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Prod.

Rate (Units/Month)

700
600
500
400
300
200
100
0
1

Period (Months)
10/13/2012

3000
2500
2000
Back Orders

1500
1000

Actual
Demand
Average
Forecast

Inventory

500
0
1

Period (Months)
10/13/2012

month

10/13/2012

M
on
th
C1

Demand
Forecast
C2

Cum.
Demand
C3

Avg. /G
Shift
output
C4

Prod
Cost
C5

Cum.
Prod.
units
C6

Buffer
Inventory
(Initial of
270) C7
=C6-C3

inventory
C8 =
C7+270

Inventory
Storage
Cost Rs.
C9=C8x5

Product
Storage
Cost Rs.
C10=
C7 X 5

Total Cost
Rs.
C10

220

220

300

30,000

300

80

350

1750

400

32,150

170

390

300

30000

600

210

480

2400

1050

33,450

400

790

300

30000

900

110

380

1900

550

32,450

600

1390

300

30000

1200

-190

80

400

BO-190

30,400

380

1770

300

30000

1500

-270

BO-270

30,000

200

1970

300

30000

1800

-170

100

500

BO-170

30,500

130

2100

300

30000

2100

270

1350

31,350

300

2400

300

30000

2400

270

1350

31,350

To
tal

2400

9650

2000

2,51650

10/13/2012

2,40000

Company chooses a production level equal to its average demand and

meets the variation in demand by holding the inventory.

This plan incurs a maximum storage of 270 units during the month 5

Since a certain amount of uncertainty is involved in the forecast the firm

may decide to carry the inventory from the beginning of the month 1.

The total cost of the plan = Production Cost + Storage cost of excess
inventories (+ Storage cost of excess Products )

Total Cost = 2,40,000 + 9650 (+ 2000) = 2,49,650 Rs.

Assumption Made; Customer accepts back order without any extra charges
0ther wise Back Order Cost = 4770 Rs.

10/13/2012

Month
C1

Demand
Forecast
C2

Avg.
Production
C3

Production
Cost C4 =
C3 x100

Subcontract
Units
C4 =C2-C3

Subcontract
Costs
C5 = C4 X125

Total Costs
C6 = C3 + C4

220

130

13,000

90

11,250

24,250

170

130

13,000

40

5,000

18,000

400

130

13,000

270

33,750

46,750

600

130

13,000

470

58,750

71,750

380

130

13,000

250

31,250

44,250

200

130

13,000

70

8,750

21,750

130

130

13,000

13,000

300

130

13,000

170

21,250

34,250

Total

2400

1040

1,04,000

1360

1,70,000

2,74,000

10/13/2012

Company may prefer to produce an amount equal to its lowest requirements

of 130 units and meet the rest of the demand by subcontracting. It chooses
a production level equal to its average demand and meets the variation in
demand by holding the inventory.

The Total cost of the plan is equal to Average Production Cost plus
subcontracting cost of the rest of the units.

10/13/2012

Month
C1

Demand
Forecast
C2

Avg /
G Shift
output
C3

G Shift
Production
units C4
(Lower of C2C3)

G Shift
Prod.
Cost C5

Over time
Production
units
C6 = C2-C3
(+ Values)

Over time
Production
Cost C7 =
C6 X 115

Total
Production
Cost C8 =
C5 + C7

220

300

220

22,000

22.000

170

300

170

17,000

17,000

400

300

300

30,000

100

11,500

41,500

600

300

300

30,000

300

34,500

64,500

380

300

300

30,000

80

9,200

39,200

200

300

200

20,000

20,000

130

300

130

13,000

13,000

300

300

300

30,000

30,000

1,92,000

480

55,200

2,47,200

Total

10/13/2012

Company chooses a max regular ( G Shift) production level of

average demand (300 Units) and meets rest of the demand by
overtime production.

The total cost of the plan is equal to cost of production at regular time
plus cost of overtime production.

10/13/2012

Mixed Strategy
Mon
th
C1

Dema
nd
Forec
ast
C2

Avg
-G
Shift
outp
ut
C3

Prod.
Cost
C4

Units
needed
C5

needed
after OT
Prod. of
100 Units
C6

Subcontract
ing Costs
C7 =
C6 X 125
(+ Value of
C6)

Inventory
Carrying
Cost C8 =
(-C5) x 5

Over Time
Costs C9 =

Cost of
increase
of work
force
C10 =

Total Cost
C11=
C4+C7+C8
+C9+C10

220

200

20,000

20

-80

400

20 x115
=2,300

20x10=
200

22,900

170

200

17,000

-30

-70

350

17,350

400

200

20,000

200

100

100x125
=12,500

100 x 115
=12,650

100x10
=1,000

46,150

600

200

20,000

400

300

300x125
=37,500

100 x 115
=12,650

100x10
=1,000

71,150

380

200

20,000

180

80

80x125
=10,000

100 x 115
=12,650

100x10
=1,000

43,650

200

200

20,000

20,000

130

200

13,000

-70

-70

350

13,350

300

200

20,000

100

100 x 115
=12,650

100x10
=1,000

33,650

Tot
al

2400

60,000

1,100

52, 900

4,200

2,67,200

10/13/2012

1,50000

10

Company chooses to maintain a production level equal to a suitable

constant production rate of 200 units and meets the rest of the
demand by using various methods.

Let us say this plan permits a maximum 100 units of overtime

production (50% of the regular shift).

Rest of the units after Regular and Overtime production are given to
subcontracting.

The total cost of the plan is equal to regular production cost of plus
over time production cost plus subcontracting cost

10/13/2012

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