Integrated Case Study: Susmar Shoes Inc.

Integrated Case Study Susmar Shoes Inc 25 Susmar Shoes Inc W

Susmar Shoes Inc. manufactures and supplies three types of shoes (A, B, and C), with demand forecasts for 2011, raw material requirements, production capacities, costs, and inventory considerations. The company aims to maximize profit through optimal decision-making about production scheduling, raw material ordering, capacity levels, shifts, production sequence, and inventory management over the 12-month period. The problem involves setting the number of shifts (single or two shifts), adjusting operating levels (in rounds of 1,000 units), planning production quantities for each product, determining production sequence, and deciding on raw material orders each month. Costs include raw materials, ordering, holding, setup, capacity changes, overtime, and penalties for late deliveries. Revenue comes from sales, while costs are accrued from production, inventory, and operational adjustments. The starting point is December 2010 with certain operating conditions, and the goal is to develop a monthly plan to meet demands efficiently, minimize costs, and maximize profit.

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Introduction

Effective production planning and inventory management are critical components for manufacturing firms to optimize operational efficiency and profitability. Susmar Shoes Inc. operates in a competitive environment, producing three similar but distinct shoe types, facing fluctuating demand patterns, raw material costs, and capacity constraints. The core challenge lies in designing an integrated plan that balances production, raw material procurement, and capacity adjustments to maximize profit while maintaining customer satisfaction through timely deliveries.

This analysis applies principles of aggregate production planning, inventory management, and operations strategy to develop a comprehensive monthly plan for Susmar Shoes Inc. for the year 2011. The approach involves evaluating demand forecasts, cost parameters, capacity options, and production sequencing to determine optimal decisions regarding shifts, operating levels, raw material orders, and product mix. The goal is to produce in a cost-effective manner that maximizes revenue, minimizes inventory and penalty costs, and adapts flexibly to demand variations.

Demand Forecast and Pricing

The forecasted demand for 2011 is given monthly for each product (A, B, C), expressed in thousands of units. The selling price per unit is fixed at $17, with raw material costs at $6 per unit and additional supply costs at $1 per unit. Market demand fluctuations necessitate careful planning to avoid stockouts or excess inventory, both of which incur costs. The forecasted total demand varies monthly, requiring dynamic adjustments in production and procurement.

Raw Material and Inventory Considerations

Each product consumes one unit of raw material, which initially totals 15,000 units in stock. Raw material procurement costs $6 per unit, with orders placed at the beginning of each month, with a lead time of one month. Raw material is received at the start of the following month, necessitating forecast-based ordering. Inventory carrying costs are $0.15 per unit per month for raw materials, and any leftover raw materials value at $6 per unit at month’s end. Finished goods inventory costs are $0.25 per unit per month, valued at $12 per unit at the end of the year.

Capacity and Production Constraints

Susmar Shoes can operate either one or two shifts per month. Capacity limits are 10,000 units in a single shift, which can be increased to 12,000 units with overtime, or to 19,000 units in a two-shift operation. Transitioning between shifts involves setup costs ($3,000-$4,000). Capacity adjustments are made in increments of 1,000 units at costs of $600 per thousand units changed, with implications for idle capacity costs ($250 per 1,000 units of unused capacity). The plant’s operating decisions, such as shifts and levels, must consider these costs and capacities to optimize the balance between production and demand.

Operational Policies and Restrictions

Production of only one product at a time is permitted, with the production sequence influencing efficiency. Changes in production sequence incur setup costs of $900. The plant can operate from 7,000 units to higher levels depending on decisions about shifts and capacity adjustments. The existing operating level at December 2010 is 10,000 units in a single shift, with a production sequence of B-C-A. Production takes place throughout the month, with finished units delivered at month-end. Overtime costs are 50% higher than regular labor costs ($3.00 per unit).

Cost Structure and Revenue

The firm’s costs include raw materials, labor, overheads (200% of labor), setup, capacity changes, and inventory holding. Penalties of $1 per unit per month for late deliveries are applied for shortages. Revenue is earned from sales ($17 per unit), with rejected or late products incurring penalties or reduced profits. The analysis involves tracking costs and revenues monthly, with the objective to maximize total profit by the year's end.

Decision Variables and Planning Process

The primary decision variables include: number of shifts, operating level (in increments of 1,000 units), production quantities for each product, production sequence, raw material orders, and inventory levels. These decisions are interconnected; changes in capacity or sequence impact costs and ability to meet demand efficiently. A systematic approach involves defining these variables monthly, evaluating their cost implications, and selecting the combination that yields the highest cumulative profit.

Approach to Solution

The solution approach involves a combination of quantitative methods, including linear programming, simulation, and heuristic techniques. First, demand forecasts guide the production schedule, ensuring sufficient raw materials are ordered and capacity is aligned with projected needs. Next, sequence optimization minimizes setup costs and idle times. Adjustments to shifts and capacity tiers are made considering their costs and benefits. Inventory policies aim to balance holding costs against service level requirements. Throughout, costs and revenues are tracked monthly to evaluate the profitability of the plan.

Analysis of Cost Components

The total costs include raw material procurement, setup and capacity change costs, inventory holding, labor costs (regular and overtime), and penalty costs for missed deadlines. These are summed monthly to derive total expenses. Revenue is calculated based on the units sold. Profitability is maximized by minimizing idle and setup costs, aligning production with demand, and optimizing inventory levels.

Conclusion

An integrated production plan for Susmar Shoes Inc. should leverage capacity flexibility, strategic sequencing, and just-in-time procurement to capitalize on demand fluctuations while controlling costs. By carefully managing capacity changes, shifts, and production sequences, the company can improve its profitability, meet customer demands efficiently, and sustain competitive advantage. Continuous evaluation and adjustments based on real-time data and demand trends are essential to maintaining optimal operations throughout the year.

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