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Aggregate Planning at Green Mills Case Solution
Green Mills Inc. Operations Director Bob Thomas must create an annual plan for the upcoming year, during which they also might buy Chilean forestlands to lower raw material costs. Exhibit 1 shows the 12-month demand forecast, noting that Chile has a maximum shipping capacity of 1,500,000 board feet per month with a one-month lead time. The company will compare chase, level, and mixed aggregate plan costs to determine the most feasible. A Chilean worker can harvest 50,000 board feet of raw timber per month, and the forest property under consideration can store 3,000,000 board feet per month. Exhibit 2 shows production costs: regular time $150, overtime $200, holding $25, shipping $50, and U.S. spot market $400 per thousand board feet. The timber product market is too competitive for backordering, and charges in Chile would, on average, be $1,000 for hiring and training and $500 for layoffs.
Following questions are answered in this case study solution:
Determine the workforce and production schedule based on a level policy, a chase policy and a mixed policy that meet the forecasted demand at minimum total cost.
Present a cost comparison between the three plans and recommend the most attractive option based on minimizing total costs.
Perform a sensitivity analysis on the following based on the mixed policy:
i. Hiring costs increase by 25 percent
ii. Inventory costs increase by 25 percent
iii. Spot market prices decrease by 10 percent
Which one of the constraints has the largest impact on the case?
Define the term "under-time" within the context of this case.
Discuss some of the advantages and disadvantages of the level and chase policies.
Discuss the impact of economies of scale on this application.
Case Study Questions Answers
1. Determine the workforce and production schedule based on a level policy, a chase policy and a mixed policy that meet the forecasted demand at minimum total cost.
In order to determine the appropriate workforce and production schedule based on a level policy, a chase policy, and a mixed policy, it is necessary to calculate the total costs associated with each policy. This includes costs for labor, inventory, and subcontracting, if applicable. The mixed policy involves a combination of chase and level approaches to achieve the lowest total cost solution that meets demand.
i. Level Policy:
The level policy mandates that the organizations keep both the number of employees and the rate of production at the same level throughout the time horizon. Because of this policy, we are able to meet demand through a combination of practices, including backordering, overtime, and undertime.
Green Mills' level policy would require monthly timber production regardless of demand. This requires a consistent workforce and output rate based on the Chilean forest property's maximum production capacity and the shipping system's capacity. Twenty workers can produce twenty times 50,000 board feet in a month, according to the case study. Despite this, shipping costs limit production to 950,000 board feet per month. Shipping constraint. The company would have to keep excess production as inventory or place backorders when demand exceeded production to meet demand. This means the company must pay for inventory or backordering.
In addition, the business may use overtime or undertime hours to increase production in the event that demand is higher than anticipated or decrease production in the event that demand is lower than anticipated respectively. When calculating the total cost that is associated with the level policy, it is necessary to take into consideration the costs of overtime and undertime work, as well as the costs of holding inventory and placing backorders.
The level policy, in general, necessitates making a compromise between the costs of holding inventory, backordering, overtime, and undertime, on the one hand, and the benefits of maintaining a constant workforce level and output rate on the other. In the context of the level policy, the most efficient workforce and production schedule would be the one that kept total costs to a minimum while sill satisfying customer demand. The level policy is outlined below:
The total cost incurred in this policy is $5,019,000.
ii. Chase Policy:
The chase policy is a strategy for production planning that involves adjusting the workforce and production levels in response to changes in demand. This strategy is also known as "chasing the demand." The objective is to produce no more than the quantity of goods required to fulfill the anticipated demand while simultaneously containing costs to the greatest extent possible. To put it another way, the goal of the chase policy is to bring the rate of production up to the level of demand.
Calculate monthly demand to start the chase policy. The Exhibit 1 demand forecast provides this data. Determine the monthly production rate to meet demand. First, divide the expected demand by the number of working days and hours in a month. After this, the next step, which comes after determining the production rate, is to adjust the workforce to align with the production rate. This may involve recruiting new employees or letting some of the existing ones go to maintain a stable level of production at a given level of output for each month. When making these decisions, it is important to take into account the cost of both hiring new employees and firing existing ones, as shown in Exhibit 2.
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