Question

Case 12 The Interface between Demand Management and Production Strategies at TractParts Abhishek Shinde' and Dileep More Mr. Alex is the head of operations at TractParts Prt. Ltd, a well known Indian manufacturer of pumps, engines, electrie motors, and transformers. The company is one of India's eariest industrial groups, established in 1980, which has grown to become a big plaver within Indian manufacturing Under the supervision of Mr. Alex, TractParts has been supplying modern tractor engines to leading tractor manu facturing firms such as Agri-Tractor, Ltd. and Mobile-Tractor, Ltd The balk of demand for tractors comes during the months from Octo- ber to March. The demand for tractor engines fluctiates throughout the year. Table 12-1 shows the orders placed with TractParts by the firms Agni-Tractor, Litd. and Moble-Tractor, Lad. in advance, based on their own forecasting models. Table 12-1 Demand Pattern for Year 2003-200 Agri-Tractor, Lid. Mebile-Tractor, Ltd. Total Meath 400 300 150 100 Indan Inotitnute of Maageset,Caleutta, Indik ablishekjsacin Indin Instihute of Managoment, Caleutta, Indla dileep [email protected] CASE 12THE INTERFACE BETWEEN DEMAND MANAGEMENT AND PROOUCTION 131 STRATEGES AT TRACTPART Agri-Tractor, Ltd. Mobile-Tractor, Ltd. Total February March To meet demand, the company can follow either a chase strategy or a level strategy. With a chase strategy, monthly production mir- rors the total demand in that month, and to follow this strategy, the company can hire new employees during higher demand periods and lay off employees during lower demand periods. This strategy sig- nificantly reduces inventory carrying costs. On the other hand, with a level strategy, the company always produces an amount equal to the average demand per month. Excess units are stored as inventory while all stockouts are backlogged and supplied from the following months' production. This strategy particularly saves on employee hir- ing and layoff costs. Moreover, to assure equal treatment, backorders are allocated to customers in direct proportion to the orders that they Currently, there are 100 workers in the TractParts manufactur- ing facility, and a total of 200 working hours (8 hours/day x 25 days/ month) are available per worker per month. Because of strict govern- ment policies, the company cannot allow overtime. Mr. Alex is concerned about the fluctuating demand and under- stands that these companies can change their demand pattern based on promotions and discounts offered to them. In order to enhance the total profit, Mr. Alex wants to optimize costs while meeting the demand pattern. He has therefore asked one of his associates to find out the associated costs and the cost structure. The associate has pre- sented the cost structure for the engine manufacturing line as shown in Table 12-2 CASE 12 THe INTERFACE SETWEEN DCMAND MANGEMENT AND PRODUCTION 133 STRATEGES AT TRACTPART tolerated. Mr. Alex has a meeting with the eoempany's Senior Vice President tomorrow morming, He is concemed about which produc- tion policy should be adopted and when the 10% discount should be offered. Help Mr. Alex make the right declsion by focusing on the folowing questions. Table 12-2 Cost Structure teventory bolding coet Stock-out cost ring co Firing cot Labor boun reguired Questions Regular labor rate Begianing invesshory Deslred ending inventory 1. Estimate the profit made by TractParts when it follows a level strategy and no discount is offered to the tractor manufacturing 2. Estimate the profit made by TractParts when it follows a chase strategy and no discount is offered to the tractor manufacturing Mr. Ales hadasked the associate to explore the possibility of offer- ing a discount to the tractor manufacturers. Mr. Alex was informed that a maximum 10% discount could be offered per company policy, and the discount woulki be offered for only one month. The associate lso pointed out that whenever such kinds of discounts are offered, the tractor manufacturers have a tendency to order more units in that mooth. However, some of that demand increase merely represents a shift froun later months (early buying), as opposed to representing brand new demand 3. Estimate the profit made by TractParts when it follows a level strategy and a 10% discount is offered to the tractor manufac- turing firms in October 4. Find out the month having the peak demand in which a 10% discount can be offered to the tractor manufacturing firms when TractParts follows a level strategy. (Hint: Estimate the profit made by TractParts when it follows a level strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.) After examining some previous data, Mr. Alex has made the fol- lowing observations. For Agri-Tractor, Ltd, a 10% decrease in price for a particular month results in a 45% increase in the demand for the same month followed by a 15% decrease in demand for each of the next two months. And in the ase of Mobile-Tractor, Ltd., a 10% decrease in price for a p denand for the same month followed by a 25% decrease in demand for each of the next two months. However, Mr. Alex also observed that if TractPart offers a discount in the Binal two months of the finan- cial year, there is no change in the demand pattern since there is a very fixed demand of tractors at the end of season. 5. Estimate the profit made by TractParts when it follows a chase strategy and a 10% discount is offered to the tractor manufac- turing firms in October. 6, Find out the month having the peak demand in which a 10% discount can be offered to the tractor manufacturing firms when TractParts follows a chase strategy. Hint: Estimate the profit made by TractPurts when it follows a chase strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.) articular month results in an 80% increase in Mr. Alex faces a unique problem, as TractParts has proven iself over the years and is considered a symbol of quality, reliability, and ccountability. Being a part of this valae system, Mr. Alex knows that any unfar treatment of the tractor manufacturers will not be

Answer 1

1. Estimate the profit made by TractParts when it follows a level strategy and no discount is offered to the tractor manufacturing firms. Answer: Revenue $9,793.000 Cost S6,862,425 Profit 2. Estimate the profit made by TractParts when it follows a chase strategy and no discount is offered to the tractor manufacturing firms. Answer: Revenue $9,793,000 Cost $5.601,100 Profit $4,191,900 3. Estimate the profit made by TractParts when it follows a level strategy and a 10% discount is offered to the tractor manufacturing firms in October. Answer: Whenever 10% discount is given in October, ther for the same month, followed by a decrease in demand for the next two months. e is certain percentage increase in demand Revenue $9,443,420 Cost S6,681,075 Profit $2,762,345

4. Find out the month having the peak demand in which a 10% discount can be offered to the tractor manufacturing firms when TractParts follows a level strategy. (Hint: Estimate the profit made by TractParts when it follows a level strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.) Answer: Mr. Alex can offer the discount in only one period. His goal should be to maximize profit. The following table shows the results of the various scenarios. Increase in Total yearly demand Results demand Revenue ($) Cost ($) ProfitS 9,793,0006,862,425 2,930,575 9,863,9806,893,550 2,970,430 9,826,740 6,884,655 2,942,085 9,796.7806,865,7702,931,010 9,765,5 9,634,8006,775,365 2,859.4325 9,365,020 6,611 9,443,4206,681,075 2,762.345 34,975 35,373 35,175 Without Discount Discount in April 1.14% Discount in Ma 0.57% Discount in June 35,030 0.16% Discount in Jul 6,851,5802,913,924 34,913 34,466 33,553 34,205 -0 I 8% 1 .46% Discount in August -4.07% Discount in September Discount in October 2.20% Discount in November 9,820,720 6,998.250 2,822.470 36,085 3.17% Discount in December 10,026.5207,184,460 2,842,060 10,221,9607,390,635 2,831,325 9,793.0006,862,425 2,930,57:5 9,793.0006,862,425 2,930,57:5 36,903 5.51% 7 .75% Discount in Janua 37,688 Discount in Februa 34,975 34,975 0.00% 0.00% Discount in March Considering these scenarios, revenue will be maximized if the 10% discount is offered in January, when there is a peak demand. However, due to the high cost of managing extremely variable demand, profit will actually be maximized if the discount is offered in April instead.

5. Estimate the profit made by TractParts when it follows a chase strategy and a 10% discount is offered to the tractor manufacturing firms in October Answer: Whenever 10% discount is given in October, there is certain percentage increase in the demand for the same month, followed by a decrease in demand for the next two months. Revenue S9,443,420 Cost S5,481,300 Profit $3.962,120 6. Find out the month having the peak demand in which 10% discount can be offered to the tractor manufacturing firms when TractParts follows a chase strategy. (Hint: Estimate the profit made by TractParts when it follows a chase strategy and a 10% discount has been offered to the tractor manufacturing firms in various months.) Answe: Mr. Alex can offer the discount in only one period. His goal should be to maximize profit. The following table shows the results of the various scenarios. Total yearly demand Increase in Results Revenue ($ Cost (S) Profit (S) 9,793,000 5,601,1004,191,900 9,863,9805,656,8204,207,16035,373 9,826,7405,640,700 4,186,040 9,796,7805,611,6004,185,180 9,765,5045,594,820 4,170,684 9,634,800 5,524,640 4,110,160 9,365,0205,380,4203,984,60033,553 9,443,420 5,481,300 3,962.120 9,820,7205,857,3003,963,420 10,026,520 6,011,020 4,015,500 10,221,9606,147,2204,074,740 9,793,000 5,601,1004,191,900 9,793,000 5,601,1004,191,900 demand 34,975 Without Discount Discount in April 1.14% Discount in Ma 35.175 0.57% Discount in June 35,030 O. I 6% Discount in Jul 34,913 -0 I 8% Discount in August 34,466 1 .46% -4.07% Discount in September Discount in October 34,205 -2.20% Discount in November 36,085 3.17% 36,903 37,688 Discount in December 5.51% 7.76% Discount in Janua Discount in Fe 34,975 0.00% Discount in March 34,975 0.00% Considering these scenarios, revenue will be maximized if the 10% discount is offered in January, when there is a peak demand. However, due to the high cost of managing extremely variable demand, profit will actually be maximized if the discount is offered in April instead.