In early September Janet Huntley, the newly-appointed planner for MacDonald Refrigeration Ltd (MRL) of Sarnia, Ontario began working on MRLs production plan for the upcoming calendar year.  The plan will be presented at MRLs regular management committee at the end of the month.
BACKGROUND
The company began operations near the Sarnia, Ontario airport in 1954 as manufacturer of commercial refrigeration systems.  By 1987, MRL had diversified into consumer refrigeration and moved to a new 300,000 square foot manufacturing facility.  Its current product line, consisting of commercial and residential air conditioning systems, refrigerators, and freezers, produced sales of $28.5 million last year.
Through a combination of careful product design and investments in new process technology, MRL has seen the annual output per manufacturing employee increase from about 240 appliances in 1987 to an estimated 480 appliances next year.  Their plant in Sarnia has the physical capacity to make up to 13,000 appliances per month.  Although it varies by product type, typical throughput time is 3 days.
THE PLANNING PROCESS
Once each month, Ms. Huntley receives monthly sales forecasts updates for all of MRL appliances for 15 months into the future.  Although the monthly forecasts are refined each month, MRL must order critical components about 3 months in advance of need.  In effect, MRL commits its resources to the forecast no later than 3 months prior to the period when the sales are to take place.
Due to the pronounced seasonality of refrigeration products, MRL develops production plans for 15 months into the future.  However, with 90-day material lead times the first three months of the plan are effectively frozen; no longer subject to change.  Therefore, the key portion of Ms. Huntley’s plan will be the 12 month period that begins next January.
Ms. Huntley’s plan need not address specific models and sizes of appliances (those details are attended to when the detailed master schedule is created and updated).  Instead, her production plan is a statement of how MRL will obtain sufficient capacity to build, in aggregate, the units they expect to sell during the coming year. Because the resource requirements for MRLs various products are roughly similar, Ms. Huntley’s aggregate plan should be able to support a variety of different product mixes as long as the total production required is near the forecasted amount.
To prepare for her decision, Janet gathered the following information.
1. MRL’s hourly employees now earn an average of $9.75 per hour.  However, MRL recently signed a two year agreement with their union that stipulates an hourly increase of $0.75 per hour, effective January 1. At that time, the average monthly cost per employee will be roughly $2400/month (including wages and fringe benefits).  2. MRL’s collective bargaining agreement with its union allows overtime, compensated at 1.5 times the regular hourly rate.  Because fringe benefits are independent of hours worked, MRL’s expected overtime costs are $3,300 per worker*month.3. As of January 1, MRL expects to have 160 hourly employees, each working 40 hours/wk.  The current production plan calls for a finished goods inventory of 240 units at the end of December.4. MRLs HR Department estimates that hiring, training, and related expenses amount to $1,800 per employee hired.  Severance pay and other layoff-related expenses cost $1,200 per employee laid off or fired.  5. All departments in the company covet working capital.  Based on the value of the materials, MRL’s finance department estimates that it costs $8.00 per month to store one finished appliance in inventory.6. MRL has a firm policy of meeting each month’s demand.  Ms. Huntley understands that backorders or stockouts are to be strictly avoided.
By the end of September, Janet had developed three different production plans that she wanted the management committee to consider (see Exhibits 1 – 3).  Each exhibit shows the current forecasted shipment quantities by month, her planned production quantities, expected inventory positions, workforce size changes, and worker-months of overtime.  Each exhibit also includes a summary of the expected cost to implement the plan.

THE AGGREGATE PLANS

Alternative 1:  In this plan the monthly production quantity and the total number of employees remain constant throughout the year, at a level sufficient to meet peak demand.  In periods of low demand inventories accumulate, and in months of high demand those inventories are drawn down.  With ample inventories, this plan provides some protection against forecast errors.  In addition, it does not stress the workforce with month after month of extensive overtime work.

 

Exhibit 1: Alternative 1Month Demand Hire Fire Workforce Regular Production OvertimeProd. Total Prod End InvInitial 160 2401 4400 51.00 0.00 211.00 8440.00 0.00 8440.00 4280.002 4400 0.00 0.00 211.00 8440.00 0.00 8440.00 8320.003 6000 0.00 0.00 211.00 8440.00 0.00 8440.00 10760.004 8000 0.00 0.00 211.00 8440.00 0.00 8440.00 11200.005 6600 0.00 0.00 211.00 8440.00 0.00 8440.00 13040.006 11800 0.00 0.00 211.00 8440.00 0.00 8440.00 9680.007 13000 0.00 0.00 211.00 8440.00 0.00 8440.00 5120.008 11200 0.00 0.00 211.00 8440.00 0.00 8440.00 2360.009 10800 0.00 0.00 211.00 8440.00 0.00 8440.00 0.0010 7600 0.00 0.00 211.00 8440.00 0.00 8440.00 840.0011 6000 0.00 0.00 211.00 8440.00 0.00 8440.00 3280.0012 5600 0.00 0.00 211.00 8440.00 0.00 8440.00 6120.00Col Sum 51.00 0.00 2532.00 0.00 75000.00$/unit $1,800 $1,200 $2,400 $82.50 $8 $ Total $91,800 $0 $6,076,800 $0 $600,000 Overall $6,768,600

Alternative 2:  This plan avoids inventories and the pain of layoffs by holding the workforce at a constant level. It uses overtime production to help increase vary monthly output during the busiest months. Janet was concerned that excessive overtime may lead to exhaustion and burnout.  To partially compensate, this plan intentionally idles some workers during slow months, even though they continue to receive full salary.

 

Exhibit 2: Alternative 2 Units Produced Month Demand Hire Fire Workforce Regular Overtime Total Prod End IInitial 160 Production (wm*40) 2401 4400 39.00 0.00 199.00 4160 0 4160.00 0.002 4400 0.00 0.00 199.00 4400 0 4400.00 0.003 6000 0.00 0.00 199.00 6000 0 6000.00 0.004 8000 0.00 199.00 7960 40 8000.00 0.005 6600 0.00 0.00 199.00 6600 0 6600.00 0.006 11800 0.00 199.00 7960 3840 11800.00 0.007 13000 0.00 0.00 199.00 7960 5040 13000.00 0.008 11200 0.00 0.00 199.00 7960 3240 11200.00 0.009 10800 0.00 0.00 199.00 7960 2840 10800.00 0.0010 7600 0.00 0.00 199.00 7600 0 7600.00 0.0011 6000 0.00 0.00 199.00 6000 0 6000.00 0.0012 5600 0.00 0.00 199.00 5600 0 5600.00 0.00Col Sum 39.00 0.00 2388.00 15000.00 0.00$/unit $1,800 $1,200 $2,400 $82.50 $8 $ Total $70,200 $0 $5,731,200 $1,237,500 $0 Overall $7,038,900

 

Alternative 3:  Janet’s final plan overcomes some of the limitations of Alternative 2 by adjusting the size of the workforce in response to changing demand. Employee morale and union relations are likely to suffer under this plan, especially during the months with heavy layoffs. Those months calling for large numbers of new hires will not be stress free, since Sarnia’s workforce is generally fully employed once the ice melts.

 

Exhibit 3: Alternative 3 Units Produced Month Demand Hire Fire Workforce Regular Overtime Total Prod Ending Inv.Initial 160 Production (wm*40) 2401 4400 56 104 4160.00 4160 0.002 4400 6 110 4400.00 4400 0.003 6000 40 150 6000.00 6000 0.004 8000 50 200 8000.00 8000 0.005 6600 35 165 6600.00 6600 0.006 11800 130 295 11800.00 11800 0.007 13000 30 325 13000.00 13000 0.008 11200 45 280 11200.00 11200 0.009 10800 10 270 10800.00 10800 0.0010 7600 80 190 7600.00 7600 0.0011 6000 40 150 6000.00 6000 0.0012 5600 10 140 5600.00 5600 0.00Col Sum 256.00 276.00 2379.00 0.00 $ 0.00$/unit $1,800 $1,200 $2,400 $82.50 $8 $ Total $460,800 $331,200 $5,709,600 $0 $0  6,501,600

 

While Janet’s plans all seem to be feasible, she is not entirely happy with any of them.  Among other things, she wonders whether there is a better (less costly) alternative for MRL.  Part of the difficulty in developing these production plans is that they all must cope with extreme fluctuations in demand.  Although Janet had no input in the forecasting process (MRL’s marketing specialists are responsible for forecasting), she realizes that the forecasts are predicated on certain assumptions about price and product mix.  She wonders whether different pricing and product mix decisions might take lead to forecasts with lower peaks and higher valleys.  With more constant output requirements, she would have to make fewer and less extreme capacity changes.

Discussion Questions
1. Characterize the dominant strategy used for each of Janet’s production plans, and provide a brief summary of the strengths and weaknesses of each. 2.  Each of Janet’s approaches offers advantages and disadvantages. If cost is the principal criterion, all three plans can be improved. For example, rather than paying overtime wages to permanent employees during the busiest months, Janet could hire “temporary” workers (who will work for at most a few months but earn regular wages and benefits).  Because the “round-trip” hiring and layoff costs for such workers amount to $3,000, she would of course need to employ the “temp.” long enough for the overtime wage savings to offset the hiring and layoff costs.
A.  Assuming the “temps.” capacity will be used to avoid some overtime production, how long will it take (in months) to breakeven with a “Temp.?”
B. Another alternative is to build inventory during slack periods and hold it until needed, rather than produce the product at overtime rates during the period the product is needed (see plan 2). Analyze the costs tradeoffs involved and develop an appropriate decision rule that will help you decide when to use one capacity option versus another. How long (in months) can you hold inventory before overtime becomes a more attractive alternative?
3. Determine the least costly feasible intermediate production plan (hint: your plan, in linear form, should cost $6.221 million).