A) Target Inventory Levels for the Three Months Based on 5 Days of Supply

CHAPTER 4 Solution

1. ELM COMPANY

Completed Table

4-1 2. TRAPPER LAWN EQUIPMENT COMPANY

Revised plan: Trapper Lawn Equipment Company Sales and Op's Planning Spreadsheet - Riding Mowers Product Group (Make-to-Stock)

a) Target inventory levels for the three months based on 5 days of supply:

January = 5 x 2000 / 20 = 500; February = 5 x 2000 / 20 = 500; March = 5 x 3000 / 20 = 750

Planned build for each month required to achieve the target accounting for the forecast demand and the inventory in the previous period:

Build plan = forecast demand + target inventory – previous month inventory

January planned build is zero since 3944 units remain in inventory at the end of December. February planed build = 2000 + 500 – 1944 = 556 March planned build = 3000 +750 – 500 = 3250

4-2 b) Qualitative factors:

The plan indicates no production in January and very light production in February.

This could be implemented as a plant shutdown that may be very disruptive to work force moral and cause an employee retention problem.

It can also have quality and productivity issues as more problems are likely at shutdown and start-up. Key skills are not practiced.

A better alternative might be to maintain some production below customer demand and gradually reduce inventory levels.

Consider going to a 4 day or other form of shorten workweek. Restrict the use of overtime. Consider the use of a planned shutdown during the summer vacation season or force the use of accrued vacation time to reduce the number of workers available.

3. TRAPPER LAWN EQUIPMENT COMPANY REVISITED a) The average forecast error is calculated as the difference between the total forecast and actual demand divided by the total forecast. In this case, since the 3 month cumulative error is given in the table:

Forecast error % = -1425 / (5000 + 4000 + 6500) x 100 = -9.2%

Reducing each of the forecast values by 9.2% for January to June yields the projected values units sales and resulting inventory levels and days of supply shown in the table below.

b) Options for consideration

Change the forecast. This would require the marketing and production mangers coming to agreement on what the new forecast should be.

Adjust the production plan to compensate for the fact that the forecast seems to have a relatively consistent negative bias. This option has little risk in the near term since inventory levels are relatively high.

4-3 4. SKI & SEA, INC. a. Level Plan Aggregating the forecast

Quarter 1 2 3 4 Total Jet Skis 10,000 15,000 16,000 3,000 44,000 Snowmobiles 9,000 7,000 19,000 10,000 45,000 Total 19,000 22,000 35,000 13,000 89,000

Determining the production rate: (Total forecast - beginning inventory) / 4 quarters (89,000 - 1,000) / 4 = 22,000 units per quarter

The Plan and its costs:

Quarter 1 2 3 4 Total Demand 19,000 22,000 35,000 13,000 89,000 Production 22,000 22,000 22,000 22,000 88,000 Beginning Inventory 1,000 4,000 4,000 0 Ending Inventory 4,000 4,000 0 0 Average Inventory* 2,500 4,000 2,000 0 8500 Backorders 0 0 9,000 0 9000 *(beginning inventory + ending inventory) / 2

Costs Total Regular time $15.00  88,000 = $ 1,320,000 Inventory $ 3.00  8,500 = $ 25,500 Backorders $24.00  9,000 = $ 216,000 Total $ 1,561,500 Consequences: Low levels of inventory Substantial back order in quarter 3 b. Cumulative Chart

4-4 100,000

Cumulative Forecast

s 80,000 t i n u

d n a 60,000 Cumulative Output m e d

n o i t 40,000 c u d o r p

. m u 20,000 C

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Quarters

c. Inventory Space = 20 cubic feetx 4000 = 80,000 cubic feet

d. Investment = $ 600.00 x 4,000 = $ 2,400,000

4-5 5. IVAR JORGENSON a. Overtime

Quarter 1 2 3 4 Total Jet Skis 10,000 15,000 16,000 3,000 44,000 Snowmobiles 11,000 7,000 19,000 10,000 47,000 Total 21,000 22,000 35,000 13,000 91,000 Production rate = (91,000 - 1,000) / 4 = 22,500 units per quarter

Quarter 1 2 3 4 Demand 21,000 22,000 35,000 13,000 91,000 Overtime 500 500 500 500 2,000 Regular 22,000 22,000 22,000 22,000 88,000 Output 22,500 22,500 22,500 22,500 90,000 Beginning Inventory 1,000 2,500 3,000 0 Ending Inventory 2,500 3,000 0 0 Average Inventory* 1,750 2,750 1,500 0 6000 Backorders 0 0 9,500 0 9500 *(beginning inventory + ending inventory) / 2

Costs Total Regular time $15.00  88,000 = $ 1,320,000 Overtime $22.50  2,000 = $ 45,000 Inventory $ 3.00  6,000 = $ 18,000 Backorders $24.00  9,500 = $ 228,000 Total $ 1,611,000

b. Subcontracting Subcontracting Cost $ 30.00  2,000 = $ 60,000 Overtime Cost $ 22.50  2,000 = $ 45,000 Net Increase/(Decrease) $ 15,000 New Total Cost $ 1,626,000

c. Hiring a New Worker Hiring $ 300.00  1 = $ 300 Regular $ 15.00  2,000 = $ 30,000 Overtime Cost 22.5  2000 = $ 45,000 Net Increase/Decrease $ (14,700) New Total Cost $ 1,596,300

10. JOAN'S JOYOUS NATURE FOOD a. Joan should produce 135 units each month. [(120 + 160 - 10)/2 = 135]

4-6 600

s 500 t

i Cumulative Output n u

d n a 400 m e d

n o i t 300 c u d o r p

. m u 200 Cumulative Demand C

Month 1 Month 2 Month 3 Month 4

Months

b. The ending inventory for month 4 is 180 units. [(10 + (4  135) - 370) = 180]

c. Joan should produce 90 units each month. [(120 + 160 + 20 + 70 - 10) / 4 = 90]

Month: 1 2 3 4 Beginning Inventory 10 0 0 0 Production 90 90 90 90 Demand 120 160 20 70 Ending inventory 0 0 0 0 Average inventory 5 0 0 0 Carrying cost $25 $0 $0 $0 Backorders (cumulative) 20 90 20 0 Backorder cost $160 $720 $160 $0 Total Inventory Cost = $5  5 = $25 Total Backorder Cost = $8  130 = $1040

4-7 11. ORO DEL MAR CO.

400 Cumulative Output s d n u o p

0 300 0 0 , 1

r 200 p

d n a Cumulative Demand m 100 e d

. m u C

January February March

Months

b. A production rate of 100 units per month is required in order to avoid backorders and result in no ending inventory in March. [(100 + 300 - 100) / 3]

4-8 18. GENERAL AVIONICS AGAIN

Chase Sales Plan Ending Overtime Quarter Sales Production Workforce Inventory Production 2 8,000 7,000 70 1,000 0 3 6,400 6,400 64 1,000 0 4 1,600 1,600 16 1,000 0 16,000 15,000 150 3,000 0

Cost Item Cost Inventory Carrying Cost (3000 x $2) $ 6,000 Overtime Cost 0 Firing Cost (54 x $400) 21,600 Hiring Cost (20 x $200) 4,000 Regular Payroll Cost (150 x $1,200) 180,000 Total Cost $211,600

Level Production Plan Ending Overtime Quarter Sales Production Workforce Inventory Production 2 8,000 7,000 50 1,000 2,000 3 6,400 6,400 50 1,000 1,400 4 1,600 5, 000 50 3,400 0 16,000 18,400 150 5,400 3,400

Cost Item Cost Inventory Carrying Cost ($2 x 5,400) $ 10,800 Overtime Cost ($14* x 3,400) 47,600 Firing Cost 0 Hiring Cost 0 Regular Payroll Cost(150 x $1,200) 180,000 Total Cost $238,400 *$14 = $12 for regular + $2 overtime premium