Aggregate Planning Problems

Q 1. Skycell, a major European cell phone manufacturer, is making production plans for the coming year.
Skycell has worked with its customers (the service providers) to come up with forecasts of monthly
requirements (in thousands of phones) as shown in Table 8-9. Manufacturing is primarily an assembly
operation, and capacity is governed by the number of people on the production line. The plant operates
for 20 days a month, eight hours each day. One person can assemble a phone every 10 minutes.
Workers are paid 20 euros per hour and a 50 percent premium for overtime. The plant currently
employs 1,250 workers. Component costs for each cell phone total 20 euros.

Given the rapid decline in component and finished-product prices, carrying inventory from one month to
the next incurs a cost of 3 euros per phone per month. Skycell currently has a no-layoff policy in place.
Overtime is limited to a maximum of 20 hours per month per employee. Assume that Skycell has a
starting inventory of 50,000 units and wants to end the year with the same level of inventory.

a. Assuming no backlogs, no subcontracting, and no new hires, what is the optimum production
schedule? What is the annual cost of this schedule?

b. Is there any value for management to negotiate an increase of allowed overtime per employee per
month from 20 hours to 40?

c. Reconsider parts (a) and (b) if Skycell starts with only 1,200 employees. Reconsider parts (a) and (b) if
Skycell starts with 1,300 employees. What happens to the value of additional overtime as the workforce
size decreases?

d. Consider part (a) for the case in which Skycell aims for a level production schedule such that the
quantity produced each month does not exceed the average demand over the next 12 months
(1,241,667) by 50,000 units. Thus, monthly production including overtime should be no more than
1,291,667. What would be the cost of this level production schedule? What is the value of overtime
flexibility?

Q 2. Reconsider the Skycell data in Exercise 1. Assume that the plant has 1,250 employees and a no-
layoff policy. Overtime is limited to 20 hours per employee per month. A third party has offered to
produce cell phones as needed at a cost of $26 per unit (this includes component costs of $20 per unit).

a. What is the average per unit of in-house production (including inventory holding and overtime cost) if
the third party is not used?

b. How should Skycell use the third party? How does your answer change if the third party offers a price
of $25 per unit?

c. Should Skycell use the third party if the per unit cost is $28?

d. Why would Skycell use the third party even when the per-unit cost of the third party is higher than
the average per-unit cost (including inventory holding and overtime) for in-house production?

Q 3. Reconsider the Skycell data in Exercise 1. Assume that the plant has 1,250 employees and a no-
layoff policy. Overtime is limited to at most 20 hours per employee per month. Also assume no
subcontracting option. Skycell has a team of 50 people who are willing to work as seasonal employees.
The cost of bringing them on is 800 euros per employee, and the layoff cost is 1,200 euros per
employee.

a. What is the optimal production, hiring, and layoff schedule?

b. How does the optimal schedule change if the seasonal pool grows from 50 to 100?

c. Relative to having 1,250 permanent employees and 50 seasonal, will Skycell gain significantly if it
carries only 1,100 permanent employees but has 200 seasonal employees?

d. Consider the case in which Skycell has 1,250 permanent employees and 50 seasonal employees. Does
Skycell gain more by eliminating its no-layoff policy for its permanent employees or by increasing the
seasonal employee pool from 50 to 100? Assume permanent employees can be hired or laid off at the
same cost as the seasonal employees.

Q 4 . FlexMan, an electronics contract manufacturer, uses its Topeka, Kansas, facility to produce two
product categories: routers and switches. Consultation with customers has indicated a demand forecast
for each category over the next 12 months (in thousands of units) to be as shown in Table 8-10.
Manufacturing is primarily an assembly operation, and capacity is governed by the number of people on
the production line. The plant operates 20 days a month, eight hours each day. Production of a router
takes 20 minutes, and production of a switch requires 10 minutes of worker time. Each worker is paid
$10 per hour with a 50 percent premium for any overtime. The plant currently has 6,300 employees.
Overtime is limited to 20 hours per employee per month. The plant currently maintains 100,000 routers
and 50,000 switches in inventory. The cost of holding a router in inventory is $2 per month, and the cost
of holding a switch in inventory is $1 per month. The holding cost arises because products are paid for
by the customer at existing market rates when purchased. Thus, if FlexMan produces early and

holds in inventory, the company recovers less given the rapidly dropping component prices.

a. Assuming no backlogs, no subcontracting, no layoffs, and no new hires, what is the optimum
production schedule for FlexMan? What is the annual cost of this schedule? What inventories does the
optimal production schedule build? Does this seem reasonable?

b. Is there any value for management to negotiate an increase of allowed overtime per employee per
month from 20 hours to 40? What variables are affected by this change?

c. Reconsider parts (a) and (b) if FlexMan starts with only 5,900 employees. Reconsider parts (a) and (b)
if FlexMan starts with 6,700 employees. What happens to the value of additional overtime as the
workforce size decreases?

Q 5. Reconsider the FlexMan data from Exercise 4. The firm is considering the option of changing
workforce size with demand. The cost of hiring a new employee is $700 and the cost of a layoff is
$1,000. It takes an employee two months to reach full production capacity. During those two months, a
new employee provides only 50 percent productivity. Anticipating a similar demand pattern next year,
FlexMan aims to end the year with 6,300 employees.

a. What is the optimal production, hiring, and layoff schedule? What is the cost of such a schedule?

b. If FlexMan could improve its training so that new employees achieve full productivity right away, how
much improvement in annual cost would the company see? How is the hiring and layoff policy during
the year affected by this change?
Q 6.FlexMan has identified a third party that is willing to produce routers and switches as needed. The
third party will charge $6 per router and $4 per switch. Assume all other data as in Exercise 4 except that
hiring and layoffs are allowed as in Exercise 5.

a. How should FlexMan use the third party if new employees provide only 50 percent productivity for
the first two months?

b. How should FlexMan use the third party if new employees are able to achieve full productivity right
away?

c. Why does the use of the third party change with the productivity of new employees?