Planning production

As per the new forecast, the cumulative production for 1980 is 120,000 units.

As for 1979, the cumulative planned production peaks at 80,000 units around May.
Considering that the present inventory level is just 8013 units cumulatively,
capacity has to be increased to match forecast.

Choice of aggregate unit: in the absence of labour hours or machine hours per
unit data, we will choose the total number of all types of A/C units as the aggregate
unit. (Note that even though direct labor index for each production week
corresponding to the unit type produced is given, the actual labor utilization per unit
type varies with each week, and for our purposes of estimation we cannot use it –
unless the theoretical or design labor requirement per unit is given. We’ll rather use
this labor hours data to calculate labor costs after capacity planning strategy is
chosen)

Inventory Policy: For 1980, the forecasts have been provided on a fiscal year
basis rather than on monthly basis. So we would be unable to choose the Demand
Chase strategy, and so we have to go with the Level Production strategy.

Our cumulative aggregate production is 130,000 units for 12 months between

September 1979 and August 1980. So rate of production per month = (120,000/12)
= 10,000 units.

This would rather be the slope of our level production line.

The aggregate unit forecast for 1980 is given below:

Cumulative No. of
Month units
September 10000
October 20000
November 30000
December 40000
January 50000
February 60000
March 70000
April 80000
May 90000
June 100000
July 110000
August 120000
Evaluation of Production Plan

Labor Considerations:

In the actual production data provided, the direct labor index for week ending
September 8th 1979 is 48.4, the unit being manufactured is Breeze Queen.

The total labor hour index values used was 5430.2.

But based on the above calculations, for the 1980 forecast, the labor hour index
requirement would be as below:

Sales Labor hour index

Unit Forecast required
Breeze Queen 41000 4510
Midget 46500 3720
Mighty Midget 11000 770
Breeze King 8000 560.00
Islander 5000 500
Super 1500 330
Total 113000 10390

Therefore the incremental labor required would be 91% of what earlier existed.
Tradeoff: since we are following a Level Production strategy, there will be costs
incurred in terms of additional inventory during non-peak seasons of September –
February. But this trade off is inevitable, and is quite better than having stock outs
and losing sales.

Note that till 1979 there was a 40% idle space in the warehouse – that problem
would be greatly reduced and the per unit floor space cost would come down by
nearly 1.015 x $14.5 = $14.72 (approx.).

Kool King corporation could consider an outright purchase of warehouse space so

that it can amortize inventory storage space costs over a few years – which would
mean beyond that point the inventory costs would come down.