Holiday Lights, Inc.

Holiday Lights, Inc. $($HLI$)$ is a manufacturer of plastic holiday decorations and ornamentations. The company$$s facilities are located in a single location near Cincinnati, OH$,$ and its labor force is drawn from the local region. It buys raw materials from chemical firms in New Orleans, Louisiana, and fabricates a variety of items for sale to department stores and retail specialty shops throughout the Midwest United States. The company is a relatively small producer and relies on its reputation for quality and a network of relationships with buyers in the region. Sales growth has been modest through time, but the company has had a solid record of profits since its founding in $1997$ by Mr$.$ Leonard van Drunen.

The production and distribution of plastic holiday decorations and ornaments is highly competitive. Because capital investment requirements are not large, many small producers enter the industry every year and almost as many disappear each year giving rise to a high rate of business failures. Product popularities change quickly, such that each year gives rise to much uncertainty for the industry and for HLI. HLI has survived the competitive uncertainties to date, in part because of a product$-$line base of certain standard items which sell consistently year after year in profitable volume. Many other products are of the $$trendy$$ variety and have short commercial lives. The composition of the recent annual sales, by product type, is given in Exhibit $1.$

It is now January of $2019,$ Mr$.$ van Drunen is reviewing a suggestion from the firm$$s operations manager, Ms$.$ Yeejin Dujoori, to revise the company$$s $2019$ operating plan by scheduling production on a level monthly basis throughout the year. Historically, production has followed a seasonal pattern in line with the seasonal pattern of sales. Mr$.$ van Drunen understands Ms$.$ Dujoori$$s view, and is attracted to the potential reduction in costs that might arise from the proposed level production policy. He is$,$ however, concerned about the financial implications of the change and about what he sees as an increase in the risk exposure of the company if the proposal is adopted. He plans to decide soon so that production plans can be put into place beginning in January, regardless of which alternative is selected.

Ms$.$ Dujoori has been concerned during her time with the company $($Ms$.$ Dujoori was hired in $2016)$ by the many problems which occur under the current practice of scheduling production only in response to orders. The company$$s sales are concentrated in the period of August through December. Approximately $80$ percent of total annual sales shipments occur during this time period. Sales are made on terms of net $30-$days and sales volume is divided approximately evenly between small, one$-$location specialty shops and larger department stores. Exhibit $2$ shows projected $2019$ sales, by month.

The initial orders for the November$-$December holiday selling season each year are usually received early in August. For the next five months, production equipment is used steadily for $12$ hours per day. The work force, which amounts to a few employees between January and July, is greatly increased and also put on $12-$hour days which requires substantial overtime pay. Production for a specific customer and specific items are completed within a single day so that there is not any work in process inventory and because shipments are made immediately after each production run there is rarely any finished goods inventory. As a result, production and sales match each other month by month. A modest stock of raw materials, averaging $$248,000,$ is held in a warehouse near the plant.

Ms$.$ Dujoori$$s idea of production efficiency is upset by HLI$$s pattern of operations. She has found both of her years with the company full of daily crises during four or five months of the year, and boredom during the other seven or eight. The overtime premiums necessitated by this schedule show up in reduced profits. Sped$-$up production runs during August$-$December mean frequent setup changes on the machinery which cause confusion in scheduling and give rise to inefficiencies. In comparison, only a small fraction of the available equipment is used during the rest of the year.

Because of these factors, Ms$.$ Dujoori has recommended to Mr$.$ van Drunen a policy of level monthly production for $2019.$ She has emphasized that projections of total annual sales have proven quite accurate historically $($though projections of specific items have been less accurate$),$ and argues that this should make anticipation of orders feasible in a production plan. Purchase and payment terms of net $30$ days from suppliers will not be affected by a change in production plans. However, the elimination of overtime wage premiums will result in savings $--$ estimated by Ms$.$ Dujoori to be $$928,000$ in $2019.$ Cost of raw materials will be unaffected by which plan is