Question

Mr. Alex is the head of operations at TractParts Pvt. Ltd., a well known Indian manufacturer...

Mr. Alex is the head of operations at TractParts Pvt. Ltd., a well known Indian manufacturer of pumps, engines, electric motors and transformers. The company is one of India’s earliest industrial groups established in the 1980 which has grown to be a big player in the Indian manufacturing industry. TractParts under the supervision of Mr. Alex has been supplying modern tractor engines to the leading tractor manufacturing firms like Sonalika and John Dear. The bulk of demand for tractors comes during the months from October to March. As a result of this seasonality in demand, the demand for the tractor engines also keeps fluctuating throughout the year as shown in Exhibit 1. Exhibit 1 shows the orders placed with TractParts by the firms Sonalika and John Dear in advance based on their own forecasting models.

Exhibit 1:

Month Sonalika John Dear Total
April 500 400 900
May 300 200 500
June 100 150 250
July 125 100 225
August 200 150 350
September 300 350 650
October 1500 1450 2950
November 3000 3200 6200
December 3200 3500 6700
January 3800 3500 7300
February 2200 2150 4350
March 2200 2400 4600

To meet the demands, the company can follow chase strategy or level strategy In the chase strategy, the monthly production takes place as per the total demand in that month and to follow this strategy, the company can hire new employees during higher demand and fire the employees during lower demand. This strategy basically saves on the inventory carrying cost and hence the total cost. In the level strategy, the company produces the average demand in a month and the excess units are stored as inventory and all stock outs are backlogged and supplied from the following month’s production. This strategy particularly saves on the employee hiring and firing cost. Moreover, the backorder quantity is also directly proportion to the demand placed by the tractor manufacturing firms in order to give equal treatments to them.

At the beginning of the period, there are 100 workers in the TractParts manufacturing facility and a total of 200 working hours (8 hours/day * 25 days/month) are available per worker per month. Due to the strict government policies, the company canny allow overtime.

Mr. Alex is concerned about the fluctuating demand and understands that these companies can change their demand pattern based on the promotion and discount offered to them. In order to enhance the total profit, Mr. Alex wanted to optimize costs while meeting the demand pattern. He had therefore asked to one of his associates to find out the associated costs and the cost structure. The associate presented cost structure for the engine manufacturing line as is shown in Exhibit 2.

Exhibit 2:

Component Cost Unit
Material Cost 140 $/unit
Inventory Cost 15 $/unit/month
Stock-Out Cost 20 $/unit/month
Hiring Cost 450 $/worker
Firing Cost 750 $/worker
Labor Hours Required 4 per unit
Regular Labor Rate 4 $/hour
Beginning Inventory 750 units
Desired Closing Inventory 400 units
Selling Price 280 $/unit

Mr. Alex had asked the associate to find out the possibility of discount that could be offered to the tractor manufacturers. Mr Alex was informed that at max 10% discount could be given to them and as per company policy, discount would be offered for only one month. The associate also pointed out that whenever such kinds of discounts are offered, the tractor manufacturers have a tendency to order more in that month. However, the order size for following months is significantly reduced compared to the previous month.

After going through some previous data, Mr. Alex has made some observations. For Sonalika, 10% decrease in price for a particular month results in 45 % increase in the demand for the same month followed by 15% decrease in demand for the next two months. And in the case of John Dear, 10% decrease in price for a particular month results in 80% increase in the demand for the same month followed by 25% decrease in demand for the next two months. However, Mr. Alex also observed that if the TractPart offers a discount in the last 2 months of the financial year, there is no change in the demand pattern since there is a very fixed demand of tractors in the end of season.

Mr. Alex faced a unique problem as the TractParts had proven itself over the years and was considered a symbol of quality, reliability and accountability. Being a part of this value system, Mr. Alex knew that any unfair treatment with the tractor manufacturers would not be tolerated. Mr. Alex has a meeting with the company’s Sr. VP the next morning. He is concerned about the production policy to be adapted and discount to be given offered to increase the total profit. Please help Mr. Alex to take the decision focusing on the following questions.

Questions:

1. Estimate the profit made by TractParts when it follows the level strategy and no discount is offered to the tractor manufacturing firms.

2. Estimate the profit made by TractParts when it follows the chase strategy and no discount is offered to the tractor manufacturing firms

3. Estimate the profit made by TractParts when it follows the level strategy and a 10% discount is offered to the tractor manufacturing firms in October.

4. Find out the month having the peak demand in which 10% discount can be offered to the tractor manufacturing firms, when TractParts follows the level strategy. (Hint: Estimate the profit made by TractParts when it follows the level strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.)

5. Estimate the profit made by TractParts when it follows the chase strategy and a 10% discount is offered to the tractor manufacturing firms in October.

6. Find out the month having the peak demand in which 10% discount can be offered to the tractor manufacturing firms, when TractParts follows the level strategy. (Hint: Estimate the profit made by TractParts when it follows the level strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.)

I REALLY NEED HELP WITH 4 AND 6. THANK YOU IN ADVANCE.

Homework Answers

Answer #1

4. January is the month wherein demand is maximum from both the buyers. Following level strategy and calculating profit of the firm in January month comes to 6,49,700$ as the total manufacturing cost (materail cost+ inventory cost+ stock out cost+labour cost) comes to Rs 13,94,300$ while the Selling Price that month comes to 20,44,000$. Thus even with 10% discount January is the month for peak demand.

6. Same as question 4. I think more information is required here or question should be different.

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