A Cut-and-Try Example:

A firm with pronounced seasonal variation normally plans production for a full year to capture the extremes in demand during the busiest and slowest months. Let, we wish to set up a production pan for a company for the next six months. We are given the information listed in Table

For solving this problem we may exclude the costs of material. We could have included these Rs. 4500 costs in all of calculations, but if we suppose that a cost of Rs. 4500 is common to each demand unit, then we required only concern ourselves with the managerial costs. As the subcontracting cost is Rs. 5400, our true cost for subcontracting is just Rs. 900 because we save the materials. Inventory at the beginning of the first period is 400 units. Because the demand forecast is imperfect the company has find out that a safety stock (buffer inventory) should be established to reduce the likelihood of stock out. Before investigating alternative production plans, it is frequently useful to convert demand forecasts into production requirements, which take in to account the safety stock estimates. In Table note down that these requirements implicitly suppose that the safety stock is never actually used, so that ending inventory each month equals the safety stock for that month. For example, the January security stock of 450 (25% of January demand of 1800) becomes the inventory at the end of January. The production needs for January is demand plus safety stock minus starting inventory (1,800 + 450 - 400 = 1,850).

Now we should formulate alternative production plan for the company using a spread sheet, we investigate four different plans with the objective of discovering the one with the lowest total costs.