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Level vs. chase strategy: Avionics Aggregate production plan

Mike Blanford, master scheduler at General Avionics, has the following demand forecast for one line of his factory.

Quarter Unit Sales
1 5,000
2 10,000
3 8,000
4 2,000

At the beginning of quarter 1, there are 1,000 units inventory. The firm has prepared the following data:

Beginning inventory = 1,000 units
Hiring cost = $200 per employee
Layoff or firing cost = $400 per employee
Beginning workforce = 60 employees
Inventory = $2 per unit per quarter of ending inventory
Stockout cost = $5 per unit
Regular payroll = $1,200 per employee per quarter
Overtime cost = $2 per unit

Note: all inventory cost is calculated from the ending inventory, not the average inventory.

Each employee can produce 100 units per quarter. Demand not satisfied in any quarter is lost and incurs a stockout penalty. Use spreadsheet for the calculation of the following.

a. If Mike produces exactly enough to meet demand each quarter, with no inventories at the end of each quarter and no overtime, how much will he produce each quarter, and what is the overall cost?

b. Use the data to calculate production amounts and costs for a level rate of output with no hiring, no firing, no overtime, and no ending inventory at the end of the year (quarter 4). Stockouts (or back orders) are allowed.

c. For the data in the problem, at the end of the first quarter, inventory is 2,000 units. Accounting for the first quarter ending inventory, please revise the forecasts for quarters 2, 3, 4 with a 20 percent reduction from the original amount (i.e., remaining sales = 16,000). Develop a level and chase plan for the revised forecast that provides for an inventory of at least 1,000 units at the end of each quarter. (Assume 50 people were in the workforce in the first quarter).

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Solution Summary

This problem explains how to prepare the production plan with different work force management plans. It tackles two different strategies - level and chase. The solution is presented in Excel model format to make it easy to understand and see how changes in different variables will have an impact on the total cost.

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