Operations Management Tutorial 8

Tutor: Vania Faulika

Problem 1
Orange Inc. has a new phone for which it has high hopes. Steve Albe, the production
planner, has assembled the following cost data and demand forecast:
Quarter

Forecast

1800

1100

1600

900

Previous quarters output = 1,300 cases

Beginning Inventory = 0 cases
Stockout cost = $150 per case
Inventory holding cost = $40 per case at end of quarter
Hiring employees = $40 per case
Terminating employees = $80 per case
Subcontracting cost = $60 per case
Unit cost on regular time = $30 per case
Overtime cost = $15 extra per case
Capacity on regular time = 1,800 cases per quarter
Steves job is to develop an aggregate plan. The three initial options he wants to
evaluate are:

Plan A: a chase strategy that hires and fires personnel as necessary to meet the
forecast

Plan B: a level strategy

Plan C: a level strategy that produces 1,200 cases per quarter and meets the
forecasted demand with inventory and subcontracting.

a) Which strategy is the lowest-cost plan?

b) If you are Steves boss the VP for operations, which plan do you implement
and why?

Problem 2
Quinns firm has developed the following supply, demand, cost and inventory data.
Alocate production capacity to meet demand at a minimum cost using the
transportation method. What is the cost? Assume that the initial inventory has no
holding

cost

in

the

first

period

and

backorders

Regular

are

not

permitted.

Demand

Period

Time

Overtime

Subcontract Forecast

30

10

40

35

12

50

30

10

40

Initial inventory = 20 units

Regular-time cost per unit = $100
Overtime cost per unit = $150
Subcontract cost per unit = $200
Carrying cost per unit per month = $4

Problem 3
Alberto Instruments, an Italian producer of lighter, develops a 4-month aggregate
plan. Demand and capacity (in units) are forecast as follow:

Capacity Source

Month 1

Month 2

Month 3

Month 4

Regular Time

235

255

290

300

Overtime

20

24

26

24

Subcontract

12

15

15

17

Demand

255

294

321

301

Labor

The cost of producing each unit is $985 on regular time, $1,310 on overtime, and
$1,500 on a subcontract. Inventory carrying cost is $100 per unit per month. There is

to be no beginning or ending inventory in stock and backorders are not permitted. Set
up a production plan that minimizes cost using the transportations method.

Problem 4
An export oriented cikarang firm has forcasted the aggregate demand of their
products as follows :

Jan
Forecasted
demand
Workdays

300

22

Feb

Mar

500

400

19

21

Apr
100

21

May

June

200

300

22

20

Assume that a workday consists of 8 working hours .

To produce each unit, it takes 10 working hours with wages at $6 per hour. The rate
for overtime however, is $9 per hour. Currently there are 20 people working on
production and the cost of hiring and training for additional workers is $300 per
person, while the cowst of layoff is $400 per person. At the beginning of the period,
the firm has 50 units stocked. It is estimated that the cost of stocking is $2 per unit per
month. If the firm runs out of stock, it will cost the firm $20 per unit per month.
There are 3 suggestions of aggregate planning so far :
1. Using a variation in the amount of workers employed to fulfill demand, thus
there is the qoncequense of paying for hiring costs and layoff costs.
2. Using a fixed amount of 20 workers and utilize overtime when there are large
demands, and so the quncequence this time is overtime costs and idle costs.
3. Using level strategy not doing overtime, and the effect of this is in stock out
cost and carrying cost
Calculate the costs related to each plan, and which Plan gives the lowest total cost ?