Case Study

Susmar Shoes, inc. will use the material studied in aggregate production planning and inventory management. The
students can work in groups of no more than five students in a group. The details of the case study are given
below.
Susmar Shoes Inc. manufactures and supplies three types of shoes (A, B and C) to several customers against
specific orders. The products are similar with some minor design differences. These products require the same
basic raw materials and are processed on the same set of machines.

DEMAND

The orders are received by the marketing department and are cumulated into three categories (A, B and C). The
demand forecast for year 2016 is given in Table 1.
Table 1: Demand for 2016 in Thousands of Units
Product Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec
A 7 8 7 5 3 5 9 10 12 15 10 8
B 4 5 4 3 2 3 5 6 8 9 6 4
C 3 3 3 2 1 1 4 4 5 6 4 3

RAW MATERIAL

The amount of raw material required for each product is the same. Therefore, it may be assumed that one unit of
raw material is required for each one unit of finished product. The cost of raw material is $ 6.00 per unit. The ordering cost is $ 1,500 per order and the inventory carrying cost is $ 0.15 per unit per month. The orders for raw
materials, if any, are placed at the beginning of each month. The lead time for receiving the material is one month.

This means that an order placed in any month will be received at the beginning of the following month and will be
available for production. Production suffers if there is not enough material in stock. There is no provision for
staggered deliveries. In addition to the basic raw material, the cost of other supplies is $ 1.00 per unit of finished
product.
Currently (beginning of January 2016) there are 15,000 units of raw material in stock and there are no outstanding
orders. These 15,000 units are available for use in January. There is no constraint on the warehouse capacity and,
therefore, any amount of raw material and/or finished product can be stored.

PRODUCTION CAPACITY

Only one product can be produced at a time and it costs $ 900.00 to change the set-up from one product to the
other. The production department can work in a single shift or two shifts. The single shift capacity is 10,000 units
per month which can be increased to 12,000 per month by producing 2,000 units during overtime. The two shift
capacity is 19,000 units. There is no provision of overtime in two shifts. It costs $ 4,000 to go from one shift to two
shifts and $ 3,000 to go from two shifts to a single shift in addition to the cost of changing the operating level.
Operating levels can be changed in rounds of 1,000. This means that plant can operate at any level like 7,000,
8,000, 14,000 etc. There is no cost of changing operating level up to 1,000 units, However, it costs $ 600.00 per
thousand units for changing capacity (up or down) if change is for more than 1,000 units. For example, it will cost $
1,200.00 and $ 1,800.00 to change capacity by 2,000 and 3,000 units respectively. If the plant is operating below
capacity then idle machine cost is estimated at $ 250.00 per thousand units of idle capacity.
The operating level in December 2015 was 10,000 in a single shift and the production sequence was B-C-A. These
are the operating conditions at the end of December 2015.

FINISHED PRODUCT

The production takes place throughout the month and finished units are delivered to customers at the end of each
month. The selling price per unit is $ 17.00. The inventory carrying cost per unit per month is $ 0.25 based on the
end of month inventory. Any raw material and finished stock left at the end of December 2016 will be valued at $
6.00 and $ 12.00 per unit respectively.
Penalty for late delivery is $ 1.00 per unit per month. Direct labor cost is $ 2.00 per unit during regular time.
Overtime cost is 50% more. Plant overheads are estimated to be 200% of the direct labor cost.
Currently, there are no finished units in stock and there is also no backlog.
Working on the Case
The students can work individually or in teams of no more than five students in a team. Only one submission is
required per team.

Solution

The objective is to maximize profit at the end of December.
The following decisions are to be made in each month
 Number of shifts (1 or 2)
 Operating level (can be changed in rounds of 1,000 only)
 Production level for each product (need not be in levels of 1,000)
 Sequence of production for the three products (A-B-C, B-A-C etc.)
 Quantity of the raw materials ordered.

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