Question

Suppose you have been given responsibility for developing the six-month aggregate production plan at Soda Galore, a manufacturer of soft drinks. Your company makes three types of soft drinks: regular, diet, and super-caffeinated. Fortunately, all three types are made using the same production process, and the costs related to switching between the three types are so minimal that they can be ignored. Thus, you can treat your problem as an aggregate planning exercise where the planning unit is cases of soft drinks, regardless of what types of drinks they are.

The S&OP team has developed a forecast of demand for the first six months of the year as shown in Table 13-3. The S&OP team has also provided you with the cost data shown in Table 13-4.

The material cost of a case of soda is the same regardless of whether it is produced in regular time or overtime.

TABLE 13-3 Monthly Demand at Soda Galore

Month	Demand Forecast
January	16,000	cases
February	32,000	cases
March	32,000	cases
April	32,000	cases
May	24,000	cases
June	80,000	cases
Total Demand	216,000	cases
Average Monthly Demand	36,000	cases

TABLE 13-4 Soda Galore Planning Data

Current workforce		10	workers
Average monthly output per worker		2,000	cases per month
Inventory holding cost	$	0.40	per case per month
Regular wage rate	$	36	per hour
Regular production hours/month/worker		235	hours
Overtime wage rate	$	54.00	per hour
Hiring cost	$	1,000	per worker
Subcontracting cost	$	7.00	per case
Firing/layoff cost	$	1,500	per worker
Beginning inventory		5,000	(all safety stock)

Assume that employees negotiate an increase in the regular production wage rate to $40 per hour and $60 per hour for overtime. Also assume that Soda Galore always plans to hold at least 5,000 cases of safety stock to meet unanticipated customer demand. Assume that hiring and layoff/firing, if necessary, occur at the beginning of the month.

a. Using the planning information and the newly negotiated wage rates, develop a six-month production plan based on level production. (Leave no cells blank - be certain to enter "0" wherever required.)

	Level Production Plan Month Demand Regular Production Overtime or Subcontract Production Ending Inventory Workers Required (2,000 cases/worker) Hire Fire layoff Jan. Feb. March April May June Total

b. Determine the cost of the level production plan.

c. Using the planning information and the newly negotiated wage rates, develop a six-month production plan based on chase production. For the Overtime or Subcontract Plan, use the lowest monthly demand value to compute the size of the fixed workforce. (Leave no cells blank - be certain to enter "0" wherever required.)

	Chase Production Plan : Adjust Workforce Size Month Demand Regular Production Overtime or Subcontract Production Ending Inventory Workers Required (2,000 cases/worker) Hire Fire layoff Jan. Feb. March April May June Total

	Overtime or Subcontract Month Demand Regular Production Overtime or Subcontract Production Ending Inventory Workers Required (2,000 cases/worker) Hire Fire layoff Jan. Feb. March April May June Total

d. Determine the cost of the chase production plan.

	Total cost if workforce size adjusted Total cost if overtime production used Total cost if subcontracting used

e. After much internal discussion, the company decides to maintain a permanent workforce of 10 production workers. Given the same planning information and this new requirement, develop a six-month production plan based on hybrid production.(Leave no cells blank - be certain to enter "0" wherever required.)

	Hybrid Plan Month Demand Regular Production Overtime or Subcontract Production Ending Inventory Workers Required (2,000 cases/worker) Hire Fire layoff Jan. Feb. March April May June Total

  
f. Determine the cost of the hybrid production plan. Use the overtime cost.

Answer 1

Part a.

Level production plan is one where the demand is made to adjust as the other parameters are made fixed. In this case, the average monthly demand is fixed at 36,000.

In this case, starting inventory is 5000.

Ending inventory is calculated as (Regular production-demand+previous inventory). For january month, inventory = 36000-16000+5000=25000. Similarly inventory for the remaining months are calculated.

Since it is a level strategy, the number of workers is based on the average demand level which is 36000. Each worker can handle 2000 cases. Hence number of workers will be 36000/2000 which is 18.

Since there are 10 workers available initially , and we require 18 workers throughout, we need to hire (18-10)=8 workers.

Part b.

1. Cost per worker per month for regular production = $40 * 235 (as given in question) = $ 9400

Total cost per worker for regular production for entire 6 months = $9400*6= $56,400

Total cost for regular production for entire 6 months and 18 workers each month = $56,400 * 18 = $10,15,200

2. Inventory Cost

Inventory cost = $0.4 per case per month.

Hence total inventory cost is = $71,200 according to calculation above.

Hence, cost of the level production plan = inventory cost + cost for workers(regular & overtime) + cost of firing/hiring

= $71,200 + $10,15,200 + ($1000 * 8)

= $10,94,400

Part c

Chase production plan is where the demand is known beforehand and all the rest of the parameters like workforce, overtime work etc are adjusted based on the demand. In this case, the workforce size is adjusted to keep up with the demand each month.

The inventory for month of january is given as 5000. This means the regular production for january month is (16000-5000) = 11000. The regular production amount for the remaining months are the same as the demand for each month.

The number of workers for each month is calculated as (demand for the month/2000) because each worker can handle 2000 cases. It is also given in the case that the initial number of workers is 10, hence for january month start there are 10 workers.

According to the demand for january which is 16000 cases, the number of workers needed is 16000/2000 = 8. We need to fire 2 workerd from the initial 10 workers to make the count 8. Similarly, the workers are hired and fired in numbers as calculated and shown in the sheet.

Part d

Cost of the chase production

1. Cost per worker per month for regular production = $40 * 235 (as given in question) = $ 9400

Total cost per worker for regular production for entire 6 months = $9400*6= $56,400

Cost for regular production for each of the 6 months and 18 workers is calculated as ($9400 * number of workers required each month).

Total cost for regular production for entire 6 months and 18 workers each month = $56,400 * 18 = $10,15,200

2. Inventory Cost

Inventory cost = $0.4 per case per month.

There is only the starting inventory for month of january which is 5000 cases.

Hence total inventory cost is = $0.4 * 5000 =$2000.

3. Cost for hiring each worker is $1000

4. Cost for firing each worker is $1500

Hence, cost of the level production plan = inventory cost + cost for workers(regular & overtime) + cost of firing/hiring

= $2,000 + $10,15,200 + ($1000 * 36) + ($1500 * 6)

= $10,62,200