Case study: the SOCA

SOCA, a television manufacturing company, produces its own speakers for assembly into its television
sets. To maintain its production schedule for television sets, the company needs to have 1,000 speakers
available for assembly per day. Each time an order is placed to produce more speakers, the rate of production is
3,000 speakers per day until the order is filled, after which the production facilities are used for other purposes
until another production run for speakers is needed. Since this production rate is three times the rate at which
the speakers are needed, speakers are being produced only one-third of the time.
The current policy for managing SOCA’s inventory of speakers is summarized below.
Current Inventory Policy of SOCA
a. Daily demand rate = 1,000 speakers per day.
b. Daily production rate = 3,000 speakers per day (when producing).
c. The production facilities get set up to start a production run each time the inventory level is scheduled
to drop to 0.
d. Each production run produces 30,000 speakers over a period of 10 working days, so another 20
working days elapse before the next production run is needed.
This policy leads to the pattern of inventory levels over time shown in Figure 5.10. Thus, the inventory
level fluctuates between 0 and a maximum inventory level that is somewhat under 30,000 speakers. The reason
for not reaching 30,000 is that speakers also are being withdrawn from inventory for assembly into television
sets while a production run is under way. Consequently,
Maximum inventory level = 20,000 speakers

Therefore,
Average inventory level = 10,000 speakers

SOCA’s costs associated with this inventory policy are summarized below.
c = unit production cost = $12 per speaker produced,
K = setup cost for a production run = $12,000,
h = unit holding cost = $3.60 per speaker in inventory per year.
With 250 working days per year, the number of speakers needed per year is
D = 250,000 speakers.

Excluding setup costs, the annual cost of producing these speakers is fixed at ($12/speaker) (250,000 speakers)
= $3 million, regardless of the choice of the production lot size.
One cost that does depend on this lot size is
Annual setup cost =
The other variable cost is
Annual holding cost = $36,000
Therefore, SOCA’s total variable inventory cost per year is
TVC = $136,000
SOCA management now wants to determine whether this total cost can be decreased by
adjusting the production lot size appropriately.