Lamson Corp

Basic Issue
 What strategy should be used for
planning production for the whole season
ahead?
 What are the trade-offs between
overtime, stockouts, and inventory
carrying costs?
 In view of the uncertainty of demand,
what steps may be taken to protect
against all eventualities

Ok then lets start the Game

Form Groups of 2 to 6
 Initial Assumptions
 How many 18-inch tiles do you have in inventory
before you start?
 2,000
 How many 36-inch?
 700
 What is your cumulative cost total before you
start the game
 $0
 Only the Nine alternative Production
combinations maybe used – Exhibit 1
 Computations to be made as shown in Exhibit 2
If not done in time Produce 2,000-18” & 1,200-36”
Calculation Mistake: $25,000.
 Start of Period 1
Planning Horizons maybe done Yearly or on a
month by month basis. For this game we’ll
follow the monthly plan
Use the Graph to estimate sales for Period 1 to
determine a production scenario for Period 1
Max 18 inch tiles sold for 2 week period – 4,500
Max 36 inch tiles sold for 2 week period – 2,000
Fluctuation is Plus/minus 25%
Use the Excel worksheet
You only input the following in Row 3 – Period 1
Yellow – Prod plan for 18” & 36”-Overtime if any
Do not touch anything else – there are formulae
Blue – Input actual after data is available
 Period 1
 A Normal Period
 18” sales – 2,250
 36” sales – 750
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 2, and determine a
production scenario
 Period 2
 Cold Weather hinders sales rise
 18” sales – 2,300
 36” sales – 1,050
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 3, and determine a
production scenario
 Period 3
 Cold receding
 18” sales – 3,200
 36” sales – 1,450
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 4, and determine a
production scenario
 Period 4
 A real recovery in sales
 18” sales – 4,550
 36” sales – 1,850
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 5, and determine a
production scenario
 Period 5
 Recovery in sales
 18” sales – 4,300
 36” sales – 1,700
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 6, and determine a
production scenario
 Period 6
 A good order just came in
 18” sales – 5,850
 36” sales – 2,100
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 7, and determine a
production scenario
 Period 7
 Recovery in sales
 18” sales – 4,500
 36” sales – 1,700
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 8, and determine a
production scenario
 Period 8
 The sewer tile industry is contemplating a change
to new/standards sizes for tile season. So, you
should try to end the season with minimum
stock on hand. There will be penalties for
holding stock at end of Period 12
 18” sales – 3,850
 36” sales – 2,000
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales for Period 9, and

determine a production scenario Your strategy should be
to keep stock at a minimum from now on
 Period 9
 Late Season Recovery in sales
 18” sales – 4,550
 36” sales – 2,050
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 10, and determine a
production scenario
 Period 10
 Recovery in sales
 18” sales – 3,650
 36” sales – 1,850
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 11, and determine a
production scenario
 Period 11
 A normal period
 18” sales – 2,600
 36” sales – 1,150
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost

Use the graph again to estimate sales

for Period 12, and determine a
production scenario
 Period 12
 Sales decline as autumn sets in
 18” sales – 1,900
 36” sales – 900
 Start doing the computations now
 Note down Period Cost
 Note down Cumulative Period Cost
Tile Standards to change in Industry
 Inventory on hand has dropped in value
 Each 18-inch tile - $30.00
 Each 36-inch tile - $100.00
 Enter these costs in column G and O on
line below period 12.
 Calculate Total Inv. Costs (holding cost
plus penalty and enter in column R
 Calculate the final cumulative total of all
costs incurred in the game
Who got the lowest Cost?
 What did we know before start of game
 We knew the curve of demand and the
variation from it Plus Minus 25%
 We knew the Inventory carrying costs,
stockout costs & overtime costs
 We knew last years sales at the peak in
both sizes
 We knew the capacities and the capacity
of the plant for size combinations
 What can you infer from this?
 Inv. Costs of 18” to 36” is a ratio of 1:3
 Production capacity at regular times is 6,000 of
18” and 1,800 of 36”, which gives a ratio of 3.3:1
 Stockout Costs were 3 times for 36”
 So, if I am short on capacity if I look at stockout
costs I am better off producing 36”
 Is it worth going overtime?
 I can make an additional 3,000 units of 18” for an
additional cost of $20,000 and avoid stockout charges
of $60,000 – looks like a good investment
 Similar scenario applies to 36”
 The ratio of Inventory to stockout is 10:1. This
means that you could carry inventory for 10
periods to incur the same kinds of costs that you
would in case of one stockout
 What you did not know?

 We don’t know the sales levels

 We don’t know if the levels are going to be
high, low or medium
 We don’t know exactly when plus of minus
25% is going to occur
 We didn’t know about a final penalty for
excess stock – but this happens in real
situations
 What are the key decisions at startup
 Choice of overtime or staying regular
 Sales can be high – This means we have to start
at overtime for first period an continue for
every period, and still cannot meet the demand
 Sales can be low – This means that at no time
during the period we ever have to go overtime to
meet demand
 Sales can be medium – In the between the two
extremes. Some overtime may have to be used
to take care of peak period

Refer to excel file for a low cost scenario