Missouri’s Soda Pop, Inc., has a new fruit drink for which it has high hopes. Steve Allen, 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
Costs/Other Data_______________________________
Previous quarter’s output 1,300 cases
Beginning inventory = 0 cases
Stockout cost = $150 per case
Inventory holding cost = $40 per case at end of quarter
Hiring employees = $40 per case
Terminating employees = $80 per ease
Subcontracting cost = $60 per case
Unit cost on regular time = $30 per case
Overtime cost = $15 extra per case
Capacity on regular time = 1,800 cases per quarter
Steve’s job is to develop an aggregate plan. The three initial options he wants to evaluate are:
Plan A: A chase 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 forecasted demand with inventory and subcontracting.
(a) Which strategy is the lowest-cost plan?
(b) If you are Steve’s boss, the VP for operations, which plan do you implement and why?