Company QMOM operates several plants throughout China that produces a variety of products using recycled plastics. The management is considering the possibility of a backward vertical integration strategy with a Malaysia supplier because of the escalating costs in China at $400 per ton. If integrated, the estimated production cost of the recycled plastics in need in Malaysia is $150 per ton, and the transporting costs from Malaysia to China averaged $50 per ton. However, the maximum available shipping capacity is capped at 1,500 ton per month.

The operation manager at QMOM is in the process of developing an aggregate plan for producing recycled plastics from Maylaysia to minimize its total cost. Specifically, the manager wanted to contrast the costs associated with a chase plan, a level plan and a mixed aggregate plan. Monthly demand projections were developed using a time series forecasting system that combined the expected monthly orders of each of the company's five companies in China. The demand forecast for the next 12 months is reported in Exhibit 1 (in a separate Excel file).

In Malaysia, one worker could produce 50 tons per month based on a 160-hours-per-month work schedule. The Malaysia supplier now under consideration for integration currently has 20 full time employees with a maximum inventory capacity of 3,000 tons per month. In this industry in Malaysia, workers were hired on a monthly basis, and this means that idle time would be paid during the month. Hiring and training costs in Malaysia is $1,000 per new employee, layoff costs is $500 per employee. Overtime was limited to 25 per cent of the regular-time hours worked

a.What's the total purchasing costs if the company purchases all of its monthly supply from China paying $400 per ton (before integration)?

b.If the company choose to integrate and purchase all of its supply from the Malaysia plant, would the shipping capacity be a constraint?Why and why not?

c.Assume the company plans to integrate with the Malaysia plant by utilizing its current 20 regular full time employee who each can make 50 tons and work 25% overtime whenever necessary, would the company be able to meet its total demand? If not, the company can continue to purchase from China's spot market to meet any excess demand, what is the total costs of such a strategy?

d.If the company uses a chase strategy, what's the total costs of such a strategy? Assume you may use both Malaysia and Chinese suppliers

e.Can you come up with a better strategy? How and what's the total costs?

Month Demand

Jan. 1,000

Feb. 1,100

Mar. 1,300

Apr. 1,500

May 1,800

Jun. 2,200

Jul. 2,500

Aug. 2,400

Sep. 2,000

Oct. 1,600

Nov. 1,200

Dec. 800

Cost Factor Cost ($)

Regular time 150

Overtime 200

Holding 25

Shipping 50

China Spot Market 400