Chapter 3: Sales & Operations Planning

DISCUSSION QUESTIONS AND PROBLEMS

1. The ABC Company has recognized the following demand for the next four quarters:
Quarter Demand
1 3000 units
2 4000 units
3 4500 units
4 3500 units
ABC has traditionally used the hiring and firing of workers to accommodate the changes
in demand for their products, but is considering maintaining a stable workforce and
subcontracting production when demand exceeds the capability of the workforce. They
currently have 30 workers, each capable of producing 100 units per quarter. It costs them
$3000 to hire a worker, and $5000 to fire the worker. If they subcontract the work, it will
cost them a $30 per unit above their normal production cost. Given this information,
should they continue their current practice or move to subcontracting the production over
what their current workforce can produce?
Current strategy of hiring/firing costs less with this forecast.
Needed Contract
Quarter Demand Capacity Needed Capacity Hire (-Fire) Cost Costs
1 3000 3000 0 0 0 0 0
2 4000 3000 1000 10 10 30000 30000
3 4500 3000 1500 15 5 15000 45000
4 3500 3000 500 5 -10 50000 15000
Total Cost $81,500 $90,000

2. Use the data from exercise 1 to consider another possibility – They could hire a
set of workers at the beginning of the year and build inventory. They could then
use the inventory (and some subcontracting, if necessary) to deal with the
quarters where demand exceeds production. Using this method, the inventory
will cost them $15 per quarter based on the inventory on hand at the end of the
quarter. Will this option be more or less attractive than the alternatives
considered in exercise 1?
Assumptions: set of employees = 5 employees. $15/quarter per unit over demand
inventory costs.
Additional Contract
Inventory Labor Costs Units Inventory
Quarter Demand Capability Needed Workers Inventory to hire Needed Costs Contract
1 3000 3000 0 5 500 15000 7500 0
2 4000 3000 1000 5 0 0 0
3 4500 3000 1500 5 -1000 1000 0 30000
4 3500 3000 500 5 0 0 0
Costs $15,000 $7,500 $30,000

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 $52,500 additional costs (Inventory at $7500 for the first quarter, $15,000 to hire the
inventory set off workers. $30,000 in contract labor costs.) One cost not taken into
account is the additional labor cost the Inventory workers will cost after hiring costs, but
we should be able to assume they will cost less than the Contract labor.

We will save $60,000 in additional costs from problem #1 contract costs (90,000-30,000).
Inventory costs will take that number to $52,500 in savings using the Inventory workers.
Taking hiring costs (52,500 - 15,000) out we then have $37,500 in savings.

3. The Icanride Bicycle company has the following projected sales demand for the
next six months (assume each month has the same number of production days):
Month Demand
1 2500
2 3600
3 2900
4 3300
5 4000
6 3500

Inventory costs them $10 per month per bike based on average monthly inventory
(beginning plus ending inventory divided by 2), and any shortage costs them $15 in lost
profit. They currently have 30 workers, each capable of producing 100 bikes per month.
The workers can produce 20 extra bikes per month on overtime, but it costs an additional
$14 in overtime cost per bike produced in overtime.

a. Compute the cost of using overtime and inventory production without

shortages. Can they accomplish that goal under current circumstances?
Icanride Bicycle
Regular time Overtime Regular time Overtime
Demand Capacity Capacity production production Inventory (end PD)
Month 0
1 2500 3000 600 3000 300 800
2 3600 3000 600 3000 300 500
3 2900 3000 600 3000 300 900
4 3300 3000 600 3000 300 900
5 4000 3000 600 3000 300 200
6 3500 3000 600 3000 300 0
Total
(units) 19800 18000 3600 18000 1800 3,300
@$0 /unit @$14 /unit @$10 /unit
Subtotal Costs $0.00 $25,200.00 $33,000.00
Total Cost $58,200.00

This is just one of many different solutions. I assumed that we forecast for the 6-month
demand and built inventory for that demand. You can also build full-scale overtime
(3600/month) you will end up with an inventory of 1800 bikes costing about $98,400.

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 b. Compute the cost of producing only using overtime and shortages (if
necessary).
Icanride Bicycle
Regular time Overtime Regular time Overtime Inventory Shortage
Month Demand Capacity Capacity production production (end PD) costs
1 2500 3000 600 3000 0 500 0
2 3600 3000 600 3000 100 0 0
3 2900 3000 600 3000 0 100 0
4 3300 3000 600 3000 200 0 0
5 4000 3000 600 3000 600 0 400
6 3500 3000 600 3000 600 100 0
Total (units) 19800 18000 3600 18000 1500 700 400
@$0 /unit @$14 /unit @$10 /unit @$15 /unit
Subtotal Costs $0.00 $21,000.00 $7,000.00 $6,000.00
Total Cost $34,000

c. Which alternative is better? Discuss.

From a pure cost standpoint - option B is better but how much customer goodwill is lost
on each missed sale?

4. The Mesa Table Company has projected the following demand for their dining
room table line:
Month Demand
1 740
2 720
3 860
4 900
5 810
6 700

There are currently 20 workers on the line, each capable of producing ten tables per week
on regular time, and an extra 2 tables per week using overtime. A table produced using
overtime costs an additional $40 per unit in overtime pay. They also have the option of
using a local subcontractor, but to do so costs an additional $50 per table. They can also
hire workers at a hiring cost of $2000 per worker hired, and if a worker is fired or laid off
there is a cost of $3000 per worker. Any table remaining in inventory at the end of a
month costs $10 per month based on the quantity at the end of the month (assume 4
weeks per month).

a. Compute the extra cost to meet all demand by using overtime and
inventory. Subcontracting is to be used only if absolutely necessary.
Hiring and firing of workers is not allowed.

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 Regular time Overtime Regular time Overtime Inventory
Demand Capacity Capacity production production (end PD)
Period 1 740 800 160 800 0 60
Period 2 720 800 160 800 0 140
Period 3 860 800 160 800 0 80
Period 4 900 800 160 800 20 0
Period 5 810 800 160 800 10 0
Period 6 700 800 160 800 0 100
Total(units) 4730 4800 960 4800 30 380
@$0 /unit @$40 /unit @$10 /unit
Subtotal Costs $0.00 $1,200.00 $3,800.00
Total Cost $5,000.00
Cost will be $5000 in overtime and inventory costs but you will not need any subcontract
work.
b. Compare the extra cost in (a) with the cost of using hiring/firing and
subcontracting, with no overtime and minimal inventory.

Regular Regular
Dema time Subcontrac time Average
nd Capacity t Capacity production Inventory Inventory Sub Hired Fired
Month
1 740 760 100 740 20 10 0 0 1
2 720 720 100 720 20 20 0 0 1
3 860 840 100 840 0 0 0 3 0
4 900 880 100 880 0 0 20 1 0
5 810 800 100 800 0 0 10 0 2
6 700 720 100 700 20 10 0 0 2
Total(units) 4730 4720 600 4680 40 50 4 6
@$0 /unit @10/month $50/unit $2000/unit $3000/unit
Subtotal Costs $0.00 $400 $2,500 $8,000 $18,000
$28,9
Total Cost 00

5. Another family of products for Mesa Table Company has the following
projected monthly demand:
Month Demand
1 1000
2 850
3 600
4 500
5 650
6 700
There are currently 30 workers each capable of producing 50 tables per month. They
have a no-inventory policy in this area because of lack of space. There is also no
subcontractor for this line. They can lay off workers at a cost of $5000 per worker. To
bring them back costs an additional $4000 per worker. The marketing department has

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suggested that if they start a promotion campaign immediately they can increase the
demand during the last four months to 750 per month. The promotional campaign will
cost the company $35,000. The company recognizes a cost of $300 per table in the event
of a shortage. Based on financial considerations, should they give the marketing
department permission to start the campaign?

Number of Employees 30
Production Rate 50 per month
Overtime Rate per month
Overtime Cost per unit
Subcontracting per unit
Hire Cost $4,000 per employee
Fire Cost $5,000 per employee
Inventory Cost per month based on eom inventory
Shortage Cost $300 per table

Number of Possible Regular Hire Fire

Month Demand Employees Production Production Hires Fires Cost Cost
30
1 1000 20 1000 1000 0 10 $0 $50,000
2 850 17 850 850 0 3 $0 $15,000
3 750 15 750 750 0 2 $0 $10,000
4 750 15 750 750 0 0 $0 $0
5 750 15 750 750 0 0 $0 $0
6 750 15 750 750 0 0 $0 $0
TOTAL $0 $75,000
Total Cost $75,000