Five Star Tools

Executive Summary

        Five Star Tools is a business that produces diamond-coated cutting tools used by jewelers.  The company is currently in a dilemma whereas they are having trouble moving purchased products into the hands of their clients in a timely manner.  In a 3 step process, the products made from unfinished steel planks, to diamond coated sharpened tools.  In the final step, coating and sharpening, is where the company is experiencing the most hardship.  The machinery used during this process is expensive and the labor needed is highly specialized.  Furthermore during this stage, products coming into this department are personally inspected for roughness or blemishes and then inspected again after production for defects.  Each part of this step is time consuming and the company is currently at capacity in production.  First we will examine if any steps can be taken to loosen constraints in this problematic department.  We will then see which of the two products is more profitable per hour of production for the company.  We will analyze the effect of extra hours on revenue and lastly, we will examine a scenario where hours are freed up in this department.  The suggestions brought forth by the writer is first acquire more machinery and personnel, discontinue the Model D400 and present a profit scenario by the rearranging of labor and adding a step between steps 2 and 3.

There are three major steps associated with creating the cutting tools; steel blanks are cut to size, the blanks get a chemical bath, and last they are sharpened and coated with diamonds.  As stated earlier, the problem is that the company is not able to meet the demands of its customers in a timely fashion. The problem department is the final step of coating and sharpening.  This process takes too long.  In this case, the company may want to buy extra machinery for this process or hire more labor.  The quality of machinery and labor must also be analyzed so that minimal mistakes are made to lessen defects.  If they need more square footage to house the extra staff, they will want to take into account that their fixed costs may rise in that respect as well.  

        If it is not a possibility to streamline Step 3 of the process we would then look at the Model C210 and the Model D400 and see which product is more optimal to profit and ensuring a timely delivery.  Lets look at the two respective contribution margins divided by hours of production.

Model C210:

Contribution Margin is $250 and hours of production is .2

250/.2 = $1250

Model D400:

Contribution Margin is $430 and hours of production is .8

430/.8 = $537.50

For every hour of production the Model C210 produces $1250 in incremental profit, as opposed to the D400, which produces only $537.50.  The Model C210 is the more optimal product and should be emphasized.  Even though there is more profit per unit made on the D400, it takes longer to making a smaller increment of profit per hour than the C210.  Any extra hourly gains in the abovementioned products (Model C210 & Model D400) would produce $1250 and $537.50 per hour respectively.

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