Problem : Production Planning

The Operations Manager of XYZ, Inc. needs to prepare an aggregate production plan for next year to meet demand forecast at minimum cost. Demand for the next four quarters is shown below:

Quarter Demand Forecast

1 22,000

2 27,000

3 29,000
4 20,000

Suppose at the beginning of the planning period (i.e., Quarter 1) there were 40 production workers and 1,500 units in inventory. Each worker produces 500 units per quarter and is paid $11,000 per quarter. If used, overtime is paid at 150% of regular pay. It costs $3,500 on average to lay off a worker and $1,700 to hire a new worker. Quarterly inventory holding cost averages $30 per unit. At the end of the fourth quarter, the manager plans to have 5,500 units of inventory on hand.

Instructions:

Suppose the operations manager was using the level strategy in the past. She is wondering if using the chase strategy will provide a more cost-effective option.

To help her make an informed decision, she has asked you to develop an alternative production plan for next year using the chase strategy.

Suppose you have already determined, based on your past experience, that the total cost of using the level strategy will be about $2,683,000. To minimize the total, would you recommend using the chase strategy to develop a production plan for next year? Explain. [You may use the table below to facilitate your computations.]

Suppose the manager is also wondering how many workers will be needed if XYZ Company used a mixed strategy that combines level with overtime.

Determine the number of workers that will be required if a mixed strategy of level plus 20% overtime during the two peak demand quarters is used.

Use the table given next page to answer part (a)--Level and Chase strategy: