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Water Pumps Case Study

1322 words - 6 pages

Case Study Teaching Notes

For

Introduction to Materials Management, 7e

J. R. Arnold
Stephen N. Chapman
Lloyd M. Clive

TABLE OF CONTENTS

Meridian Water Pumps – Chapter 2 1

Acme Water Pumps – Chapter 3 5

Apix Polybob Company – Chapter 4 6
Wescott Products – Chapter 5 9

Johnston Products – Chapter 6 14

Let’s Party! – Chapter 7 17

Northcutt Bikes: The Forecasting Problem – Chapter 8 20

Randy Smith: Inventory Control Manager – Chapter 9 22

Carl’s Computers – Chapter 10 25

CostMart Warehouse – Chapter 12 29

Metal Specialties, Inc. – Chapter 13 32
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8 workers. Rounding that to 31 workers, we have the following result:
* We need to hire 11 workers (there are currently 20, and we need 31)
* There is an upfront cost of $1100 ($100 hiring cost for each worker)
* The monthly production will be 775 (31 workers x 25 pumps per worker)
* The inventory at the end of month 1 will be 225 (production of 775 plus existing inventory of 50 = 825, then subtract the production of 600)

Month | 1 | 2 | 3 | 4 | 5 | 6 |
Demand | 600 | 750 | 1000 | 850 | 750 | 700 |
Production | 775 | 775 | 775 | 775 | 775 | 775 |
Inventory | 225 | 250 | 25 | -50 | -25 | 50 |
Inventory cost | $1125 | $1250 | $125 | $0 | $0 | $250 |

The total inventory cost is $2750
The total hiring cost is $1100
The total extra cost of the level plan is $2750 + $1100 = $3850
There are several qualitative issues that can and should be discussed here. Three of the more important ones may be:
* There are two months when shortages appear. There is no indication how customers will react. For example, if the customers are willing to wait for one to two months, then certainly there will at least be some loss of good will. There is a high probability that customers would not be willing to wait if they could obtain the product from a competitor (given that water pumps are a common product, this is highly likely). In that case a real financial cost is the loss of profit from those lost sales, and potentially some permanent loss of those disappointed customers. At a minimum, there is likely to be some cost in filling the backorders.
* As indicated in the case, such shortages also require sales people to make additional visits to customers to calm their anger. Such visits might cost some real dollars and also create some anger and discouragement within the sales staff.
* There is an assumption that the newly hired 11 people will be able to produce a full production (25 pumps per month) immediately. Most production jobs entail a learning curve, implying the production of 775 total pumps in month 1 may be overly optimistic.

2. The chase plan is also fairly easy to develop. To create it, the assumption is made that the target inventory of 25 can be accomplished in the first month. To obtain the number of people needed each month, the demand for that month is divided by 25 (the number of pumps one worker can make in one month). The only exception is the first month, when we assume that 25 units of demand can be taken from inventory to get to the target level immediately.

Month | 1 | 2 | 3 | 4 | 5 | 6 |
Demand | 600 | 750 | 1000 | 850 | 750 | 700 |
People needed | 23 | 30 | 40 | 34 | 30 | 28 |
People +/- | 3 | 7 | 10 | -6 | -4 | -2 |
Inventory | 25 | 25 | 25 | 25 | 25 | 25 |
Hire/layoff cost | $300 | $700 | $1000 | $600 | $400 | $200 |

The total hire/layoff cost for the six months is $3200. The inventory cost for each month is 25($5) = $125. For the full six month the cost for inventory is $750. The total...

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