Washington Laundry Products, Inc, makes commercial and industrial laundry machines (the kinds hotels use), and has these aggregate demand requirements for the next six months
The firm has regular capacity for 200 units, and overtime capacity for 40 more. Currently, subcontracting can supply up to 100 units per month, but the subcontracting firm may soon be unavailable.
Month Demand Costs and other data
1 220 Previous output level 150 units
2 160 Beginning inventory 100 units
3 200 Stockout cost $250 per unit
4 210 Inventory holding cost $100 per unit at end of month
5 200 Unit Cost, regular time $1,200 per unit
6 190 Subcontracting $2,000 per unit
Unit Cost, overtime $1,500 per unit
Hiring workers $200 per unit
Laying off workers $500 per unit
Which is cheaper: to produce level, incurring back orders and inventory charges; or to produce a base quantity of 120, using first, overtime, then subcontracting, to meet demand?
The cost of the level strategy is $1,326,000. The cost of the mixed strategy is $1,499,000. The added holding costs of the level strategy are far cheaper than the added overtime and subcontracting costs of the mixed strategy, as well as hedging against the potential loss of subcontracting.
Level Strategy
Washington Laundry Products Solution
Demand Regular Time Capacity Regular Time Production Inventory (end PD) Units Increase
Initial Inventory 100.
Period 1 220. 180. 180. 60. 30.
Period 2 160. 180. 180. 80. 0.
Period 3 200. 180. 180. 60. 0.
Period 4 210. 180. 180. 30. 0.
Period 5 200. 180. 180. 10. 0.
Period 6 190. 180. 180. 0. 0.
Total (units) 1,180. 1,080. 1,080. 240. 30.
@$1200/unit @$100/unit @$200/unit
Subtotal Costs 1,296,000. 24,000. 6,000.
Total Cost 1,326,000.
Mixed Strategy
Washington Laundry Products Solution
Demand Regular Time Capacity Overtime Capacity Subcon-
tract Capacity Regular Time Production Overtime Production Subcon-
tracting Units Decrease
Initial Inventory
Period 1 220. 120. 40. 100. 120. 0. 0. 30.
Period 2 160. 120. 40. 100. 120. 40. 0. 0.
Period 3 200. 120. 40. 100. 120. 40. 40. 0.
Period 4 210. 120. 40. 100. 120. 40. 50. 0.
Period 5 200. 120. 40. 100. 120. 40. 40. 0.
Period 6 190. 120. 40. 100. 120. 40. 30. 0.
Total (units) 1,180. 720. 240. 600. 720. 200. 160. 30.
@$1200/u @$1500/u @$2000/u @$500
Subtotal Costs 864,000. 300,000. 320,000. 15,000.
Total Cost 1,499,000.
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