Problem: Andrew-Carter, Inc. (A-C), is a major Canadian producer and distributor of outdoor lighting fixtures. Its fixture is distributed throughout North America and has been in high demand for several years. The company operates three plants that manufacture the fixture and distribute it to five distribution centers (warehouses).
During the present recession. A-C has seen a major drop in demand for its fixture as the housing market has declined. Based on the forecast of interest rates, the head of operations feels that demand for housing and thus for its product will remain depressed for the foreseeable future. A-C is considering closing one of its plants, as it is now operating with a forecasted excess capacity of 34,000 units per week. The forecasted weekly demands for the coming year are:
Warehouse 1 9,000 units
Warehouse 2 13,000 units
Warehouse 3 11,000 units
Warehouse 4 15,000 units
Warehouse 5 8,000 units
The plant capacities in units per week are:
Plant 1, regular time 27,000 units
Plant 1, on overtime 7,000 units
Plant 2, regular time 20,000 units
Plant 2, on overtime 5,000 units
Plant 3, on regular time 25,000 units
Plant 3, on overtime 6,000 units
If A-C shuts down any plants any plants, its weekly costs will change, as fixed costs are lower for a nonoperating plant. Table 1 shows production costs at each plant, both variable at regular time and overtime, and fixed when operating and shut down. Table 2 shows distribution costs from each plant to each warehouse (distribution center).
TABLE: Andrew-Carter, Inc., Variable Costs and Fixed Production Costs per Week
|
|
|
Fixed Cost per Week
|
|
Plant
|
Variable Cost
|
Operating
|
Not Operating
|
|
No. 1, regular time
|
$2.80/unit
|
$14,000
|
$6,000
|
|
No. 1, overtime
|
3.52
|
|
|
|
No. 2, regular time
|
2.78
|
12,000
|
5,000
|
|
No. 2, overtime
|
3.48
|
|
|
|
No. 3, regular time
|
2.72
|
15,000
|
7,500
|
|
No. 3, overtime
|
3.42
|
|
|
TABLE: Andrew-Carter, Inc., Distribution Costs per Unit
|
|
To Distribution Center
|
|
From Plant
|
W1
|
W2
|
W3
|
W4
|
W5
|
|
No. 1
|
$0.50
|
$0.44
|
$0.49
|
$0.46
|
$0.56
|
|
No. 2
|
0.40
|
0.52
|
0.50
|
0.56
|
0.57
|
|
No. 3
|
0.56
|
0.53
|
0.51
|
0.54
|
0.35
|
Questions to answer:
Question 1. Evaluate the various configurations of operating and closed plants that will meet weekly demand. Determine which configuration minimizes total costs.
2. Discuss the implications of closing a plant.