BUSN – Integrated Case Study: Susmar Shoes Inc.

Integrated Case Study: Susmar Shoes Inc.Susmar Shoes Inc. manufactures and supplies three types of shoes (A, B and C) toseveral customers against specific orders. The products are similar with some minordesign differences. These products require the same basic raw materials and areprocessed on the same set of machines.DEMANDThe orders are received by the marketing department and are cumulated into threecategories (A, B and C). The demand forecast for year 2011 is given in Table 1.ProductABCJan743Table 1: Demand for 2011 in Thousands of UnitsFeb Mar Apr May Jun July Aug Sep Octt875359101215543235689332114456NovDec1064843RAW MATERIALThe amount of raw material required for each product is the same. Therefore, it may beassumed that one unit of raw material is required for each one unit of finished product.The cost of raw material is $ 6.00 per unit. The ordering cost is $ 1,500 per order andthe inventory carrying cost is $ 0.15 per unit per month. The lead time for receiving thematerial is one month. This means that an order placed in any month will be received inthe following month. Production suffers if there is not enough material in stock. There isno provision for staggered deliveries. In addition to the basic raw material, the cost ofother supplies is $ 1.00 per unit of finished product.Currently, there are 15,000 units of raw material in stock and there are no outstandingorders. There is no constraint on the warehouse capacity and, therefore, any amount ofraw material and/or finished product can be stored.PRODUCTION CAPACITYOnly one product can be produced at a time and it costs $ 900.00 to change the set-upfrom one product to the other. The production department can work in a single shift ortwo shifts. The single shift capacity is 10,000 units per month which can be increased to12,000 per month by producing 2,000 units during overtime. The two shift capacity is19,000 units. There is no provision of overtime in two shifts. It costs $ 4,000 to go fromone shift to two shifts and $ 3,000 to go from two shifts to a single shift in addition to thecost of changing the operating level. Operating levels can be changed in rounds of1,000. This means that plant can operate at any level like 7,000, 8,000, 14,000 etc.There is no cost of changing operating level up to 1,000 units, However, it costs $600.00 per thousand units for changing capacity (up or down) if change is for more than1,000 units. For example, it will cost $ 1,200.00 and $ 1,800.00 to change capacity byPage 1 of 42,000 and 3,000 units respectively. If the plant is operating below capacity then idlemachine cost is estimated at $ 250.00 per thousand units of idle capacity.The operating level in December 2010 was 10,000 in a single shift and the productionsequence was B-C-A.FINISHED PRODUCTFinished units are delivered to customers at the end of each month. The selling priceper unit is $ 17.00. The inventory carrying cost per unit per month is $ 0.25 based onthe end of month inventory. Any raw material and finished stock left at the end ofDecember 2011 will be valued at $ 6.00 and $ 12.00 per unit respectively.Penalty for late delivery is $ 1.00 per unit per month. Direct labor cost is $ 2.00 per unitduring regular time. Overtime cost is 50% more. Plant overheads are estimated to be200% of the direct labor cost.Currently, there are no finished units in stock and there is also no backlog.Working on the CaseThe students can work individually or in teams of no more than five students in a team.Only one submission is required per team. Write names of all team members on thesubmission.SolutionThe objective is to maximize profit at the end of December.The following decisions are to be made in each monthNumber of shifts (1 or 2)Operating level (can be changed in rounds of 1,000 only)Production level for each product (need not be in levels of 1,000)Sequence of production for the three products (A-B-C, B-A-C etc.)Quantity of the raw materials orderedPage 2 of 4SubmissionThe solution to the problem should be presented in the following format. A drop box hasbeen created in the Blackboard. Submit a word document or a pdf file.JanFebMarAprSolutionMa JunyJulyAugSeptOctNovDecNumberof ShiftsOperatingLevelProduction Level ofAProduction Level ofBProduction Level ofCTotalProduction (A + B+ C)Sequence ofProduction for thethreeproductsQuantityof RawMaterialOrderedGive a complete analysis of various costs incurred.What is the revenue and total profit made?It will be a good idea to keep track of costs, revenue and profit on a monthly basis.GradingThe team that makes the maximum profit will be the winning team and will get 100% forthe grade. All other teams will be compared with the winning team. The percentagegrade will go down by 5% for every $10,000 reduction in profit. For example, supposethe maximum profit made by one of the teams is $400,000. This team gets 100%. ThePage 3 of 4teams that make $390,000 and more (but less than $400,000) will get 95%. The teamsthat make $380,000 and more (but less than 390,000) will get 90% and so on.