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EGAD Bottling company: Choose plan with lowest cost

I need a little help figuring out this case study.

The EGAD Bottling Company has decided to introduce a new line of premium bottled water that will include several "designer" flavors. Marketing manager Georgianna Mercer is predicting an upturn in demand based on the new offer and the increased public awareness of the health benefits of drinking more water. She has prepared aggregate forecasts for the next six months, as shown in the following table (quantities are in tankloads):

Month May June Jul Aug Sept Oct Total

Forecast 50 60 70 90 80 70 420

Production manager Mark Mercer (no relation to Georgianna Mercer) has developed the following information. (Note that one unit equals 100 bottles, and there are 10,000 bottles per tank load.)

Regular production cost $10 per unit
Regular production capacity 60 units
Overtime production cost $16 per unit
Subcontracting cost $18 per unit
Holding cost $2 per unit per month
Back ordering cost $50 per month per unit
Beginning inventory 0

Among the strategies being considered are the following:

1. Level production supplemented by up to 10 tankloads a month from overtime.
2. A combination of overtime, inventory, and subcontracting.
3. Using overtime for up to 15 tankloads a month, along with inventory to handle variations.

Questions

1. The objective is to choose the plan that has the lowest cost. Which plan would you recommend?
2. Presumably, information about the new line has been shared with supply chain partners. Explain what information should be shared with various partners, and why sharing that information is important.

Solution Preview

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The EGAD Bottling Company has decided to introduce a new line of premium bottled water that will include several "designer" flavors. Marketing manager Georgianna Mercer is predicting an upturn in demand based on the new offer and the increased public awareness of the health benefits of drinking more water. She has prepared aggregate forecasts for the next six months, as shown in the following table (quantities are in tankloads):

Month     May June July August September October Total
Forecast 50 60 70 90 80 70 420

Production manager Mark Mercer (no relation to Georgianna Mercer) has developed the following information. (Note that one unit equals 100 bottles, and there are 10,000 bottles per tank load.)

Regular production cost $10 Per unit
Regular production capacity         60 units 60 units
Overtime production cost  $16 Per unit
Subcontracting cost $18 Per unit
Holding cost                $2 per unit per month
Back ordering cost          $50 per unit per month
Beginning inventory   0

Among the strategies being considered are the following:

1. Level production supplemented by up to 10 tankloads a month from overtime.
2. A combination of overtime, inventory, and subcontracting.
3. Using overtime for up to 15 tankloads a month, along with inventory to handle variations.

Questions

1. The objective is to choose the plan that has the lowest cost. Which plan would you recommend?
2. Presumably, information about the new line has been shared with supply chain partners. Explain what information should be ...

Solution Summary

This post provides a good example of how to select the plan with lowest cost. It considers different plans such as level production supplemented by overtime and using additional labor.

$2.19