Davis Instruments has two manufacturing plants located in Atlanta, Georgia. Product demand
varies considerably from month to month, causing Davis extreme difficulty in workforce
scheduling. Recently Davis started hiring temporary workers supplied by WorkForce Unlimited,
a company that specializes in providing temporary employees for firms in the greater Atlanta
area. WorkForce Unlimited offered to provide temporary employees under three contract options
that differ in terms of the length of employment and the cost. The three options are summarized:
Option Length of Employment Cost
1 One month $2000
2 Two months $4800
3 Three months $7500
The longer contract periods are more expensive because WorkForce Unlimited experiences
greater difficulty finding temporary workers who are willing to commit to longer work
assignments.
Over the next six months, Davis projects the following needs for additional employees:
Month January February March April May June
Employees Needed 10 23 19 26 20 14
Each month, Davis can hire as many temporary employees as needed under each of the three
options. For instance, if Davis hires five employees in January under Option 2, WorkForce
Unlimited will supply Davis with five temporary workers who will work for two months:
January and February. For these workers, Davis will have to pay 5(4800)=$24,000. Because of
some merger negotiations under way, Davis does not want to commit to any contractual
obligations for temporary employees that extend beyond June.
Davis’s quality control program requires each temporary employee to receive training at the time
of hire. The training program is required even if the person worked for Davis Instruments in the
past. Davis estimates that the cost of training is $875 each time a temporary employee is hired.
Thus, if a temporary employee is hired for one month, Davis will incur a training cost of $875,
but will incur no additional training cost if the employee is on a two- or three-month contract.
Managerial Report
Develop a model that can be used to determine the number of temporary employees Davis
should hire each month under each contract plan in order to meet the projected needs at a
minimum total cost. Include the following items in your report:
- A schedule that shows the number of temporary employees that Davis should hire each
month for each contract option. - A summary table that shows the number of temporary employees that Davis should hire
under each contract option, the associated contract cost for each option, and the
associated training cost for each option. Provide summary totals showing the total
number of temporary employees hired, total contract costs, and total training costs. - If the cost to train each temporary employee could be reduced to $700 per month, what
effect would this change have on the hiring plan? Explain. Discuss the implications that
this effect on the hiring plan has for identifying methods for reducing training costs. How
much of a reduction in training costs would be required to change the hiring plan based
on a training cost of $875 per temporary employee? - Suppose that Davis hired 10 full-time employees at the beginning of January in order to
satisfy part of the labor requirements over the next six months. If Davis can hire full-time
employees for $16.50 per hour, including fringe benefits, what effect would it have on
total labor and training costs over the six-month period as compared to hiring only
temporary employees? Assume that full-time and temporary employees both work
approximately 160 hours per month. Provide a recommendation regarding the decision to
hire additional full-time employees.
CHAPTER 6
Case Problem 2 Supply Chain Design
The Darby Company manufactures and distributes meters used to measure electric power
consumption. The company started with a small production plant in El Paso and gradually built a
customer base throughout Texas. A distribution center was established in Fort Worth, Texas, and
later, as business expanded, a second distribution center was established in Santa Fe, New
Mexico.
The El Paso plant was expanded when the company began marketing its meters in Arizona,
California, Nevada, and Utah. With the growth of the West Coast business, the Darby Company
opened a third distribution center in Las Vegas and just two years ago opened a second
production plant in San Bernardino, California.
Manufacturing costs differ between the company’s production plants. The cost of each meter
produced at the El Paso plant is $10.50. The San Bernardino plant utilizes newer and more
efficient equipment; as a result, manufacturing cost is $0.50 per meter less than at the El Paso
plant.
Due to the company’s rapid growth, not much attention had been paid to the efficiency of its
supply chain, but Darby’s management decided that it is time to address this issue. The cost of
shipping a meter from each of the two plants to each of the three distribution centers is shown in
Table 6.10.
Table 6.10
Shipping Cost per Unit from Production Plants to Distribution Centers (In $)
Distribution Center
Plant Fort
Worth
Santa
Fe
Las
Vegas
El Paso 3.20 2.20 4.20
San
Bernardino — 3.90 1.20
The quarterly production capacity is 30,000 meters at the older El Paso plant and 20,000 meters
at the San Bernardino plant. Note that no shipments are allowed from the San Bernardino plant
to the Fort Worth distribution center.
The company serves nine customer zones from the three distribution centers. The forecast of the
number of meters needed in each customer zone for the next quarter is shown in Table 6.11.
Table 6.11
Quarterly Demand Forecast
Customer
Zone
Demand
(meters)
Dallas 6300
San Antonio 4880
Wichita 2130
Kansas City 1210
Denver 6120
Salt Lake City 4830
Phoenix 2750
Los Angeles 8580
San Diego 4460
The cost per unit of shipping from each distribution center to each customer zone is given in
Table 6.12; note that some distribution centers cannot serve certain customer zones. These are
indicated by a dash, “—”.
Table 6.12
Shipping Cost from the Distribution Centers to the Customer Zones
Customer Zone
Distribution
Center Dallas San
Antonio Wichita Kansas
City Denver Salt Lake
City Phoenix Los
Angeles
San
Diego
Fort Worth 0.3 2.1 3.1 4.4 6.0 — — — —
Santa Fe 5.2 5.4 4.5 6.0 2.7 4.7 3.4 3.3 2.7
Las Vegas — — — — 5.4 3.3 2.4 2.1 2.5
In its current supply chain, demand at the Dallas, San Antonio, Wichita, and Kansas City
customer zones is satisfied by shipments from the Fort Worth distribution center. In a similar
manner, the Denver, Salt Lake City, and Phoenix customer zones are served by the Santa Fe
distribution center, and the Los Angeles and San Diego customer zones are served by the Las
Vegas distribution center. To determine how many units to ship from each plant, the quarterly
customer demand forecasts are aggregated at the distribution centers, and a transportation model
is used to minimize the cost of shipping from the production plants to the distribution centers.
Managerial Report
You are asked to make recommendations for improving Darby Company’s supply chain. Your
report should address, but not be limited to, the following issues: - If the company does not change its current supply chain, what will its distribution costs
be for the following quarter? - Suppose that the company is willing to consider dropping the distribution center
limitations; that is, customers could be served by any of the distribution centers for which
costs are available. Can costs be reduced? If so, by how much? - The company wants to explore the possibility of satisfying some of the customer demand
directly from the production plants. In particular, the shipping cost is $0.30 per unit from
San Bernardino to Los Angeles and $0.70 from San Bernardino to San Diego. The cost
for direct shipments from El Paso to San Antonio is $3.50 per unit. Can distribution costs
be further reduced by considering these direct plant-to-customer shipments? - Over the next five years, Darby is anticipating moderate growth (5000 meters) to the
north and west. Would you recommend that Darby consider plant expansion at this time?