Problem 2.9 A company wants to develop a level production plan.

The beginning
inventory is zero. Demand for the next four periods is given in what follows.
a. What production rate per period will give a zero inventory at the end of
period 4?
b. When and in what quantities will backorders occur?
c. What level production rate per period will avoid backorders? What will be
the ending inventory in period 4?

a) Answer = 8 units is the rate that will give zero inventory at the end.
Period 1 2 3 4 Total

Forecast Demand 9 5 9 9 32

Planned Production 8 8 8 8 32

Planned inventory 0 -1 2 1 0

b) Answer = Backorders occur in period 1, as a minus 1 planned inventory occurs.

c) Answer = 9 units production will avoid backorder. The ending inventory will be 4 units.
Period 1 2 3 4 Total

Forecast Demand 9 5 9 9 32

Planned Production 9 9 9 9 36

Planned inventory 0 0 4 4 4
 Problem 2.13 Because of its labor contract, a company must hire enough labor for
100 units of production per week on one shift or 200 per week on two shifts. It
cannot hire, lay off, or assign overtime. During the fourth week, workers will be
available from another department to work part of all of an extra shift (up to 100
units). There is a planned shutdown for maintenance in the second week, which
will cut production in half. Develop a production plan. The opening inventory is
200 units, and the desired ending inventory is 300 units.

Answer = The plan that gets closest to the desired ending inventory is hiring for 200 units per
week, and not taking advantage of the extra workers in week 4.
Week 1 2 3 4 5 6 Total

Forecast Demand 120 160 240 240 160 160 1080

Planned Production 200 100 200 200 200 200 1100

Planned inventory 200 380 320 280 240 280 320

Problem 2.17 For the following data, calculate the number of workers required
for level production and the resulting month-end inventories. Each worker can
produce 13 units per day, and the desired ending inventory is 9000 units.

Answer = 98 workers are needed to get the desired ending inventory. At the end of the first
month, the inventory is 12,650 units.
Month 1 2 3 4 Total

Working Days 20 24 12 19 75

Forecast Demand 28,000 27,500 28,500 28,500 112,500

Planned Production 29,400 35,280 17,640 27,930 110,250

Planned Inventory 11,250 12,650 20,430 9,570 9,000

 Case 2.1
Assume you have been given the job to develop an effective approach to the
problem. First, here is the forecast developed by marketing:
Month 1 2 3 4 5 6
Forecasted Demand 600 750 1000 850 750 700
The production manager said there were currently 50 units in inventory, and
they would like to end the six months with only 25 in inventory. He also said that
currently, each worker produces an average of 25 pumps in any given month.
There are currently 20 workers in the medium-size pump area.
1. Using the data, develop a level production plan. How much extra cost (inventory and
HR costs) are involved in this plan? What additional costs (both financial and
nonfinancial) might be involved with such a plan?
2. Using the data, develop a chase production plan. How much extra cost (inventory and
HR costs) are involved in this plan? What additional costs (both financial and
nonfinancial) might be involved with such a plan?
3. Try to develop a possible hybrid plan that would accomplish the task with smaller total
costs than either level or chase.
4. Based on your work, what would you recommend and why? What are some of the pros
and cons of the solution you recommend?

Answer 1.
Month 1 2 3 4 5 6 Total

Demand 600 750 1000 850 750 700 4650

Production 775 775 775 775 775 775 4625

Inventory 50 225 250 25 -50 -25 25

Inventory cost $1125 $1250 $125 $0 $0 $250 $2750

The monthly production will be about 775 (4625 needed production divided by 6
months). There are currently 20, which can make 500 pumps. To make 775 pumps, we need to
hire 11 workers. There is an upfront cost of $1100 ($100 hiring cost for each worker).
The inventory at the end of month 1 will be 225 (production of 775 plus existing
inventory of 50 = 825, then subtract the production of 600).
 The total inventory cost is $2750. The total hiring cost is $1100 The total extra cost of the
level plan is $2750 + $1100 = $3850.
There are several qualitative issues. Three of the more important ones may be:
● There are two months when shortages appear. There is no indication how customers will
react. For example, if the customers are willing to wait for one to two months, then
certainly there will at least be some loss of goodwill. There is a chance that customers
won’t be willing to wait if they could obtain the product from a competitor (given that
water pumps are a common product, this is highly likely). In that case, a real financial
cost is the loss of profit from those lost sales, and potentially some permanent loss of
those disappointed customers. At a minimum, there is likely to be some cost in filling
backorders.
● As indicated in the case, such shortages also require salespeople to make additional visits
to customers to calm their anger. Such visits might cost some real dollars and also create
some anger and discouragement within the sales staff.
● There is an assumption that the newly hired 11 people will be able to produce a full
production (25 pumps per month) immediately. Most production jobs entail a learning
curve, implying the production of 775 total pumps in month 1 may be overly optimistic.

Answer 2.
Month 1 2 3 4 5 6 Total

Demand 600 750 1000 850 750 700 4650

People Needed 23 30 40 34 30 28

People +/- 3 7 10 -6 -4 -2

Inventory 50 25 25 25 25 25 25

Inventory Cost

Hire/Layoff cost $300 $700 $1000 $600 $400 $200 $3200

The total hire/layoff cost for the six months is $3200. The inventory cost for each month
is 25*($5) = $125. For the full six month the cost for inventory is $750. The total cost for the
chase strategy, then, is $3950. That is only slightly higher than the level strategy ($100). As with
the level strategy, however, there are qualitative issues that should be discussed. Included should
be the following:
 ● From a customer perspective, this approach is clearly better than the level plan that
represents at least two month of inventory shortages. One might argue (and in a real
situation even calculate) that this approach is financially better, in that the potential cost
of lost profitability was not included in the level schedule analysis.
● The largest qualitative cost in this chase plan is the constant movement of people in and
out of production. This ignores several potential “hidden” costs, including:
○ The learning curve impact of the new people. The analysis assumes a new person
can produce at the same rate as an experienced one. This is seldom the case
○ The issue of employee loyalty. The production people will likely get the
impression (rightly so) that the company has little or no loyalty to the feelings and
needs of the workers. In that case, it would likely that the employees will also
have little feeling of loyalty. That can not only impact morale, but also
productivity improvement efforts.
○ A little recognized issue is the impact of employee “guilt”. In some cases
employees who escape a layoff will feel guilty.

Answer 3.
Month 1 2 3 4 5 6 Total

Demand 600 750 1000 850 750 700 4650

Production 750 750 850 850 750 725 4625

Inventory 50 150 150 0 0 0 25

Inventory cost $750 $750 $0 $0 $0 $125 $1625

People Needed 30 30 34 34 30 29

People +/- 10 0 4 0 -4 -1

Hire/Layoff cost $1000 $0 $400 $0 $400 $100 $1900

The total expenses for this hybrid plan is $3525, which is $325 less than level production
plan, and $425 less than chase production plan.
 Answer 4.
From a financial standpoint, the hybrid plan that was developed in the previous answer
would be the best course of action. If, optimistically, the plan works as intended, the customers
will be happy and extra expenses won’t need to be spent to please angry customers, and it will
keep the workers mostly loyal to the company and moral somewhat higher than if there were
angry customers.
However, the hybrid plan carries some impact of problems for a chase and a level
production plan:
● This plan assumes that newly hired people (10 for that first month, and 4 for the third)
can instantly make the full production of 25 pumps on average. 750 pumps in that first
month is highly optimistic. This also plays into learning curve of new employees as well.
● There will be problems in the fifth and sixth month, with some employees feeling a little
guilty for escaping a layoff.
● There might be a little bit of wavering moral and loyalty when some people get fired.