Return to the FlexMan data in Exercise 4. The company has signed a service-level agreement with its customers and committed to carry safety inventory from one month to the next that equals at least 15 percent of the following month’s demand. Thus, FlexMan is committed to carrying over at least 0.15 × 1,700,000 = 255,000 routers and 0.15 × 1,500,000 = 225,000 switches in inventory from December to January.

Data From Exercise 4

FlexMan, an electronics contract manufacturer, uses its Topeka, Kansas, facility to produce two product categories: routers and switches. Consultation with customers has indicated a demand forecast for each category over the next 12 months (in thousands of units) to be as shown in Table 8-11.

Table 8-11

Manufacturing is primarily an assembly operation, and the number of people on the production line governs capacity. The plant operates 20 days a month, 8 hours each day. Production of a router takes 20 minutes, and production of a switch requires 10 minutes of worker time. Each worker is paid $10 per hour, with a 50 percent premium for any overtime. The plant currently has 6,300 employees. Overtime is limited to 20 hours per employee per month. The plant currently maintains 100,000 routers and 50,000 switches in inventory. The cost of holding a router in inventory is $3 per month, and the cost of holding a switch in inventory is $1 per month. The holding cost arises because products are paid for by the customer at existing market rates when purchased. Thus, if FlexMan produces early and holds in inventory, the company recovers less given the rapidly dropping component prices.

a. Assuming no backlogs, no subcontracting, no layoffs, and no new hires, what is the optimum production schedule for FlexMan? What is the annual cost of this schedule?
b. How much does the service contract mandating minimum inventories increase costs for FlexMan?
c. What would be the increase in cost if FlexMan agreed to a 15 percent minimum for switches but only a 5 percent minimum for routers? What would be the increase in cost if FlexMan agreed to only a 5 percent minimum for switches but a 15 percent minimum for routers? Which of the two is better for FlexMan?

Transcribed Image Text:

Router Switch Router Switch Month Demand Demand Month Demand Demand January 1,800 1,600 July 1,200 700 February 1,500 1,400 August 1,400 800 March 2,600 1,500 September 2,500 1,400 April 2,500 2,000 October 2,800 1,700 May 800 1,500 November 1,000 800 June 1,800 900 December 1,000 900