RED TOMATO TOOLS

Red Tomato sells each tool to the retailers for $40.

The company has a starting inventory in January of
1,000 tools.
At the beginning of January the company has a
workforce of 80 employees.
The plant has a total of 20 working days in each
month, and each employee earns $4 per hour regular
time.
Each employee works eight hours per day on straight
time and the rest on overtime.
The various costs are shown in Table 8-2.

Month Demand
Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
Currently, Red Tomato has no limits on
subcontracting, inventories, and stockouts/backlog.
All stockouts are backlogged and supplied from the
following months' production. inventory costs are
incurred on the ending inventory in the month.

















Item Cost
Material cost $10/unit
Inventory holding cost $2/unit/month
Marginal cost of
stockout/backlog
$5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Overtime cost $6/hour
Cost of subcontracting $30/unit


The supply chain manager's goal is to obtain the
optimal aggregate plan that allows Red Tomato to end
June with at least 500 units (i.e., no stockouts at the
end of June and at least 500 units in inventory).

The optimal aggregate plan is one that results in the
highest profit over the six month planning horizon.

For now, given Red Tomato's desire for a very high
level of customer service, assume all demand is to be
met, although it can be met late.

Therefore, the revenues earned over the planning
horizon are fixed.

As a result, minimizing cost over the planning horizon
is the same as maximizing profit.

In many instances, a company has the option of not
meeting certain demand, or price itself may be a
variable that a company has to determine based on
the aggregate plan.

In such a scenario, minimizing cost is not equivalent
to maximizing profits.





Red Tomato lays off a total of 16 employees at
the beginning of January.

After that, the company maintains the
workforce and production level.

They do not use the subcontractor during the
entire planning horizon.

They carry a backlog only from April to May.
In all other months, they plan no stockouts.

In fact, Red Tomato carries inventory in all
other periods.


Define Decision Variables

For t = 1, ..., 6
W
t
= Workforce size for month t
H
t
= Number of employees hired at the beginning of month t
L
t
= Number of employees laid off at the beginning of month t
P
t
= Production in month t
I
t
= Inventory at the end of month t
S
t
= Number of units stocked out at the end of month t
C
t
= Number of units subcontracted for month t
O
t
= Number of overtime hours worked in month t


Define Objective Function
The objective function is to minimize the total cost (equivalent to
maximizing total profit as all demand is to be satisfied) incurred during
the planning horizon.

Minimize (Regular-time labor cost + Overtime labor cost + Cost of hiring
and layoffs + Cost of holding inventory + Cost of stocking out + Cost of
subcontracting + Material cost)








These costs are evaluated as follows:
1. Regular-time labor .cost: Recall that workers are paid a regular-
time wage of $640 ($4/hour X 8 hours/day X 20 days/month) per
month. Because Wt is the number of workers in Period t, the
regular-time labor cost over the planning horizon is given by :



2. Overtime labor cost. As overtime labor cost is $6 per hour (see
Table 8-2) and 0t represents the number of overtime hours
worked in Period t, the overtime cost over the planning horizon is :



3. Cost of hiring and layoffs. The cost of hiring a worker is $300 and
the cost of laying off a worker is $500 (see Table 8-2). Ht and Lt
represent the number hired and the number laid off, respectively,
in Period t. Thus the cost of hiring and layoff is given by:


4. Cost of inventory and stockout. The cost of carrying inventory is
$2 per unit per month, and the cost of stocking out is $5 per unit
per month (see Table 8-2). It and St represent the units in
inventory and the units stocked out, respectively, in Period t. Thus,
the cost of holding inventory and stocking out is:




5. Cost of materials and subcontracting. The material cost is $10 per
unit and the subcontracting cost is $30/unit (see Table 8-2). P1
represents the quantity produced and C1 represents the quantity
subcontracted in Period t. Thus, the material and subcontracting
cost is:



The total cost incurred during the planning horizon is the sum of all the
aforementioned costs and is given by:




CONSTRAINTS

1. Workforce, hiring, and layoff constraints



The starting workforce size is given by W0 = 80.

2. Capacity constraints


The starting inventory is given by I0 = 1,000,
the ending inventory must be at least 500 units (i.e., I6 > 500),
and initially there are no backlogs (i.e., So = 0).


3. Inventory balance constraints



4. Overtime limit constraints






P
t
40W
t
+
O
t
4
I
t 1
+ P
t
+C
t
D
t
+ S
t 1
+ I
t
S
t
O
t
10W
t


average of the starting and ending inventories, that is,



the average inventory over the planning horizon is given by :









We describe this inventory as seasonal inventory because it is carried in anticipation of a future increase in demand.

Given the sale price of $40 per unit and total sales of 16,000 units, revenue over the planning horizon is given by:

(I
0
+ I
T
) / 2 + I
t
t1
T 1

( )
T

D
t
t1
T 1

( )
T

Average
time
Example 8-1 :Impact of Higher Demand Variability

Red Tomato sells each tool to the retailers for $40.
The company has a starting inventory in January of
1,000 tools.
At the beginning of January the company has a
workforce of 80 employees.
The plant has a total of 20 working days in each
month, and each employee earns $4 per hour regular
time.
Each employee works eight hours per day on straight
time and the rest on overtime.
The various costs are shown in Table 8-2.
Month
Demand
Forecast
January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400

Currently, Red Tomato has no limits on
subcontracting, inventories, and stockouts/backlog.
All stockouts are backlogged and supplied from the
following months' production. inventory costs are
incurred on the ending inventory in the month.
Item Cost
Materials cost/unit $ 10
Inventory holding cost/unit/month $ 2
Marginal cost of stockout/unit/month $ 5
Hiring and training cost/worker $ 300
Layoff cost/worker $ 500
Labor hours required/unit $ 4
Regular time cost/hour $ 4
Over time cost/hour $ 6
Subcontracting cost/unit $ 30

The supply chain manager's goal is to obtain the
optimal aggregate plan that allows Red Tomato to end
June with at least 500 units (i.e., no stockouts at the
end of June and at least 500 units in inventory).

The optimal aggregate plan is one that results in the
highest profit over the six month planning horizon.

For now, given Red Tomato's desire for a very high
level of customer service, assume all demand is to be
met, although it can be met late.

Therefore, the revenues earned over the planning
horizon are fixed.

As a result, minimizing cost over the planning horizon
is the same as maximizing profit.

In many instances, a company has the option of not
meeting certain demand, or price itself may be a
variable that a company has to determine based on
the aggregate plan.

In such a scenario, minimizing cost is not equivalent
to maximizing profits.

Red Tomato lays off a total of 16 employees at the
beginning of January.

After that, the company maintains the workforce and
production level.

They do not use the subcontractor during the entire
planning horizon.

They carry a backlog only from April to May. In all
other months, they plan no stockouts.

In fact, Red Tomato carries inventory in all other
periods.



Obtain the optimal aggregate plan in
this case.





















Example 8-2 :Impact of Lower Costs of Hiring and Layoff

Red Tomato sells each tool to the retailers for $40.
The company has a starting inventory in January of
1,000 tools.
At the beginning of January the company has a
workforce of 80 employees.
The plant has a total of 20 working days in each
month, and each employee earns $4 per hour regular
time.
Each employee works eight hours per day on straight
time and the rest on overtime.
The various costs are shown in Table 8-2.

Month
Demand
Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200

Currently, Red Tomato has no limits on
subcontracting, inventories, and stockouts/backlog.
All stockouts are backlogged and supplied from the
following months' production. inventory costs are
incurred on the ending inventory in the month.
Item Cost
Materials cost/unit $ 10
Inventory holding cost/unit/month $ 2
Marginal cost of stockout/unit/month $ 5
Hiring and training cost/worker $ 50
Layoff cost/worker $ 50
Labor hours required/unit $ 4
Regular time cost/hour $ 4
Over time cost/hour $ 6
Subcontracting cost/unit $ 30

The supply chain manager's goal is to obtain the
optimal aggregate plan that allows Red Tomato to end
June with at least 500 units (i.e., no stockouts at the
end of June and at least 500 units in inventory).

The optimal aggregate plan is one that results in the
highest profit over the six month planning horizon.

For now, given Red Tomato's desire for a very high
level of customer service, assume all demand is to be
met, although it can be met late.

Therefore, the revenues earned over the planning
horizon are fixed.

As a result, minimizing cost over the planning horizon
is the same as maximizing profit.

In many instances, a company has the option of not
meeting certain demand, or price itself may be a
variable that a company has to determine based on
the aggregate plan.

In such a scenario, minimizing cost is not equivalent
to maximizing profits.

Red Tomato lays off a total of 16 employees at the
beginning of January.

After that, the company maintains the workforce and
production level.

They do not use the subcontractor during the entire
planning horizon.

They carry a backlog only from April to May. In all
other months, they plan no stockouts.

In fact, Red Tomato carries inventory in all other
periods.



Obtain the optimal aggregate plan in
this case.