Case

Course: Dec Mod HS 4001

Sem: Jan-May 2015 Faculty: Seshasayee
Date: Jan 12, 2015

Planning at a Plywood Mill

The chief of planning at Standard Plywood Company is all set to plan for the next year. He has to face two
decisions, i.e. i) Plant Capacity and ii) Labour rate.
The plant capacity decision involves whether or not the firm should expand the mill, by how much and
when. If they decide to expand now, additional capacity can be added at first quarter of next year.
The second decision relates to labour organizations that are about to start with the companys labour union.
The company and the labour union have to agree on a labour rate for the coming year. This is a joint
decision and the result of a negotiation process.
The company has prepared forecasts of the prices for the plywood that it will sell next year as well as
projections for how much would be sold (i.e. an estimate of demand). The company has a policy of
producing to order so that no inventory of plywood is maintained. This implies that the company cannot
sell more than what it can produce in any period. Forecasts, have been made for the price of logs, the raw
material from which the plywood is made.
In order to produce plywood, the company incurs expenses for (i) labour, (ii) supplies and (iii) raw
material i.e. logs. Other expenses are related to sales. The company leases its production equipment and
pays fees for these leases. There are also certain fixed (overhead) costs during each period.
The present capacity is 9,200 MSF per quarter. For each MSF of plywood that is produced, 0.52 MBF of
logs is required. The total labour hour required depends on the plywood production and the labour
productivity.
Labour hour = plywood production / labour productivity
Each MSF of plywood uses $28 in supplies in the production process. Sales expense is 10% of sales
revenue. Fixed expense is $20,000 per quarter. The cost of leasing equipment is $11 per MSF of installed
capacity per quarter. The current labour rate is $9 per hour.
Estimates for exogenous variables are given in the table below:
Variable
Plywood price
Plywood demand
Log cost
Labour productivity

Unit

Quarter 1

Quarter 2

Quarter 3

Quarter 4

$ / MSF

125

125

130

130

MSF

10,000

10,800

8,000

10,000

$ / MBF

75

75

75

80

MSF / hr

0.4

0.4

0.4

0.4

Questions:

1)

List the exogenous and endogenous variables.

2)

How much could the labour rate increase before the mill became unprofitable?

3)

If for an addition of $2 in the labour rate, the union promises to improve the productivity to 0.5.
is this proposal acceptable from profit point of view?

4) What is the impact of additional capacity on annual profit?

--------------------------------------------------------------------------------------------------------------------------Source: The above case is based on a problem given in the book, Introduction to Management Science
By Charles P Bonini, McGraw-Hill, 2000.

A Problem on Reliability:
An application requires that at least two processors in a multiprocessor system be
available with more than 95 percent probability. The cost of a processor with 60 percent
reliability is $10,000 and each 10 percent increase in reliability will cost $8,000.
Determine for each of the following cases of (i) the number of processors (n) and the
reliability (p) of each processor (assume that all processors have the same reliability) the
total system cost.
Case No of
Reliability of
processors
each processor
1
3
0.6
2
4
0.7
3
4
0.8
4
5
0.7
5
5
0.8
6
6
0.8
7
6
0.9
For each of these cases clearly mention (a) if the system reliability satisfies the minimum
requirement of 0.95 (b) what is the cost. Do you think the optimal solution (ie. the case
where the total cost is MINIMUM) must be the case where the processor reliability is
high and number of processors is low? Give reasons for your stand.
Source: Probability & Statistics for Computer Science And Engineering by Kishore Trivedi. Wiley 2004