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- 1000, Aug- 1200, Sept- 1400, Oct- 1800, Nov- 1800, Dec- 1800.

a) Assuming one-time stockout costs for lost sales of $100 per units, 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 1000 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 1300 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 layoffs costs are incurred in the month of the change (ie going from production of 1300 in July to 1000 in August requires a layoff ( and related to costs) of 300 units in August, just as going from production of 1000 in August to 1200 in September requires hiring ( and related costs) of 200 units in September.

B) which is the best plan and why?

Explanation / Answer

Plan A

Plan B

Plan B is better from the point of view of the total cost.

Month Demand Production Subcontract Jun Jul 1000 1000 0 Aug 1200 1000 200 Sep 1400 1000 400 Oct 1800 1000 800 Nov 1800 1000 800 Dec 1800 1000 800 Total 6000 3000 Cost/ unit $60 Cost $180,000

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