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Meridian Water Pumps

Q1.

Month 0 1 2 3 4 5 6
Production 771 771 771 771 771 771
Opening Inventory 50 221 242 13 -66 -45
Demand 600 750 1000 850 750 700
Ending Inventory 50 221 242 13 -66 -45 26
Carrying Cost 1105 1210 65 130
Total Carrying Cost 2510
Total Hiring Cost 1100
Total Additional Cost 3610
Workers Benchmark 500

Total cost of inventory is recorded $2510. Total cost of hiring in this case is recorded $1100. Total extra cost is calculated by adding these two costs together. Total extra cost is $3610. Different qualitative issues are needed to include here. There are only two months for shortage and no information is present related to reaction of customers. If customers accept wait for few months, then goodwill loss would be included. If customers can obtain products from other competitors, then there is very low possibility of their wait. In this case, company would bear financial loss due to lose of sales. It requires that sales agents or staff should visit to their customers for reducing their anger. It is assumed in this case that these 11 newly hired employees will provide their full production. Full production in this case is 24 pumps in one month. Most jobs of production provide learning curve. It is over optimistic to produce 771 pumps in one month.

Q2.

Chase Production Plan
Month 1 2 3 4 5 6
Demand 600 750 1000 850 750 700
People needed 23 30 40 34 30 28
People +/- 3 7 10 -6 -4 -2
Inventory 25 25 25 25 25 25
Hire/layoff cost 300 700 1000 600 400 200

In this case, there are other quantitative issues. This approach is acceptable and good from perspective of customers. It can also be said that this approach is feasible financially. In this case, probability of loss in not included in schedule. Quantitative cost is this case is the people moving in and out of the production. Few hidden costs have ignored in this case. The learning effect of new people has ignored here. It is assumed that old and new person have same production units. Employee’s loyalty issue is not yet discussed here. This approach will provide negative effect on employee’s loyalty.

Another non-financial cost can be the employee’s guilt. This is for the ones, which were kept. This can affect their performance as they can think with guilt that they got cleared off while their colleagues got laid off.

Q3.

Hybrid Plan
Month 1 2 3 4 5 6
Demand 600 750 1000 850 750 700
People needed 23.2 30 40 34 30 28
People +/- 12 0 0 -2 0 -1
Production 800 800 800 750 750 725
Inventory 250 300 100 0 0 25
Hire/layoff cost 1200 0 0 200 0 100
Inventory cost 1250 1500 500 0 0 125

The hybrid plan is based on level schedule for the first 3 months until the demand of production is lowered. At this point, the level schedule is lowered for two months and ultimately lower for the last month. The hiring of the employees is done in the first month, and the laying off is done in the months where the demand gets lower.

The total cost of this plan is $ 4875. The financial analysis would therefore not recommend this method. However, by considering the non-financial costs as well, we can say that this method is preferential as it also gives advantage for higher demands as well.

Q4.

Both the plans for the production plan Hybrid strategy and the chase plan have their own pros and cons. Where Hybrid plan has more cost of inventory, because of the same level of production, the Chase production plan has more cost of hiring and laying off. The total cost is however, higher for the hybrid strategy. If the company is looking for cost reduction, then it should go for the Chase production plan as it has only $100 higher cost as compared of the production plan devised.

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