The S&OP team at Kansas Furniture, has received the following estimates of deman

Question

The S&OP team at Kansas Furniture, has received the following estimates of demand requirements:

July

Aug.

Sept.

Oct.

Nov.

Dec.

1,000

1,200

1,400

1,800

1,800

1,600

a)Assuming stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per unit per month, and zero beginning and ending inventory, evaluate these two plans on an incremental cost basis:

Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month and subcontract additional units at a $60 per unit premium cost.

Plan B: Vary the workforce, to produce the prior month’s demand. The firm produced 1,300 units in June. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back.

Note: Both hiring and layoff costs are incurred in the month of the change, (i.e. going from production of 1,300 in July to 1,000 in August requires a layoff (and related costs) of 300 units in August, just as going from production of 1,000 in August to 1,200 in September requires hiring (and related costs) of 200 units in September).

b)Which plan is best and why?

July

Aug.

Sept.

Oct.

Nov.

Dec.

1,000

1,200

1,400

1,800

1,800

1,600

Explanation / Answer

Solution:

Plan B is best as total incremental cost is lower in Plan B i.e. $36000 as compared to Plan A which have cost of $168,000.

The reason for this was due to less hiring & layoff cost in Plan B. Plan A have fixed $60 per unit outside vendor rate.

July August September October November December Total Demand(in units) 1000 1200 1400 1800 1800 1600 - Plan A - Incremental cost Nil 200x$60=$12,000 400x$60=$24,000 800x$60=$48,000 800x$60=$48,000 600x$60=$36,000 $168,000 Plan B Nil $3000(/100units)*2=$6,000 $3000(/100units)*2=$6,000 $3000(/100units)*4=$12,000 Nil $6000(/100units)*2=$12,000 $36,000

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