Basic Inventory Planning

Generic Situation:

One of the most difficult tasks confronting a manager is creating a production and inventory plan for a future period of time that meets expected demand for that period while minimizing both production and inventory costs.

Example:

Maclave Corp. manufactures high end air-conditioning units for both residential and small industry application. Jack Maclave is presently trying to plan his production and inventory levels for the next six months. Because of seasonal fluctuations in utility and raw materials costs, the per unit cost of producing his products varies from month to month. Production capacity also varies from month to month due to differences in the number of working days, vacations, and scheduled maintenance and training. The following table summarizes the monthly production costs, demands, and production capacity that Jack expects to face over the next six months.

123456
Unit Production Cost$240$250$265$285$280$260
Units Demanded1,0004,5006,0005,5003,5004,000
Maximum Production4,0003,5004,0004,5004,0003,500
MONTHS

McClave's warehouse can house a maximum of 6,000 units in inventory at the end of every month. Jack likes to keep 1,500 units in inventory as a safety net to meet unexpected demand emergencies. To maintain a stable workforce, the company wants to produce at no less than one half on its maximum production capacity each month. The controller estimates that the cost of carrying a unit in any given month is about equal to 1.5% of the unit production cost in the same month. Management estimates the number of units carried in inventory each month by averaging the beginning and ending inventory for each month. There are presently 2,750 units in inventory. Jack wants a production schedule that would result in a maximum profit.

Profit Maximizing Solution:

The following table summarizes the optimal production schedule:

123456
Units Produced 4,0003,5004,0004,2504,0003,500
MONTHS