to produce 2 million pairs.  A smaller work force can translate into lower total payroll costs and lower labor costs per pair produced if the cost-reducing gains in productivity outweigh the cost-increasing impact of the higher compensation per worker.

Annual worker productivity (that is, how many pairs each worker, on average, produces in a given year) is influenced by five factors:

The numbers shown for cumulative best practices training at a plant represent average expenditures at the plant per worker and per pair produced, respectively, over all years such training has been done at the plant. Your company first began best practices training in Year 10, so the cumulative numbers reflect the Year 10 effort plus any amounts spent on training price then.

The numbers shown for cumulative spending for best practices training at each plant, together with the information and on-screen calculations on the Branded Production screen, will help you evaluate the cost effectiveness of more/less expenditures for best practices training.

Production Statistics. The information in this section gives you a solid overview of the production activities at each plant during the report year.  It shows branded and private-label pairs produced at regular time and overtime, the pairs rejected and reject rate percentages, the percentage of plant capacity that was utilized to make branded and private-label footwear, the number of models produced, and the S/Q ratings of the footwear produced at each of the company’s plants.

You should make a habit of monitoring reject rates at each plant each year and whether the reject rate is rising or falling. Historically, reject rates have been higher at the Asia-Pacific plant than at the plant in North America.  The reject rates at a plant are a function of five factors:

It is possible to reduce plant reject rates to 1% or less, but it remains for company co-managers to explore to what extent such efforts would be cost-effective.

Branded Production Cost Statistics. This section of the report should always merit your full attention because it provides detailed cost breakdowns of making branded footwear at each of your company’s plants.   Note that there are two columns of cost data—one for total dollars of cost and one for costs per branded pair produced (after allowing for rejects).  The columns of data for the geographic regions where you have plants are the most pertinent because they convey the costs at each plant; the numbers in the “Overall” column on the right provide the total dollars of cost for all plants and the companywide average cost numbers per branded pair produced.

Using the Information on This Report to Enhance Decision-Making

This report is particularly valuable for staying on top of what is going on at each of your company’s plants and for gaining clues about whether actions are needed to drive down certain costs components at one or more plants.  The information in this report allows you to: