V20-21o - Assignment 5

Assignment 5 (weight 20%)

Green-Motor is a small company producing lawn mowers. Due to seasonality, it is

facing demands as shown in the table below:

The main season is over and the company is now developing a sales and operations
plan for the next year. At the end of December this year, it has a workforce of 10
workers that it also wants to have at the end of December next year. The sales and
operations plan assumes 20 working days in each month, and each worker works 8
hours per day on regular time. On average, each worker can produce up to 40 units
per month during regular time. It is also possible to produce on overtime, but only up
to a limit of 10 units (40 hours per month) per month for each worker.

Furthermore, the company can subcontract production to a partner with whom it has
been working for several years. The material cost for each lawn mower is estimated to
be 600 DKK. The regular time salary for each worker is 32000 DKK per month, and this
salary is paid regardless of the number of units produced. The salary rate for overtime
is 50% higher than the rate for regular time. Subcontracting costs 1900 DKK per unit.
To maintain its reputable customer service, the company is committed to meet all
demand. (don’t allow any stock out) The holding cost is estimated at 100 DKK per unit
per month. The inventory level at the beginning of the planning period is zero and
accordingly there will be no need for an inventory at the end of the planning horizon.
Changes in the work force will involve extra costs. Hiring one worker is estimated to
cost 20000 DKK and to lay one worker off will cost 30000 DKK.

The lawn mowers are currently sold for 2400 DKK each. Market research has shown
that a promotion campaign dropping prices by 10% in a given month will increase
sales in that month by 25 percent and bring forward 5 percent demand from each of
the following two months.
Preparation in Excel
The purpose of the exercise is to find the most attractive strategy for Green-motors, and
thereby the strategy that maximizes their profit. The objective function is, therefore:
"# "#

𝑀𝑎𝑥 $ 𝑃𝑟𝑖𝑐𝑒! 𝐷! − -$(32000 𝑊! + 20000 𝐻! + 30000 𝐿! + 300 𝑂! + 100𝐼! + 0 𝑆! + 600 𝑃! + 1900 𝐶! )>
!$" !$"

Based on the information in the exercise, the following constraints are made.
The balance equation for the work size has to be 0. The production for each month cannot
exceed capacity. The balance equation for the inventory has to be 0. The overtime for each
month must not exceed the limit. The firm does not allow any stockout and, therefore,
stockout has to be 0.

𝑊! − 𝑊!"# − 𝐻! + 𝐿! = 0

40𝑊! − 𝑂! /4 − 𝑃! ≥ 0

𝐼!"# + 𝑃! + 𝐶! − 𝐷! − 𝑆!"# − 𝐼! + 𝑆! = 0

40𝑊! − 𝑂! ≥ 0

𝑆! = 0
Question 5.1
Which of the following three promotion planning strategies would be most attractive
for Green- Motor?

I. No promotions throughout the year

II. Promotion in April

III. Promotion in July

Provide a quantitative analysis to justify your answer and give a qualitative

explanation for the most preferred strategy that you identify.

Based on the calculations in excel the following profits for each strategy is maximized:

No promotion

Total cost 10.293.000

Revenue 15.552.000
 Profit 5.259.000

Promotion in April

Total cost 10.396.700

Revenue 15.634.080

Profit 5.237.380

Promotion in July

Total cost 10.866.500

Revenue 15.949.200

Profit 5.082.700

The calculations show that the profit for the firm is higher when a no promotion strategy is
used. Here the profit is 5.259.000. This is, therefore, the most attractive strategy for Green-
motor to use as it allows the firm to maximize their profit.

Question 5.2
Explain whether the method you use for developing the sales and operations plan in
Question 5.1 can be considered as an integrated as opposed to a sequential
approach.

The solution provided in question 5.1 can be considered as an integrated approach, since
the marketing parameters relating to demand and price are considered at the same time as
the different cost parameters. The maximized profit is based on a mutual dependence of the
marketing and cost parameters and both are considered instead of only focusing on either
minimizing the costs or maximizing the revenue, as we would in the sequential approach.