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Demand factor - Assembly time

05.01.2015

Assembly time is one of the most underrated factors. A common optimum of assembly time for products is 110% - 120%, but the real optimum of assembly time can greatly go beyond this range, as it depends on several factors:

1. Elasticity of demand versus assembly time
2. Features of the influence of assembly time on demand
3. Wage rate

Elasticity of demand from assembly time

Diagram presents test results of assembly time for product 1 among 5 teams in the same group. Vertical - relative change in demand compared with previous period. Horizontal - relative value of assembly time in % from normal time.

Demand versus assembly time is a power function that will be unique to each market and product.

Features of the influence of assembly time on demand

An increase in assembly time will be reflected in an increase in sales only after 1 period, but a decrease in assembly time will reduce sales already in the current period. It is important to remember and calculate the optimal value of the assembly time at once for all 5 periods, so as not to incur unnecessary costs. For example, in scenario 12C3, in period 1, the company has a shortage of assembly workers to fulfill the production plan, so you cannot increase the assembly time to the optimal value of 120%. At the same time, there is a shortage of assembly workers on the labor market and in the 2 period you will most likely not be able to hire the required number of assembly workers. As a result, in period 2, you also cannot increase assembly time to the optimal one. By the 3 period, the required number of assembly workers has been hired, but remember that the effect on demand will affect only after a period, i.e. in the 4 and 5 periods, and the 3 period you will work "for free". In such situation, it makes no sense to increase the assembly to 120%, it will be unprofitable, so you should leave everything as it is.

Wage rate

Main thing you should pay attention. Between wage rates 10.00 and 13.50 is a huge difference. At rate 10.00 you can safely increase assembly time up to 125% - 130%, increased demand offsets wage costs. While at wage rate 13.50 setting assembly time above 120% is dangerous, because salary costs will “eat” effect of sales growth.

Hints

1. There is no residual effect on demand from assembly time
2. Dependence of demand on assembly time is expressed by a power function
3. The effect on demand from assembly time differs by market and product
4. The dependence of demand on assembly time is influenced by competitors in the group

Automatic demand forecast based on assembly time is built into the Calculation model, which can be purchased in our store.