Operation Decisions

1326 Words Mar 2nd, 2015 6 Pages
ASSIGNMENT 1: OPERATIONS DECISION 2
The company that I am consulting is Simple Simon’s Pecan Pie Factory. Simple Simon’s has been producing pecan pies for thirty years and is an established and well-recognized competitor in the gourmet pie market. The company has two manufacturing plants in Tifton, GA and Charleston, SC, and ships its pies all over the world. Recently, I was contacted by the president of the company, Simon Fair, to make recommendations on how to turn around the company’s floundering operations. Over the last three years, Simple Simon has seen its market share fall and its revenue decline 15% each year. There have been several competitors that have entered the market within the last five years that have taken
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Competitors have used this fact to differentiate themselves from Simple Simon.
Simple Simon’s current financial situation is tenuous. The company is producing 6,000 units per month, but after all variable and fixed costs, they are losing $40/month. The company’s labor costs are extraordinarily high. The current labor cost is $23.33/unit, which is 72.9% of the $32 sales price (See attached Table 1).
The production function of a firm relates the quantity of inputs to the quantity of outputs. For this analysis, Simple Simon’s production function is a linear function with labor as its only input. Production functions can be short run or long run. In the short run, capital inputs like plant and machinery are fixed and only variable inputs like labor and raw materials can be changed (Production Functions, p.1). Depending on what stage of production the firm is in, the law of diminishing returns affects the level of output. The law of diminishing returns states that as more units of a variable input (i.e. labor) are added to fixed amounts of land and capital, the change in total output will at first rise and then fall. Simple Simon is so under-utilizing its labor that even if the number of workers is doubled, there is still not a reduction in the level of output per unit of labor.
There are several steps Simple Simon’s should undertake to increase profitability. In the short-run, the company should reduce the cost of labor to $65
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