Kite Fabrication has the following aggregate demand requirements and other data for the upcoming four quarters.
Quarter Demand Previous quarter's output 1300 units
1 1800 Beginning inventory 0 units
2 1100 Stockout cost $150 per unit
3 1600 Inventory holding cost $40 per unit at end of quarter
4 900 Hiring workers $40 per unit
Firing workers $80 per unit
Subcontracting cost $60 per unit
Unit cost $30 per unit
Overtime $15 extra per unit
Which of the following production plans is better: Plan A-chase demand by hiring and firing; Plan B-pure level strategy, or Plan C-1200 level with the remainder by subcontracting? Explain how the relative costs of storage, shortage, overtime, subcontracting, layoffs, etc., influence the choice of strategy.
Chase costs $314,000; Level costs $329,000; Mixed costs $236,000. Mixed is by far the cheapest. In this problem, stockouts and storage are relatively expensive compared to subcontract cost and hiring/firing costs. This leads to the low-cost solution that avoids inventory-chase strategy.