Question

Skycell, a major European cell phone manufacturer, is making production plans for the coming year. Skycell has worked with its customer (the service providers) to come up with forecast of monthly requirements (in thousands of phones) as shown in Table 1.

Month	Demand (in ‘000s)
Jan	250
Feb	275
Mar	250
Apr	300
May	375
Jun	400
Jul	400
Aug	200
Sept	275
Oct	175
Nov	350
Dec	425

Manufacturing is primarily an assembly operation, and the number of people on the production line governs capacity. The plant operates for 20 days a month, eight hours each day. One person can assemble a phone every 5 minutes. Workers are paid $25 per hour and a 50 percent premium for overtime. The plant currently employs 1000 workers. Component costs for each cell phone total $30. Given the rapid decline in component and finishing product prices, carrying inventory from one month to the next incurs a cost of $3 per phone per month. Skycell currently has a no-layoff policy in place. Overtime is limited to a maximum of 25 hours per month per employee. Assume that Skycell has a starting inventory of 40,000 units and wants to end the year with the same level of inventory.

a) Assuming no backlogs, no subcontracting, and no new hires, what is the optimum production schedule? What is the annual cost to this schedule?

b) Is there any value for management to negotiate an increase of allowed overtime per employee per month from 25 hours to 50 hours?

c) Reconsider parts (a) and (b) if Skycell starts with only 800 employees. Reconsider parts (a) and (b) if Skycell starts with 1500 employees. What happens to the value of additional overtime as the workforce size decreases?

Answer 1

Worker productivity = 20 days a month * 8 hours per day * 60 minutes per hour / 5 minutes per unit = 1920 units per month

With 1000 workers, regular production per month = 1920*1000 = 1920 (000s) units.

Annual production = 1920*12 = 23040 (000s) units

Annual demand = (250+275+250+300+375+400+400+200+275+175+350+425) = 3675 (000s) units

Overtime capacity per month per worker = (25 hours * 60 minutes per day / 5 minutes per unit) = 300 units per worker per month

With 1000 workers, overtime capacity per month = 300 (000s) units

(a) Annual regular-time production is far more than the annual demand. With no-layoff policy in place, the current annual production on regular-time is approximately 6.27 times the annual demand.

Cost per unit on regular production = component cost + labor cost = 30 + 25*5/60 = 32.083

Cost per unit on overtime production = component cost + labor cost = 30 + 25*1.5*5/60 = 33.125

Formulas:

C5 =B5-C2+C3+C4 copy to C5:N5

C7 =B7+C8   copy to C7:N7

P13 =SUMPRODUCT(O3:O5,P3:P5)

b) Current regular time capacity is far more than annual demand, so overtime capacity is not used at all, so there is no use of increasing overtime capacity

c) With 800 employees,

With 1500 employees