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Gupta Furniture: Demand Fulfillment and Cost Efficiency through Aggregate Planning Custom Case Solution & Analysis
1. Evidence Brief: Case Extraction
Financial Metrics
- Regular production cost: 100 per unit
- Overtime production cost: 150 per unit
- Subcontracting cost: 200 per unit
- Inventory holding cost: 20 per unit per month
- Backorder / Stock-out cost: 50 per unit per month
- Hiring cost: 500 per worker
- Layoff cost: 800 per worker
- Average wage: 15 per hour
Operational Facts
- Planning Horizon: 6 months (January to June)
- Demand Forecast: Jan (1200), Feb (1500), Mar (1900), Apr (2300), May (2200), Jun (1500)
- Total Demand: 10600 units
- Opening Inventory: 500 units
- Labor Requirement: 1.5 hours per unit
- Workday: 8 hours per day, 20 days per month
- Starting Workforce: 10 workers
- Maximum Overtime: 10 percent of regular capacity
Stakeholder Positions
- Management: Focused on minimizing total fulfillment costs while maintaining service levels.
- Production Team: Concerned with workforce stability and avoiding frequent hiring or firing cycles.
- Finance: Prioritizes reduction of working capital tied up in inventory.
Information Gaps
- Subcontractor capacity limits are not specified.
- Raw material lead times and supply chain constraints are absent.
- Impact of backorders on long-term customer retention is unquantified.
2. Strategic Analysis
Core Strategic Question
- How should Gupta Furniture balance production capacity, workforce size, and inventory levels to satisfy a highly seasonal demand profile at the lowest total cost?
Structural Analysis
The demand profile shows significant seasonality, peaking in April (2300 units) from a low in January (1200 units). The 91 percent increase in monthly demand requires a flexible capacity strategy. Using a pure Chase strategy would necessitate aggressive hiring and firing, leading to high separation costs and low morale. A pure Level strategy would result in massive inventory holding costs or unacceptable backorder levels during peak months.
Strategic Options
Option 1: Chase Strategy (Demand Matching)
- Rationale: Adjust workforce monthly to match demand exactly.
- Trade-offs: Eliminates inventory holding costs but incurs 800 per layoff and 500 per hire. High risk of quality degradation due to temporary staff.
- Resource Requirements: Aggressive HR recruitment and training function.
Option 2: Mixed Strategy (Level Workforce with Overtime and Subcontracting)
- Rationale: Maintain a stable workforce of 15 workers; use overtime and subcontractors for the April-May peak.
- Trade-offs: Higher unit costs for peak production but avoids layoff/hiring expenses and maintains quality.
- Resource Requirements: Reliable third-party manufacturing partners.
Option 3: Level Production Strategy
- Rationale: Produce 1767 units monthly (total demand minus opening inventory divided by 6).
- Trade-offs: High inventory buildup in Q1. Lower production costs but high capital tie-up.
- Resource Requirements: Expanded warehouse space.
Preliminary Recommendation
Adopt Option 2 (Mixed Strategy). A workforce of 15 workers provides a baseline capacity of 1600 units per month. This minimizes workforce volatility costs while keeping inventory holding costs manageable during the March to May peak. Overtime should be utilized first during peak months as it is cheaper than subcontracting.
3. Implementation Roadmap
Critical Path
- Month 1: Increase workforce from 10 to 15. This requires hiring 5 workers immediately to build inventory ahead of the March spike.
- Month 2: Establish quality standards and contracts with two local subcontractors for overflow capacity in April.
- Month 3-5: Execute maximum allowable overtime (10 percent) to buffer against the 2300-unit peak in April.
- Month 6: Review demand forecasts for the second half of the year before making layoff decisions.
Key Constraints
- Labor Availability: The plan assumes 5 skilled workers can be hired and trained within 30 days.
- Subcontractor Quality: Outsourced furniture components must meet internal specifications to avoid returns.
Risk-Adjusted Implementation Strategy
Maintain a safety stock of 200 units at all times. If the February demand exceeds the forecast by 10 percent, trigger subcontracting earlier in March rather than waiting for the April peak. This prevents the compounding effect of backorder costs which are 2.5 times higher than inventory holding costs.
4. Executive Review and BLUF
BLUF
Gupta Furniture must shift to a mixed aggregate planning strategy immediately. The current workforce of 10 is insufficient for the 10600-unit demand cycle. Increasing the permanent workforce to 15 workers and utilizing overtime and subcontracting for the April peak is the most cost-effective path. This approach avoids the high cost of frequent layoffs while keeping inventory holding costs below the 50 per unit backorder penalty. Total cost optimization requires prioritizing overtime over subcontracting due to the 50 per unit price delta between these two methods. Execution must begin in January to prevent a stock-out crisis in March.
Dangerous Assumption
The analysis assumes the 1.5 hours per unit labor requirement remains constant. Any drop in productivity during the high-stress peak months or with new hires will break the capacity model and force expensive, last-minute subcontracting.
Unaddressed Risks
- Subcontractor Reliability: Probability: Medium. Consequence: High. If subcontractors fail to deliver in April, Gupta will face a 700-unit shortfall that cannot be recovered through overtime.
- Inventory Obsolescence: Probability: Low. Consequence: Medium. Carrying high inventory in February to prepare for April assumes no design changes or order cancellations.
Unconsidered Alternative
Demand Side Management: The team did not consider using price increases or extended lead-time incentives during the April-May peak to smooth the demand curve. Shifting 300 units of demand from April to June through pricing would eliminate the need for subcontracting entirely.
Verdict
APPROVED FOR LEADERSHIP REVIEW
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