As a manager of a washing machine manufacturing company, you are required to determine the level of output per month from your plant for the next quarter. At the end of September (last quarter) you had 100 finished washing machines in stock. Your company works with 20 small suppliers on a fee for service of $1600 per month. On an average, each supplier can provide material for 10 washing machines per month.
If you decide not to use all 20 suppliers, average cost of not buying from a supplier is $400 per supplier as the supplier has to be compensated for lost business. If you decide to get new suppliers, the cost of contracting and training a new supplier is $300 per supplier.
Your major customer has projected a requirement of 200 washing machines in October. In November, the customer projects a demand of 300 washing machines and 200 again for December.
1. Calculate the total cost using a one-month planning horizon.
2. Calculate the total cost using a three-month planning horizon.
3. Based on the results of your calculations, write a one page memo to your General Manager explaining to him what will be the cost advantage of going with one option over the other. You could explain to him how the decision is good for managing the supplier pool and how the application of aggregate planning will benefit the organization.