Question

QUESTION 2:

Kafue Steel has recorded the monthly forecast for one of its products, mild steel grade AISI 1023 rods, for January, February, March and April as 1000, 1500, 1200, and 1400, respectively. Safety stock policy recommends that half of the forecast for that month be defined as safety stock. There are 22 working days in January, 19 in February, 21 in March and 21 in April. Beginning inventory is 500 units.

Manufacturing cost is K1,000,000 per unit, storage cost is K15,000 per unit per month, standard pay rate is K30,000 per hour, overtime rate is K45,000 per hour, cost of stock out is K50,000 per unit per month, marginal cost of subcontracting is K50,000 per unit, hiring and training cost is K1,000,000 per worker, layoff cost is K1,500,000 per worker, and worker productivity is 0.1 unit per hour. Assume that Kafue Steel starts off with 50 workers working 8 hours per day.

Which of the following strategies would you recommend Kafue Steel use for its aggregate planning and why?

(a) Produce exactly to meet demand, vary the workforce

(b) Constant workforce of 80, vary inventory and stock outs

Answer 1

Excel model was prepared and SOLVER was used to solve for the decision variables. Decision variables are highlighted in Orange/Red. Objective function in Yellow.

(a). Total cost as per "Meet Demand" strategy = $378,250,000 as shown below:

(b) Total cost as per "Constant Workforce" strategy = $6,414,900,000 as shown below:

The huge difference between these 2 strategies is because of sub-contracting cost which is substantially low, which is why under "Meet Demand" strategy, all employees get fired and all production is sub-contracted.

As per the above results, I would definitely recommend "Meet Demand" strategy, which is option (a) due to significantly lower total osts.