Southeast Soda Pop, Inc., has a new fruit drink for which it has high hopes. John Mittenthal, the production planner, has assembled the following cost data and demand forecast:
quarter forecast
1 1,800
2 1,100
3 1,600
4 900
cost/other data:
previous quarter=1,300 cases
beg. inventory=0
stockout cost=$150 per case
inventory holding cost=$40 per case at the end of quarter
hiring employees=$40 per case
terminating employees=$80 per case
subcontracting cost=$60 per case
unit cost on regular time=$30 per case
overtime cost=$15 per extra case
capacity on regular time=$1,800 cases per quarter
John's job is to develop an aggregate plan. The three initial options he wants to evaluate are:
¨ Plan A: a strategy that hires and fires personnel as necessary to meet the forecast.
¨ Plan B: a level strategy.
¨ Plan C: a level strategy that produces 1,200 cases per quarter and meets the forecast demand with inventory and subcontracting.
a) Which strategy is the lowest-cost plan?
b) If you are John's boss, the VP for operations, which plan do you implement and why?