13 Jun EVALUATE THE ENVELOPE MACHINE’S CAPACITY TO MEET WHITE SNOW GREETING CARD BUSINESS.
n 1960, after moving to Denver, Ted Barber founded White Snow Greeting Card, Incorporated. Ted had graduated from college three years earlier with a degree in commercial art and was interested in starting his own business. He obtained a loan from a local bank, leased an old plant in the industrial section of Denver, and purchased a used press from a bankrupt printing shop. Two months after the company moved into the plant, the first cards were being shipped to customers.
In the years that followed, the business expanded rapidly through internal growth and acquisition. The current year’s forecast of more than 200 million cards was the best in the company’s history. White Snow distributes and sells cards nationally, with all printing, packaging, and shipping being done at the Denver plant. The plant has been expanded over years and is currently in need of another addition.
Operations
Like most companies in this industry, White Snow manufactures a full line of greeting cards, i.e. Christmas, Valentine, birthday, get well, etc. By 1989 the product line included more than 1,500 designs.
The greeting card business is very seasonal, with the bulk of sales occurring during the Christmas holiday period. The sales of the recently completed year are shown in Exhibit 1. Along with the forecasts for the next two years.
The manufacturing and shipping of all cards is done by 186 employees at the Denver plant. The plant is fully integrated, meaning that all activities are carried out at White Snow, from the design of 5-by-7 inch card right down to packaging 2,500 cards in a box measuring 30 inches by 15 inches by 10 inches for shipment. The plant operates at full capacity most of the time. Occasionally, subcontracting to outside printer is necessary to relive temporary backlog conditions.
Exhibit 1: Actual and forecasted sales (millions of cards)
Current year: 1st quarter: 47.5 – 2nd quarter: 19 – 3rd quarter: 28.5 – 4th quarter: 95 – Total: 190 millions(actual)
Year 1: : 1st quarter: 50 – 2nd quarter: 20 – 3rd quarter: 30 – 4th quarter: 100 – Total: 200 millions(forecasted)
Year2: : 1st quarter 55 – 2nd quarter: 22 – 3rd quarter: 33 – 4th quarter: 110 – Total: 220 millions(forecasted)
Envelope Machine Acquisition
At an executive committee meeting on January 5, Ted Barber raised the question of whether White Snow should purchase an envelope machine from the Gray Tool Company. Up to this point, White Snow has always purchased its entire supply of envelopes. Gray is offering to sell them a machine that has an expected life of about 10 years. The pricing tag on the machine is $900,000. Ted estimates that the machine running at full capacity could make enough envelopes to cover next year’s expected card sales.
Ted’s assistant, Tom Marshall, has already collected some information on the proposed acquisition and operating requirements. Mr. Marshall figures that seven men would be required to run the machine. A two-man-crew would be needed to operate the machine on each of three daily shifts five days per week. Each worker would earn $4.50 per hour. One supervisor, earning $7 per hour, would be required to coordinate and schedule the three shifts. Mr. Marshall estimated that paper and glue would run $2.42 per 1,000 envelopes.
The question of available space was also raised at executive meeting. There is just enough room at the plant for the new machine. However, space for seasonal envelope inventory is limited. They could possibly rent space at the public warehouse down the street at $2 per square foot per year, but would be required to rent in minimum space lots of 1,000 square feet.
At the close of the meeting Ted Barber directed Tom Marshall to gather more information on the important proposal within the next two weeks. A few days later, Marshall sent Ted Barber and update memo saying :
“During our January 5 meeting you directed me to gather more detailed information on the proposed envelope machine now under consideration. This memo summarizes my investigations. Most of the information was gathered from John Deutsch, Plant Manager: Jill Thomas, Personal Director: and Phil McKenzie, Material Manager.
I spent two hours with John the other day discussed the issue of the new machine. He thought our initial estimates of staffing requirements were correct. He wondered if it’s all right to run the machine on overtime. He knows there is a 50 percent premium for Saturday and 100 percent for Sunday overtime, but feels he might have use it when production falls behind. He mentioned that breakdowns and the two-week August vacation shutdown always cause problems in meeting shipping schedule. He hopes the financial budget will allow him some flexibility.
John also reviewed the records of the current machine in the plant. He estimates that power and maintenance costs would be about 65 cents/thousands envelopes run. However, that figure could be expected to increase as the machine gets older.
Later that day I met with Jill Thomas. We discussed the current wage structure in our plant. She mentioned that our workers currently average about $4.50 per hour in wages and there is a 25 percent fringe benefit packages also in force under the current union contract. However, they expect a 5 to 10 percent wage increase when the new contract talks occur next year. Jill also mentioned that we pay shift differentials. Employees on the evening shift get an added 10 percent, while night workers receive 15 percent extra per hour shift differential.
The final item of interest came from Phill Mckenzie. Our current envelope vendor has just provided us with a new price list on orders. They must have heard we plan to make our own envelopes. Listed below is the new price schedule for a placed order, which may have different color and size specification
Price: $4.50/thousands – Order size: less than 20 million
Price: $4.30/thousands – Order size: 20-40 million
Price: $4.10/thousands – Order size: above 40 million QQT “
Questions:
1. Evaluate the envelope machine’s capacity to meet White Snow greeting card business. Is i
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