The president of Hill Enterprises, Terri Hill, projects the firm\'s aggregate de

Question

The president of Hill Enterprises, Terri Hill, projects the firm's aggregate demand requirements over the next 8 months as follows 1,450 1,600 1,800 1,900 2,100 2,300 1,800 1,300 May June January February March April August Her operations manager is considering a new plan, which begins in January with 200 units of inventory on hand. Stockout cost of lost sales is $65 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle-time costs. Evaluate the following plans D and E. Plan D: Keep the current workforce stable at producing 1,600 units per month. In addition to the regular production, another 20% of the normal production units can be produced in overtime at an additional cost of $55 per unit. A warehouse now constrains the maximum allowable inventory on hand to 600 units or less Note: Do not produce in overtime if production or inventory are adequate to cover demand.

Explanation / Answer

Since, stock out costs are 6565, while inventory costs are 2525 and subcontract cost are 75 only, it makes sense to
1. Keep inventory at zero and subcontract units if stock out is happening
2. The rule used will be first fill subcontract to make invenotry zero. Whereever, last month inventory+prod+sourcing- demand is greater than 0, don't do sourcing.
3. Whereever, without sourcing invenotry is coming negative, use the same amount of units is sourcing to make inventory zero.
Final output is given as:
Plan E
Month Demand Production Subcontract (Units) Ending Inventory Subcontract costs inventory holding costs Stockout costs
(Units)
December 200 505000
January 1,400 1,600 400 0 1010000 0
February 1,600 1,600 400 0 1010000 0
March 1,800 1,600 200 0 505000 0
April 1,900 1,600 100 0 7500 0 0
May 2,200 1,600 600 0 45000 0 0
June 2,100 1,600 500 0 37500 0 0
July 1,700 1,600 100 0 7500 0 0
August 1,300 1,600 300 0 757500 0
97500 3282500 0
Formulas used for ending inventory: Lat month ending inv + prod + sourcing- demand = ending invenotry of this month

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